Fitch Ratings said today subprime challenges have so far had a limited effect on Wall Street’s major investment banks. From the press release:

Fitch attributed the positive results to four factors: 1) effective product diversity, tempering the affect of the deteriorating subprime mortgage market; 2) active employment of hedges to limit their credit and interest rate risks from real estate collateral owned or warehoused; 3) increasing geographic diversity; and 4) sufficient capital to support underperforming and deteriorating assets, avoiding the need for ‘fire sales’ that would pressure some values and exacerbate negative mark-to-market adjustments. “While mortgage exposure exists throughout investment banks’ franchises, each firm says that fewer than 5% of total net revenues are attributable to subprime mortgage activities,” said Leslie Bright, Senior Director, Fitch Ratings. “Since May, unusual levels of credit deterioration have been concentrated in the subprime space, impacting underwriting and primary trading markets. Contagion to the Alt-A and prime sectors has greater possibility, as does fallout in the secondary market following pending rate resets of vintage mortgage pools.”

Part of the implication here is that the “limited exposure” argument only works when trouble is limited to a single credit class — a broader hiccup in the secondary market across all credit sectors would implicate investment banks to a much greater degree. Fitch also implied that future stability, at least in terms of reported balance sheets, will depend on the valuation strategies employed — particularly in mark-to-market versus mark-to-model.