HOWZAT

However, he said that the likely losses suffered by European insurers would be "limited" because they tend to hold assets with high credit ratings.

"We argue that the European insurers' likely losses from sub-prime are very limited, as their holdings are concentrated at the upper credit tiers, with only small holdings of the sub-AA sub-prime credit," Mr Paulson said.

"It is possible that there will be some hits to the insurers from sub-prime losses, while a more general credit deterioration, be it in prime mortgages or corporate credit, would clearly affect their profitability."

He argued that, for the highest-quality investments, upwards of 30 per cent of mortgagees in a pool would have to default on their loans.

Mr Paulson said that concerns about potential losses had unfairly weighed on European insurers' shares.

Other investors are already being forced to accept losses.

In a letter sent out late last night, Bear Stearns provided a chilling update to investors in its High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged funds.

These are managed by Bear Stearns Asset Management.

Bear said that there was "effectively no value left" for investors in the Enhanced fund and "very little value" in the High-Grade fund.

It described the drop in values of a number of its highly rated, AA or AAA, securities, as "unprecedented".

The losses suffered by investors are the latest to hit a market that is reeling in the wake of the collapse in American housing market values.

The crisis has forced Bear Stearns to extend a $1.6 billion emergency loan to two of its heavily exposed hedge funds to help them meet their margin calls. Some $200 million of that has now been repaid, Bear said today.

It has previously moved Tom Marano, the head of its mortgage department, to oversee an orderly sale of the funds' assets. The funds have been put into orderly wind-down.

"As you know, in early June, the funds were faced with investor redemption requests and margin calls that they were unable to meet," Bear Stearns wrote in the letter.

"The funds sold assets in an attempt to raise liquidity but were unable to generate sufficient cash to meet the outstanding margin obligations.

"As a result, counterparties moved to seize collateral or otherwise terminate financing arranagements they had with the funds. During June, the funds experienced significant declines in the value of their assets resulting in losses of net asset value."

Bear said that calculating the value of the funds had been "much more time-consuming than in prior months due to increasingly difficult market conditions".

Worries that the US's sub-prime mortgage woes would spill into the wider economy sent the dollar tumbling to 12-year lows on the currency markets and pushed the British pound to its highest level since 1981.

Tempus: Sub-prime uncertainty

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