Just hours after being printed, Merrill Lynch analysts Dan Castro and Glenn Costello issued a report refuting Thursday's Wall Street Journal story on the negative effects of banks' exposure to subprime mortgages titled "Subprime Could Be Bad News For Banks."

Castro wrote: "While we warned last year that subprime was sensitive to the weakening economy, it's important to look past the headlines here." Castro calls the WSJ view that the increase of seriously delinquent loans, to 6% from 4% in 2001, "simplistic."

Noted are the facts that the stabilization and seasoning of subprime mortgage production in recent years, as well as increased lender competition driving loan-to-value ratios higher and FICO scores lower, were expected to lead to slight increases in average delinquency levels.

"The important point is that when we look at serious delinquencies on a vintage-by-vintage basis, we are not seeing major increases. To us this is much more meaningful than overall annual delinquency numbers and suggests that subprime is in fact holding up quite well."

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