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US banks could face further $325bn sub-prime loss after margin calls

Wall Street banks could lose a further $325bn in capital due to deteriorating sub-prime US mortgages in the face of a “systemic margin call”, according to JPMorgan.

The warning came in a report after JPMorgan sent a default notice to Thornburg Mortgage Inc after the lender missed a $28mn margin call. The Carlyle Group's mortgage fund also failed to meet $37mn in margin calls last week.

JPMorgan added that more default notices and margin calls were likely.

“A systemic credit crunch is underway, driven primarily by bank writedowns for sub-prime mortgages,” according to the report co-authored by analyst Christopher Flanagan. “We would characterise this situation as a systemic margin call.”

And the credit crisis is likely to be further exacerbated by the US’s weak February employment report “that most definitely signals recession”, JPMorgan said. US employers slashed payrolls in February for a second consecutive month, with the loss of 63,000 jobs – the biggest monthly job decline in nearly five years, the US Labor Department reported.

Corporate bond spreads widened to a new record on 7 March exceeding those in October 2002, which were sparked by bankruptcies following the dot-com crash.

“The weak February employment report points to an economy in recession,” JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said.

The US jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100bn in total in the central bank's latest effort to ease credit concerns.

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