US investment bank Goldman Sachs has said that the cost to the US economy of the fallout from credit market crisis may reach $2 trillion.
Jan Hatzius, chief US economist at Goldman Sachs in New York, writes in a client report that losses related to record US home foreclosures using a ``back-of-the-envelope'' calculation may be as high as $400 billion for financial firms. The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report.
``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,'' Hatzius wrote. ``A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10.''
US bank Wells Fargo & Co. Chief Executive Officer John Stumpf said on Thursday that the worst U.S. housing market since the Great Depression may mean ``elevated'' equity losses through 2008.
Hatzius said his figure for total losses for the US economy is based on a ``conservative estimate'' of investors cutting lending by 10 times the loss to their capital. Investors realizing half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said.
Deutsche Bank AG, Germany's biggest bank, also estimated credit losses at $400 billion.
Deutsche Bank analyst says subprime losses could reach $400 billion worldwide
Losses arising from falling values of subprime mortgage assets may reach $300 billion to $400 billion worldwide, a Deutsche Bank said in research published on Monday last.
Banks and brokers will be forced to write down as much as $130 billion because of the plunge in subprime-related debt, based on a ``seat-of-the-pants'' estimate the firms will account for a third of total mark downs, Mike Mayo, a New York-based analyst says in a research report. Banks may have to write off $60 billion to $70 billion this year, he wrote.
The world's biggest financial firms including Citigroup and Merrill Lynch & Co. have written down more than $40 billion of assets as mortgage-related bond prices slump on record US foreclosures. About $1.2 trillion of the $10 trillion of outstanding US mortgages are considered to be subprime, Mayo said in the note.
Deutsche Bank expects 30% to 40% of subprime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo said.
The estimate for banks' and brokers' losses in 2007 is based on known charges of $43 billion and expected additional losses of $25 billion, Mayo said in the note.
Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run as high as 80% according to the note.
The Economist says in its current issue that housing starts are down by 47% from their peak and residential building now accounts for 4.4% of GDP, down from a record of 6.3% in 2005. That is a big drop, but not yet unusually long or deep by historical standards. Nouriel Roubini and Christian Menegatti, of Roubini Global Economics, point out that the seven other housing recessions since 1960 lasted an average of 32 months and saw housing starts fall by 51%.
Judging by the large number of unsold homes and the pace at which buyers are cancelling contracts (around 50% according to some homebuilders), it is clear that builders have further to cut back. Richard Berner, of Morgan Stanley, expects a further 25% decline, taking the pace of housing starts in 2008 to below 1m, the slowest since records began in 1959.
Nouriel Roubini writes in his blog: So far banks and other financial institutions have recognized losses only in the $40-50 range. But market estimates by myself and other analysts (RBS, DB) suggest that total losses for investors from submprime and other mortgages (and their related securitized assets) could be in the $300 billion to $500 billion range. While many of these losses will be borne by banks and investment banks many will be borne by other financial institutions (hedge funds, insurance companies, asset managers, both in the US and abroad). Losses will be even larger once we including the looming disaster in commercial real estate (expected losses of $100 billion), credit cards, auto loans and other consumer credit (securitized or not).
Goldman Sachs is one of the few big financial players that escaped the subprime fallout.
Goldman Sachs Presentation at the 2007 Merrill Lynch Banking and Financial Services Investor Conference:
Lloyd C. Blankfein, Chairman & CEO, at the 2007 Merrill Lynch Banking & Financial Services Investor Conference on Tuesday, November 13, 2007
