After last week's wild ride for the credit markets and mortgage rates, JP Morgan Chase & Co. said in a report late Friday that Wall Street firms are facing a "systemic margin call" as the financial markets face a reinforcing downward pattern of writedowns.
, who covered the analyst report:
"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call."
The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said.
One such victim of this crunch has been troubled ultra-prime mortgage lender Thornburg Mortgage, which has seen margin calls on its investment grade Alt-A RMBS portfolio put the company on the brink of insolvency
Much of the current mess hit its latest high note when rumors of a fire-sale at UBS AG, which allegedly dumped more that $24 billion in Alt-A RMBS, took hold early last week
. The result was a quick deleveraging in the credit markets by hedge funds and other investors that managed to sweep up even agency-backed mortgage debt, pushing yield spreads for Fannie Mae-backed bonds to their highest level in more than two decades
The Financial Times reported Monday that the market pressure likely has yet to play out
"Risk reduction is firmly on the menu," said Willem Sels, credit strategist at Dresdner Kleinwort. "We continue to believe that risk positions in general are being closed or de-levered on the back of more demanding prime brokers and a partial unwind of the carry trade."
"The sell-off is particularly painful and likely to cause such sales because of its speed, amplitude and because it is occurring in many asset classes at the same time."