> Don't take it up with me; take it up with the following:
> <http://www.ft.com/cms/s/1/16e6c4e8-8c4a-11dc-b887-0000779fd2ac.html>
>
> Bank of England mark-to-market analysis Oct 15 $ 100b
> RBS Greenwich fundamental analysis 160
> Moody's Economy.com fundamental analysis 225
> RBS Greenwich mark-to-market, early Nov 238
> disclosed writeoffs by major banks 28
> total Tier-1 capital 2,000
> So, the losses are big, but still relatively small next to bank capital.
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The New York Times reported on October 25th that "at this juncture,
economists say the troubles in the mortgage market could, all told, cost
financial firms and investors up to $400 billion."
It went on to say:
"That is far more than the roughly $240 billion cost, adjusted for inflation, of the savings and loan crisis of the early 1990s, according to estimates of the combined financial toll of that crisis on both the federal government and private sector.
"The loss in total real estate wealth is expected to range from $2 trillion to $4 trillion, depending on how far home prices fall, according to several economists."
"That would be significantly less than the losses suffered by investors in the stock market collapse earlier this decade, which erased more than $7 trillion, or about 40 percent, of market value."
"Experts caution that these estimates are preliminary and the total costs could get bigger still. They also note that the loss of real estate wealth could prove more damaging for the general public than falling stock values because more American families own homes than own stock."
In addition, according to a Wall Street Journal report on October 10th, the major banks are also stuck with an estimated 300bn in leveraged buyout loans loans to private equity firms which they can't securitize and which will have to remain on their balance sheets.
http://online.wsj.com/article/SB119197749870054211.html?mod=rss_whats_news_us
They may also have to account for the bad debt being held by the SIVs and conduits which they sponsor.
Adding this all up, the FT's Tony Jackson reported on November 4th, that "the investment banks have been caught two ways. First, they have been hit by warehousing risk. In the absence of buyers, they are stuck with assets held for sale, such as leveraged loans and assets awaiting repackaging into asset-backed securities.
"Second, they face the threat of having to take special purpose vehicles such as conduits back on to their balance sheets.
"Add to that the warehousing problem and you have a big number - somewhere well north of $1,000bn globally, I would guess."
http://www.ft.com/cms/s/0/bb3080ae-8aea-11dc-95f7-0000779fd2ac.html?nclick_check=1
So is it potentially a trillion dollar crisis, and how well-capitalized are the banks to deal with it? That's not at all clear to me.
The WSJ reported on October 16th that Tier 1 ratios at the major banks were well in excess of the 4% of total assets which regulators require them to hold in reserve to deal with bad loans. Even Citigroup, whose Tier 1 ratio had fallen at mid-year to 7.4% of total assets from 8.6% a year earlier is considered to be well protected. (a Tier 1 ratio of 6% qualifies a bank as well-capitalized).
http://online.wsj.com/article/SB119244482103159018.html?mod=rss_whats_news_us
However, Gretchen Morgenstern writing in the October 25th New York Times commented that "anyone who thinks that we have hit bottom in the increasingly scary lending world is paying little mind to the remarkably low levels of reserves that the big banks have set aside for loan losses. Indeed, loss provisions as a percentage of total loans held for investment plummeted to a historic low inthe second quarter of 2007, the most recent period for which comprehensive figures are available.
I guess the most we can venture to predict at this stage is that bank profits and stock prices are going to plunge, credit will be squeezed, the economy will go into recession in an election year, and the White House will fall to the Democrats despite their best efforts to lose it.