Roubini Ups Losses Estimate to 3T - Still Smaller Than the Rescue Packages

From Bloomberg: Roubini Sees Worst Recession in 40 Years, Stock Drop

I have no idea if Nouriel Roubini, "the professor who predicted the financial crisis in 2006", is going to be right or wrong on the market drop or the recession.  If we see bank lending rates come down, I think he’ll be wrong.  If bank lending rates stay high, he may be right.  One other thing I’ll be looking at in the weeks ahead is PPI All Commodities.

But the main point is this: His estimate of total credit-related losses have gone from 1 trillion to 2 trillion to his current estimate of 3 trillion.  He’s double the worst estimates out there.  As bad as that sounds, it is STILL smaller than the amount that global governments have pledged to their respective rescue plans.

I never knew that, when I started my blog in January, I’d have used the word trillion so many times!

Comments

[PastTense:]

"As bad as that sounds, it is STILL smaller than the amount that global governments have pledged to their respective rescue plans."

So you don't think it as bad for the world (as opposed to the banking/investment industry) if it the governments which lose 3 trillion dollars instead of the banking/investment industry?

This priniciple of privatize the gains and socialize the losses has massive negative consequences for the future.

2008 Oct 15 11:59 AM

[Reinko:]

I don't exactly know what this 3 trillion means; are these write downs & losses or are these 'troubled bank assets'.

Yet elementary calculations indicate in the entire housing crisis up to 10 trillion in family home value will get lost and this will lead to 3 to 4 trillion of so called bank assets.

But there is a little problem: The bad loans were turned into securities, the securities were sold and resold, sliced and packed together to be sold and resold. No one knows what the entire package is worth.

Beside this there are about 55 to 62 trillion CDS contract value outstanding and this is about 10% of all OTC derivates. Lets say, if you sold for 50 dollar exactly 1000 dollar of CDS on Lehman, you earned 50 dollar and now you have to pay a 1000 dollar...

2008 Oct 15 12:24 PM

[Stone Fox C...:]

With both JPM and WFC reporting profits today, it gets very perplexing where these losses will come from. At least, to the extent that they cause further capital raises and such. JPM wrote off $3.6B in losses and added $1.3B to loan reserves plus took another $1B in losses from Fannie/Freddie/Lehman and $640M after tax for WM. Yet with all of those losses, they still made $547M. Nothing to get excited about, but all of the losses were absorbed. WFC had a similar picture of writedowns absorbed.

So yes we'll see more writedowns as we saw nearly $10B from the combined JPM & WFC reports (remember that includes Bear Stearns and some WM as well), but where are all these losses coming from that'lll require substantial capital? Just about all the bad banks have been absorbed and the govt has handed out a ton of capital. Roubini seems off his rocker to think it'll be 5x as much. At this point its starting to look like most writedowns can be absorbed by profits.

2008 Oct 15 01:02 PM

[Don Fishback:]

I didn't say it wasn't bad, I just said what it is -- that the amount of money being thrown at the problem is bigger than the problem itself. Whether that's good or bad as policy is unknown at this time.

I was just surprised that the magnitude of the problem as defined by even the most pessimistic guys out there is less than the amount of money being committed. The way the news cycle has been going, you'd think that the problem was so large that governments couldn't stem the losses. But this makes it seem that the solution is bigger than the problem. Let me know if I am missing something.

And just to repeat, this is not a policy issue. From a taxpayer's point of view, I think it sucks. But from a loss mitigation point of view, it seems as though governments, supported by their respective country's economies, can make up the worst-case losses.

2008 Oct 15 01:16 PM

[Diane Ritter:]

Well, unfortunately, the banks are lying to us. They are managing their reporting of their write-downs each quarter, reporting as much as they think they can get away with without spooking investors. It will probably take them 3 or 4 years to write down all of it. And that 3 or 4 years is just a guess. Their balance sheets and many of their assets are so opaque that probably the banks themselves don't know how badly they are in the hole. The Japanese banks are still gradually writing down their real estate and stock market losses, 10 years later, making sure each quarter that the write downs are less than total profit. And until real estate prices stop going down, and foreclosures and credit card defaults and auto loans defaults and business bankruptcies stop going up, no one can know how badly off all the banks really are.

2008 Oct 15 03:53 PM

[Smarty_Pants:]

What's a couple trillion in losses between executives and shareholders? As long as the execs continue to get their mega-huge paychecks and bonuses everything is copacetic.

And it's not lying, it's an alternate interpretation.

2008 Oct 15 04:06 PM