Credit Crisis Losses Will Put Black Monday in the Shade

Bank of America delivered a report last week highlighting the current losses of the "Credit Crisis". According to the report, the meltdown in the U.S. subprime real estate market has led to a global loss of $7.7 trillion in stock market value since October.

Quoting Bank of America chief market strategist Joseph Quinlan ,"The crisis, which has spread beyond U.S. shores to banks and other sectors worldwide, is one of the most vicious in financial history".

In his report, Joseph Quinlan states that the losses are worse than any in the past few decades, including Wall Street's Black Monday of 1987, the 1999 Brazilian real currency crisis, and the collapse of hedge fund Long Term Capital Management (LTCM) in 1998. Quinlan quantifies the current credit crisis by determining that world market capitalisation is currently down 14.7 per cent three months after a peak in late October. He has compared this with similar losses three months down the road of 13.2 per cent after the LTCM crisis, 9.8 per cent for Black Monday and 6.1 per cent after the Brazil crisis. The losses were also greater than those suffered after the September 11, 2001 terror attacks, the Asian financial crisis starting in 1997, Argentina's default on its debt in 2001, and the 1994 Mexican peso crisis.

A report last week by Standard & Poors ratings agency showed global stock markets were devastated with a collective loss of $5.2 trillion in the month of January alone. This does not take into account all the further repercussions. Banks have been tightening their standards. Lack of counterparty integrity is a common occurrence.

So many are asking where the next surprise will come from. Or possibly one could even argue that it is not a surprise any more. Swiss bank UBS shocked markets on Thursday with tens of billions of dollars of new exposure to risky U.S. mortgages, leveraged finance and complex securities. It used to be that banks did not trust hedge funds, and now hedge funds are afraid of the banks.

One of the biggest problems is that it seems no one knows how to quantify the losses, or what is the true value of paper or derivatives that so many banks and institutions are holding. Using this a basis of thought, how could one expect the "Credit Crisis" to be solved in the near future. In comparison, (at least hopefully so), the Depression of the late 1920s to late 1930s lasted longer than anyone expected. There were rallies then as well as severe down drafts. One can also look at Japan: In 1989, the Japanese stock market was 39,000 and today it is at 13,600.

In the end, the current financial crisis could be one for the record books. One more possibly ominous thought, it's not over yet! Even Ben Graham, the father of Value Investing, encountered drawdowns that took him years to recover.

Comments

[George Gorski:]

The problem with credit over the last 10 years, is that non-bank financial institutions did not honor the .35 debt to income ratio set out by banks. George

2008 Feb 18 10:09 AM

[R. Louis:]

As one who sold my home of 20 years in 2005, I knew then that the boom would have to go bust. Now I am holding on to my gains and will buy again at the bottom, which is still far off. Any imbecile should have seen this coming, wages were nowhere near where they needed to be for people to be pur hasing property at such inflated prices, particularly here in California. People wouldn't listen then as they were caught up in the euphoria of buying with no down payment, low initial payments and quick equity which they borrowed against to buy new toys. Banks thought they would be immune to liability as the bankruptcy laws had just been changed to their advantage. Never did they consider that folks would just foreclose, and why shouldn't they? What, with no down payment and low house payments they had nothing to lose. Only those who took out home equity loans are going to find themselves in a bind. Most of the blame has to be shouldered by those in the real estate business, they knew what was happening or else they just had their heads buried in the sand or were blinded by their own greed. I don't feel sorry for any of them, people get what they deserve. But now, of course, the codependents out there will bail out all their cronies so that the cocktail parties can still go on while they laugh about it all. But I agree with wakeup, it will get worse. The effects are just too far reaching this time, unlike the dot com bust. Good Luck!!!!

2008 Feb 18 03:59 PM

[helplessobs...:]

Louis,
Also all those home equity loans are subordinate to the first mortgage. I've seen reports where banks are not even trying to collect the payments, moving them to level 3 assets for the next generation of bankers to try and collect.

2008 Feb 19 12:16 PM

[Al Badran:]

As an Arab-American, Few months ago I was presented with a consulting position and have moved into Kuwait to work as an Investment Banker/Business Developer consultant for Kuwaiti/GCC clients. Approx., 5 months ago I've warned my clients about the fall out of the subprime credit ripple effect and it's impact on GCC market. One key addressed factor they've taken lightley 'Short term liquidity'.

There are several factors to the credit squeeze and the increased cost of raising capital in the regional and global market. The regional market is suffering from short term liquidity concerns that are due to several trends such as the increased pricing of the upcoming securitizations in the MENA region and the hyper activities of an active GCC investment houses.

Financial turmoil has not hit GCC market as hard as mature markets but weakening credit risk has increased vulnerabilities with some of the regional banks. Persistently high oil prices continue to ensure a high rate of nominal GDP growth in the GCC region, but escalating inflationary pressures are putting pressure on real growth rates.

In a nut shell and according to market trends the ripple effect of the sub prime fall out will be short-lived in theory as demand for capital funds for investment projects in the GCC region is increasingly strong. Add to that the aggressive drive and support for project financing/infrastructu... development by GCC governments remain aggressively strong.

For example Saudi Arabia is courting local banks to participate by upfronting 20% cash capital in order to entice participation. Nevertheless, the impact of the subprime fall out would still be 'Short term' liquidity as a result a new opprtunity would emerge and we will need to capitalize on that.

2008 Mar 01 01:04 AM

[investor88:]

Another of Andy's article which has proven its worth in gold, now that we have the benefit of hindsight.

2008 Sep 17 10:39 AM