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.
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