Posted on 07/27/2008 1:11:08 AM PDT by TigerLikesRooster
Gross predicts $1 trillion of writedowns
Mark Cobley
25 Jul 2008
One of the world's most successful bond fund managers, Bill Gross of Pimco, expects the fall-out from the US sub-prime mortgage crisis to hit $1 trillion (??35bn), in terms of the amount that will have to be written off the global financial services industry's combined balance sheet.
The total suggests Gross believes the crisis has much further to run.
According to the most recent total on Financial News' writedown-ometer, which is compiled from banks' results, $205bn had been written down as of June.
Since then, fresh book-losses have been reported by Merrill Lynch, which wrote off a further $9.7bn earlier this month, and the US bank Wachovia , which wrote off $6.1bn this week.
(Excerpt) Read more at efinancialnews.com ...
Ping!
Ping !!!
The smart money is calling up to $1200 billion total writedowns for the Financials (or $1.2 trillion). The total taken to date is $400- to $450 billion of that possible $1200 billion. We have a LOT further to go, and that assumes the smart money current estimates are right and the total doesn’t wind up north of $1500 billion.
No sign of recession here. Go back to sleep. Pull the covers over your head. Think happy thoughts.
Goldman is calling $1200 billion total, with $460 billion in write downs to date.
http://seekingalpha.com/article/70428-goldman-total-leveraged-credit-losses-1-2-trillion
IMF, a trillion dollars or thereabouts.
http://calculatedrisk.blogspot.com/2008/04/imf-financial-losses-may-approach-1.html
Nouriel Roubini is calling a wildly high $1600 billion. Not that he is wrong, just that he is so much higher than everyone else’s guess that when you throw out the high and low, you have to discard his number. If he proves to be right, not only he garner even more respect, but we will be so deeply screwed, his reputation won’t matter anymore. Not much will.
http://cheaprealty.net/roubini-credit-losses-crisis-1-6-trillion
Hedge Fund manager John Paulson (Paulson & Co.) is looking for $1300 billion. All of these guys, started predicting a nice round trillion in write downs and are becoming more pessimistic with time as losses mount. The collapse of Fannie and Freddie will do that to you...
http://www.bloomberg.com/apps/news?pid=20601110&sid=a_dAvx5tof.o
Bridgewater Associates Hedge Fund is with Roubini at $1600 billion. They say only $400 has been written down to date.
http://www.creditwritedowns.com/2008/07/16-trillion-new-esimate-on-writedowns.html
Enjoy the ride, folks. It's gonna be wild and bumpy.
What is the ultimate result of all these writedowns. When you writedown your assets, it is a debit(expense) to Bad Debt Expense and a credit (reduction) to the asset. Here’s where it gets interesting. These huge writedowns generate tremendous tax credits. How? Simple accounting: when you go from gross to net profit, there is a tax calculation. When you make money, taxes are positive and is recorded as a liability (owed to the IRS) on the balance sheet. When you lose money, taxes are negative and can be recorded as a debit to reduce the liability or as a separate asset to be reduced by future profits.
Net result: These writedowns are going to let these companies off the hook for any taxes owed for a LONG time.
You have part of the answer.
The problems with the writedowns is that they are a charge against capital. Banks and Savings & Loand have minimum capital adequacy requirements by law, below which they are insolvent. There is an international standard also (Basle Compact).
Insolvent banks go into liquidation and the devil shows up when there are customers that use more than one bank. Example: You have a commercial construction with Bank A and a credit line with Bank B. Bank A goes down and istaken over. The Feds will not further fund your construction loan, which defaults creating a default in your loan at Bank B.
We have about 9,600 banks in the U.S. now. When this is over in two years or so, I would guess we will have maybe 6,000.
My point is if some house gets bubble priced up to 1 million dollars, and a “fair and reasonable” valuation puts it at say $500,000, does it really effect the economy in the long run that the phony asset/price appreciation got zapped?
Send the bill to Nancy Pelosi?
I know that's not the best way to phrase this, but I think many of you will know what I mean...
It is at times like this that I enjoy being poor, since I don't have to worry about this "stuff" :-)
Do these 1 trillion, 1.3 trillion, 1.6 trillion dollar estimates include the writedowns on the coming tsunami of ARM resets?
And do you agree with Bill Gross that the current bailout abomination bill going through Congress is the best solution?
NO cheers, unfortunately.
When a bank has to write down (or write off entirely) a bad debt (non-performing asset), they have to reduce the other side of the balance sheet. They obviously can't reduce customer deposit liability, so they have to reduce equity. The issues at hand are: 1) banks will usually estimate how many loans go bad and create bad debt allowances, but if their estimate is wrong, well, you get where this is going; and 2) the equity is serving as a cushion against the deposit base, but if there are too many write downs of bad debts (or impairments of other assets), and equity gets eaten up, it's game over...you can't eat into customer deposit liabilities. Note that tax liabilities related to these transactions may or may not have a significant and noticeable impact on the bank in question.
I recognize the differences between banks and manufacturing, which I have more than passing acquaintance. However, Bad Debt expense is a P & L item. You can’t reduce equity directly,; it has to go through the P & L. So, somehow banks must be producing some kind of P & L statement. This is where the tax calculation come in.
The reduction to equity is the P & L loss. Net effect is that they still will have a tax credit to use against future profits.
I think we are saying the same thing, just using different words.
They all tend to start talking, giving you just enough information, and stop it in mid-sentence. They dread putting a period to their stark assessment. They just leave a room for sliver of hope, however vague it could be.
They all do not want to be featured in a history book as a guy who started the panic.
On the other hand, politically there is no choice but to take the course of bail-out. However, its effectiveness is a different problem. They may start bail-out because of political pressure, but if dollar goes in tailspin again and inflation shoots up further, they will have to stop for a while. I suspect that this kind of ad-hoc stop-and-go actions will continue for a while, until everybody gets tired and sees the futility of it.
The income statement, perhaps? That would reflect revenues less expenses, or net income, i.e. a profit or a loss, for a given period.
An end-of-the-world-as-we-know-it bump
This “trillion dollar writedown” implies that the banks lost $1 million on each of a million houses, or a quarter-million on each of 4 million houses, or $100,000 on each of 10,000,000 houses.
Is that realistic?
A great majority of the remaining write downs will come overseas. Only US companies have really written down much at all. View Australia’s NAB last week as a step to come.
In amy event this in turn flows through to the retained earnings account which is part of the banks capital structure. Again, beyond a cewrtain debt equity ratio a bankis considered insolvent and is taken over.
No one knows which mortgages are good and which are bad. It drags down the value of the whole portfolio.
This huge number is why I think the most reasonable way to fix this is to deflate the money supply. The Fed and treasury created this mess by creating cheap fiat money, and loaned it out to banks, at no cost to themselves. The money can now not be paid back entirely, and banks are starting to go under. Just take the bad debt from the collapsed banks, hand it to the Fed, and they will mark it in in their computers that the money supply has shrunk. We don't need to print more money to replace what has vanished.
. . o k , but, what’s the down side of that?
It makes no attempt to "fix" or bail out the people who cannot pay their debts, it simply collects up the sum of the bad debts, and writes them off at the highest level. The flip side of this is that there is no moral hazard at any level.
Deflation will support the value of the dollar, but it will not support the value of the inflated assets. All homes will lose value, because there will be less dollarars available to buy them. However, I don't see any way to prop up the value of homes, except hyperinflation, and that will cause more damage.
Consider this a roll back to a 2003-2004 GDP level.
Very little. Both have rocket-assisted trajectories.
Ok, but what’s ‘causing what I feel is slippery slope inflation and why(I suspect it’s deeper than the drive by explaination).
Are policy makers oblivious to the concept of moral hazard? I would tend to argue that the most important aspect of almost any policy is the avoidance of moral hazards. No matter how well-intentioned a policy may be, if moral hazards are not guarded against the policy can be expected to cause harms that spiral out of control.
I think some of that is due to the price of oil, and some due to the deflating dollar. Deflation will help prop up the value of the dollar, so it should help things like the price of oil, priced in dollars.
SCOPE OF WRITE DOWNS
I don’t know for certain if losses from Alt-A and Option ARM loans are included in these loss projections, since the articles don’t provide that detail, but I assume these loss predictions DO include them. I find it hard to believe that the analysts would be stating total losses from mortgage defaults while ignoring half the market in creative financing.
My logic tells me that these loss estimates would be based on ALL forms of mortgage financing. So I consider it a good assumption that these losses are the total expected losses from all forms of mortgages including prime, sub-prime, Alt-A and Option ARMs. The only question is, how conservative are the assumptions made about the number of defaults. We may see these numbers revised upward yet again.
HOUSING BAILOUT
Housing and the bailout are so complex, I can’t begin to guess if it is a good idea or bad. This is not a housing bailout. It is a banking bailout. The intention is to prop up and save the banks from an onslaught of continuing losses. The banks don’t get off scott free. They will take some losses by renegotiating non-performing loans. But they will still be much better off than without the bailout. So, is this a good idea?
If it avoids a depression, I guess it is a good idea. I think it is a bad idea. It is a socialist plan to reward bad economics, encouraging more in the future, and punishing those who were prudent. It sends a bad message, rewards poor financial judgment on every level, and worse, it is not likely to be effective. It is likely to delay, not prevent, a day of reckoning. Japan had great savings rates when they went through their lost decade of stagnation. We are deep in debt and stand to lose a couple of decades if we repeat Japan’s mistake.
I would prefer to see the market work this out and let bygones be bygones. It would create a shorter term economic hardship, but we need to get the debt down, get savings rates up, and get house prices back to affordability. All the bailouts in the world won’t fix the inherent systemic problems in the financial system and in housing.
It is anybody’s guess if the bailout is a good idea or even if it will work. I’m against it. I want the market to wring these problems out and get back to soundness, not continue artificially inflated housing values just to save some banks from insolvency.
I would like to see a requirement that companies seeking eligibility for government bailouts must post as bond a certain amount of personal capital from their executives. Otherwise, executives get to make decisions which may or may not work; if they luck out, they keep the profits, but if they don't they still lose nothing. Why wouldn't executives make risky decisions given such the present structure?
The S&L mess was cleaned up for 500 billion when a dollar was worth more. So a 1.2 billion dollar cleanup for the sub prime mess is digestible. Or is it?
This mess seems 10 times bigger than the S&L mess but what do I know
Personally, if all we had to contend with was $1.2 trillion in losses in the banks, I wouldn’t be too worried.
Add hundreds of trillions of derivatives running around loose.
Add $4 trillion in lost home equity.
Add the lack of transparency and fear among financial institutions who now fear lending to any person or institution who is not a sure bet to pay 100% on the loan.
Add fuel and food inflation.
Add weakening retail sales as consumers pull back from fear or from being squeezed by food and fuel inflation.
Add drops in government tax revenue.
Add increases in unemployment.
I’m not liking it. There is way more going on in the economy today than there was in the early 1990s with the S&L crisis, and it still did a nice job of taking down housing at the time.
This is worse. Much worse. It is not only the magnitude of financial loss and the resulting tightening of credit as lenders suck up money to meet reserve requirements, but it is the fear and opaqueness in the financial markets and all of the other issues I listed.
All this presumes the losses will ONLY be $1 trillion. It remains to be seen.
Try this on for size.
Here is an article from 1991 about the S&L crisis, where projected losses of $130 billion made in 1990 had soared to $500 billion just the next year.
“Mr. Bowsher is expected to tell the Senate Banking Committee that Resolution Trust is likely to spend significantly more than the $130 billion the Bush Administration projected last year.
“Mr. Brady has repeatedly predicted that the savings and loan bailout will not exceed $130 billion, counted in 1990 dollars. The G.A.O. has put the cost as high as $500 billion over the 40 years that the Government is expected to borrow money to pay for the bailout. “
http://query.nytimes.com/gst/fullpage.html?res=9D0CE6DB1539F932A25755C0A967958260
What happens when it turns out the losses are $2 trillion or $3 trillion? What then?
I ESPECIALLY like the statement from above “over the 40 years that the Government is expected to borrow money to pay for the bailout.” That means going into this crisis WE ARE STILL PAYING FOR THE LAST ONE.
So how long must the goverment borrow for for this crisis. They are committing to a $300 billion housing bailout, but you KNOW the cost will be 3 times that when all is said and done. Are we going to borrow that money over 90 years? Paid for by your children’s children’s children 90 years from now? Sickening. And all just so fat cats could get rich, brokers could gouge on commissions, and politicians could report lofty GDP growth, all the while China grew rich. Sickening.
FWIW, I can’t find a solid number on the S&L crisis, but when all was said and done, the total bailout seems to be around $150 billion — far lower than what we are talking about here.
I guess that is good and bad.
The bad is that that the projected losses due to housing is some 10 times the actual spent by the RTC for the S&L bailout.
The good is that, the S&L bailout turned out to be a third of the most pessimistic projections of $500 billion. Maybe many of mortgages at risk will turn out to have solid value and the housing bailout will only be a third of these pessimic projections, coming in at $400- to $500 billion. That would be good news indeed!
The lesson we learned from the S&L bailout is, if you screw up badly enough, Uncle Sugar will come to the rescue. Don’t think for a minute the big financials didn’t know that going in to this. They didn’t expect to see massive losses, but they knew if it happened, Uncle Sugar would be there with a torrent of money.
The housing bailout means the moral hazard will only get worse. The can add volumes of new regulations to those existing, but at the end of the day, everybody knows that risk gets profit or it gets government losses. You can’t lose!
>>>Bill Gross of Pimco, expects the fall-out from the US sub-prime mortgage crisis to hit $1 trillion
Bill Gross’ estimate can be found at http://www.pimco.com:
“PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble.”
Also, the estimate can be found at http://www.bloomberg.com
William Poole, the outspoken, retired St. Louis Federal Reserve official, has written about the dangers in taking over Fanny/Freddie Mac back in 2003 (?) and today. He has a recent letter to WSJ (yesterday?) about how putting the full faith and credit behind these organizations will effectively DOUBLE the debt of the US from a foreign central bank point of view. You can view the earlier free version of these comments at Financial Times website:
http://www.ft.com/cms/s/0/a8b69fcc-5460-11dd-aa78-000077b07658.html?nclick_check=1
As I understand it (see Hussman Funds report this week), the Fed has $2.4 trillion in mortgages outstanding (some portion of those are bad)... BUT over 5 trillion in mortgages and MBS guarantees. That amount exceeds the amount of publicly held debt of US.
http://www.hussmanfunds.com/wmc/wmc080728.htm
The problem is not that we can’t handle it, but that other nations will think we can’t handle the debt load with our lower growth rates. The upshot is that with low growth rates stemming from the financial (real estate) bubble, we can expect higher real interest rates and/or another currency devaluation along the way.
Didn’t one of Bush’s team fire one of their own for estimating the Iraq war to be greater than $300 billion. That proved to be just a starter number, and I fear the numbers being tossed around by (government beholding) PIMCO is also low.
Let us hope that PIMCO is high. But Poole’s comments must be taken seriously as Poole has always been one to not mince words and to warn us in advance of the folly of our ways.
So far, the government bailouts of non-banks have not zeroed out equity and management. Nor have they give a haircut to the debt holders. We have rewarded these financial firms for taking on huge risks so they could enrich themselves. We need “bailouts” that address these issues. We can’t keep rewarding bad behavior.
One thought with regards to higher food and fuel prices - folks are using their credit cards more to cover those increases. Of course in the past one could just take out a second mortgage to pay off those credit cards - but now!? So if Bank of America has the home loan which goes bad now, and the credit card loan, which goes bad in a little while - I guess the gov’t will have to pony up again!?
I recall a few years ago when folks were complaining about the “obscene” profits of “Big Oil”, that the banking industry had much higher profits - like on the order of 30%to 40%. These high profits were to make up for the amount of “risk” that they were taking in doing business. I have no idea what these profits amount to in total dollars - but it would seem to me that 30% profits over many years in a HUGE industry would go a long ways towards the $1 trillion.
I have no problem with a 30% profit. I do have a problem with the bailout afterwards.
Wouldn’t this basically be financial doomsday?
What matters is which one of the honchos gets the performance bonus at year end or the bullet-proof golden parachute.... (/sarcasm)
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