The Next Subprime Target

Last weekend, finance leaders from the Group of Se...

Last weekend, finance leaders from the Group of Seven nations met in Tokyo. The overwhelming verdict: The subprime fallout is not over–and no one is sure which country it will impact next.

The U.S. seems to be the most optimistic about the global economic situation–Treasury Secretary Hank Paulson said this week he believes the U.S. will see growth next year–but, then again, we have already seen a good deal of the subprime fallout’s force.

The Federal Reserve had already more than doubled its original $50 billion estimate for subprime damage; German finance minister Peer Steinbrück said this week that the amount could actually be a whopping $400 billion.

Although the G7 talks indicated everyone felt the subprime crisis was sure to trouble some economies and industries in the future, which ones will be affected? A few possibilities:

  • Taiwan and Korea. Regulators and investors have been examining financial
    institutions in Asia recently, and both Taiwan and Korea have been fans of buying structured products in the past few years, the Financial Times reported today.
  • Insurance companies. Because insurance companies have been highly involved with structured credit in the past 10 years, they’re attracting close scrutiny, the Times says. Asset insurer AIG’s stock fell yesterday by the biggest amount in two decades after the company announced that writedowns from credit-default swaps sold to safeguard fixed-income investors were four times larger than previously thought.
  • European banks. Although some are emerging seemingly unscathed–such as Credit Suisse, which today announced subprime-related losses of just $1.8 billion because, as investment banking head Paul Calello said, the bank reduced its exposure to
    subprime earlier than most banks, in late 2006–concern is mounting that other banks may show big losses.
  • Chinese banks. Hong Kong shares were down Monday because of subprime impact fears, spurred by the G7 meeting news. That’s a tough situation for Chinese banks, which gain a considerable amount of their total income from stock investments. In addition, to prepare for a potential subprime hit, last week, China’s largest bank–the Industrial & Commercial Bank of China Ltd.–announced that,  to cover any losses, it was holding reserves equivalent to 30 percent of its $1.2 billion
    subprime holdings.

So who’s next? Mario Draghi, governor of the Bank of Italy and
chair of the Financial Stability Forum, thinks we’ll have a better idea soon.

“The next 10 days to two weeks will be crucial because we are going to
have the first audited accounts [from financial institutions] since the
crisis started,” Draghi said.

The coming weeks will surely reveal some clues–and we’ll be watching.