Hidden U.S. subprime losses may mirror Japan bank crisis (Reuters)

NEW YORK (Reuters) - Investors and banks holding on to U.S. subprime mortgage bonds in hopes of a recovery in value may make losses worse, mirroring the Japanese banking crisis in the 1990s, according to authors of a new report.

The Japanese banking crisis, triggered in the early 1990s by a slumping property market and brokerage collapses, led to a decade-long credit crunch. The government subsequently had to step in to stabilize the banking system by injecting public money into top banks.

"The Japanese experience of holding large losses as opposed to taking a hit and moving on was a direct cause of the Japanese malaise," said Josh Rosner, co-author of the report and a managing director at Graham Fisher, an investment research firm in New York.

The new report, "Financial Services Exposures to Subprime," said "there are many institutions with significant levels of embedded losses that have not yet been recognized as a result of questionable valuations."

Today, only a few banks and brokerages have recognized losses on U.S. subprime mortgage bets, as the housing market has weakened. Bear Stearns Cos (BSC.N) has publicly recorded losses from its hedge fund bets on subprime mortgage bonds held in collaterized debt obligations. Outside the U.S., four hedge funds, two in Britain and two in Australia, have said they suffered losses.

More investors are hiding losses that may only get worse, the report said. Growing concern about the deteriorating U.S. housing market may hurt corporate buyouts, debt financing and stock markets. The Standard & Poor's 500 Index lost $300 billion in value this week on concern about credit markets.

Today's investors and financial institutions are now "playing a dangerous game," Rosner said on Friday. "The losses will almost certainly be larger than they are today."

As more rating downgrades come, values will continue to fall and margin calls will increase, the report said.

Standard & Poor's cut ratings on $6.4 billion in debt this month and Moody's Investors Service slashed $5.2 billion worth. S&P on Thursday cut various residential mortgage-backed securities to junk, including one class of bonds whose ratings were out of synch by 12 levels.

S&P lowered its grade from "AA," S&P's third best rating, to "B," or five levels into junk status.

Bear Stearns also on Thursday seized control of most assets in a troubled hedge fund, after declines in the value of riskier, subprime home loans caused the fund's value to plummet to almost nothing.

Bear Stearns said it "assumed possession of the assets" securing a $1.3 billion credit facility provided to its High-Grade Structured Credit Strategies Fund after the fund was unable to meet a margin call.

Joseph Mason, co-author of the report, said the drying up of capital for investors and banks that rely on that financing to fund leveraged buyouts may begin to weigh on growth.

"I'm not saying it will cause a recession, but we could have a low economic growth environment," Mason said.

Rosner and Mason also compared the current subprime crisis to the U.S. savings and loans crisis in the 1980s, when waves of S&L failures led to a federal bailout.

In the Japanese case, the bursting of the asset bubble in the real estate and stock markets led to a deteriorating economy. Japanese banks were saddled with massive non-performing loans, raising concerns about a systemic meltdown.