Sunday, July 06, 2008


Paul Kedrosky posted on a report published in a Swiss paper (he courteously provided the English translation) of the results of a study prepared for hedge fund Bridgewater Associates that projects that total losses to the financial system from the credit crisis will reach $1.6 trillion. Note that losses taken to date are only $400 billion. This is consistent with the off-the-cuff view of Ted Forstman in an interview with the Wall Street Journal that we are only in the second inning of the credit crisis.

The IMF has forecast total losses from the credit contraction of $945 billion, and that included damage to hedge funds and other investors, not to the financial intermediaries that are an integral part of the functioning of advanced and even not so advanced economies. By contrast, Goldman Sachs has put the likely damage at $1.1 trillion, George Magus of UBS at $1 trillion, and hedge fund manager John Paulson at $1.3 trillion. So this is far and away the grimmest estimate to date, particularly given its focus on financial intermediaries.

Reader Dwight, who pointed out this post to us, wonders if this report (or perhaps thinking along similar lines) is the basis for recent apocalyptic calls from RBS, Barclays, Fortis. SocGen, and the BIS.


Blogger John Liberty said...

Once upon a time, when credit conditions and the costs of borrowing money were normal, the bank opened at 9:00 a.m. and closed at 5:00 p.m. For eight hours a day, bankers made loans and took deposits, and then they went home.

But after 9/11, the Fed opened the spigot. Short-term interest rates went to zero in real terms and then into negative territory. When real interest rates are negative, borrowing money is effectively free – the debt loses value faster than the interest adds up. This led to a series of distortions in the financial sector that are only now coming to light. The children's story continues: "Now they [the banks] have all this excess money. And they open at nine, and from nine to noon or so, they're doing all the same kind of basically legitimate things with it that they did before."

So far, so good. "But at noon, they have tons of money left. They have all this supply, and the, what I would call 'legitimate' demand – it's probably not a good word – but where risk and reward are still in balance, has been satisfied. But they're still open until five. And around 3:30 in the afternoon they get to such things as subprime mortgages, OK? And what you guys haven't seen yet is what happened between noon and 3:3

11:45 PM  

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