OECD: Subprime losses could hit $420 billion

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The OECD (Organisation for Economic Co-operation and Development) reported that the losses related to the subprime mortgage bust could hit $420 billion based on an ultimate recovery of mark-to-market assets to 40 to 50% of their initial value. The OECD denied that the $1 trillion loss that the IMF has been reporting lately is incorrect because the estimate includes losses that would occur in any market and doesn’t take in to account the recovery of certain assets over a longer time horizon.

The $420 billion loss represents a $120 billion increase in the OECD’s initial subprime loss estimates.

From Reuters on the subprime loss totals:

The cost of the financial crisis caused by the collapse of the U.S. sub-prime mortgage market may be around $350-420 billion, and a $1-trillion figure floated by the IMF is misleading, OECD officials said on Tuesday.

The OECD, which until now was predicting a cost of $300 billion in losses and writedowns, said it had ceased using market price, or mark-to-market methods, and was instead using assumptions of ultimate recovery rates of 40-50 percent on asset values.

Seeking Alpha pulled another great quote from the article that points to the size of the losses to-date:

“It could take six to 12 months for banks to grow themselves out of losses of this size, and longer if capital for actual expansion were required.” ? Organisation for Economic Cooperation and Development, Financial Markets Committee chairman Thomas Wieser

What I want to know is how are these numbers being calculated? What assumptions are being made about the large swath of option-arm loans and other exotic prime loans set to adjust in the near future? I don’t think anyone has any idea about how these exotic prime loans are going to perform when they begin to reset in negative-equity situations. In fact, it’s safe to assume that based on the so-called “expert” estimates to date that the calculations are entirely too bullish and that we’ll see much bigger losses as the next wave of prime resets sweeps through in a greatly-reduced equity environment.

I think the bottom line is that all of these “experts” and estimates are using a varying degree of fuzzy math that they themselves have no clue as to the accuracy of their assumptions – making each one of these numbers that the various organizations throw out just as likely or unlikely as the next.