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US banks may get $325 billion subprime hit

JPMorgan Chase & Co in a report said that Wall Street banks are facing a systemic margin call that may deplete banks of $325 billion of capital due to deteriorating subprime US mortgages.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc after the lender missed a $28 million margin call, said that more default notices and margin calls were likely. According to the report co authored by Christopher Flanagan an analyst said that “A systemic credit crunch is underway, driven primarily by bank write downs for subprime mortgages. We would characterize this situation as a systemic margin call.” JPMorgan said that “The credit crisis that began about a year ago will likely intensify after February US employment report that most definitely signals recession.”

The US Labor Department reported that indeed, corporate bond spreads widened to a new record, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot com crash. US employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years. JPMorgan said that “The weak February employment report points to an economy in recession.” The report included a revised bleaker forecast for subprime related home prices. The bank now sees prices falling 30% from its prior 25% forecast. Those prices have declined 14% since mid 2006. (SteelGuru)