Goldman: Total Leveraged Credit Losses = $1.2 Trillion

Barron's Alan Abelson praised Goldman Sachs' (GS) economic team this weekend, saying, "They're not always right . . . but they do tend to call them as they see them, they avoid as much as possible the usual economic gobbledygook, and the numbers they collect -- the raw material, as it were, of their analyses and forecasts -- are commendably reliable.

Abelson specifically cited Andrew Tilton's recent report on leveraged losses: "that is, losses inflicted on banks, broker-dealers, hedge funds and government-sponsored outfits by the cruel credit crunch."

Ubiq-cerpt:™

"The sorry total weighs in, by Goldman's reckoning, at a cool $460 billion. And that's after loan-loss provisions.

Now, $460 billion is a nice round figure, with about half of it losses on residential mortgages and perhaps 15%-20% from commercial mortgages. As Tilton comments, "although we have made considerable progress in the residential-mortgage area, U.S. leveraged institutions have written off less than half" their projected losses. Manifestly a cheerful type, he feels "there is light at the end of the tunnel, but it still is rather dim." So dim, we must admit, that these tired old eyes, strain as they will, have trouble making it out.

We hate to add to what we consider a pretty gloomy prospect, but Tilton takes care to note that the $460 billion that Goldman expects to go down the drain is "only part of total credit losses," which it anticipates will reach a tidy $1.2 trillion. However, he explains, the leveraged losses are especially critical, as they cause a significant tightening of credit as institutions curb their lending to conserve shrinking capital. Which, for us, anyway, makes the tunnel a lot longer and the light a lot dimmer."

A trillion here, a trillion there, pretty soon, you're talking real money...

Source:
The True Contrarians
ALAN ABELSON
UP AND DOWN WALL STREET
Barron's, March 31, 20080

Related:
Everett Dirksen

Comments

[ChristopherBush]

SKF looks like a good buy....

[vrspace]

Some questions if GS is correct and there is still more than 80% (almost $1trn) to be written off:

Has the pain and trauma from the write-offs to date been proportional to the size of those write-offs, exaggerated in anticipation of what is to come or diminished due to the administering of fiscal and monetary anesthetics / treatment?

Will the pain and infection from future write-offs be similar to what has been experienced so far or will it be cumulative and increasing in intensity?

Will there be sufficient quantity and type of anesthetic and treatment options to deal with the additional $1trn of write-offs?

What side effects might be expected? Are the anesthetics addictive? What is the prognosis?

[hollowman]

All I can say is - we'll see.

These guys really sucked when it came to predicting this little mess in the first place, so I'm not sure I have any faith in their correctness now.

[johnthebear]

Commercial mortgages, (CMBS) represent 20% of the $460 B lose or 20% of the 1.2 trillion loss? Makes a huge difference on the world wide stage.

So far the real estate bubble remains in place for the REITs, even though they have fallen a lot already.

For comparison, I suggest pulling up a chart of the NASDAQ and then compare the IYR, the Dow Jones real estate index of the REITs.

Note that the REIT bubble is higher than the NASDAQ in 2000 when the index was trading at 5,000!

For comparison of an even bigger bubble, add EEM and FXI to the mix.... They are both substantially higher than the old NASDAQ in 2000.

The real estate bubble in China and Asia is super big and when those loans start defaulting the tunnel becomes downright bleak and midnight black.

[venividivici]

When you have a financial disaster the initial predicted losses always turn out to be way too optomistic.

[jimmy46]

a significant part of that trillion was lost by foreigners,
so far the Japanese haven't fessed up to a penny of losses,

swiss and canadian banks have admitted to part of their losses
Hopefully over half the losses will be borne by foreigners.
I know this won't endear us to them, but most of them
have gotten a free ride off us since WW2,
so now the worm turns :> I hope

[sammyg123]

Goldman's actions reflect it's views. Goldman went short subprimes in August 2007, and heavily at that. History might judge this move as being that which started the unwinding, and thus Goldman is the smartest student in the class. I think it would be best to see if Goldman is or has been short other CDS classes, or how the firms' trading reflects this view. I wouldn't put it past Goldman to say one thing and then do another. It's par for the course in the industry, naturally.

Regardless of Goldman's views, I have to think that with banks and financial institutions' reluctance to lend, that this will further lead to some friction in all businesses which rely on bank lending to monetize their contracts. This tells me that the cost of business is going up, and the pace of business will slow by some degree. Financial institutions will want to fill the loss breaches with fresh profits, if they can, so they'll charge more. Ultimately, we all will finance the bailout, either by taxes or by increased lending rates, or both.

[fxtrader07]

hey jimmy 46 , well, that's really silly!
the guys who really had a big free ride over the past 2 decades were the USA! draining well educated staff away from poor countries paying zero to those countires who invested all their scarce money into their training, borrowing billions and billions for consumption in exchange fior worthless IOU-nothing-paper-doll... extracting commodities from poor countries by use of force, threats and again, worthless paper dollars.. to just name a fery few items.
Now, all these fancy almost worthless paper dollars come home to buy up assets before those green toilet slips get completely worthless. the usa depends like no other country in the world on the kindness of foreigners to lend them capital. you will find out thjat your funny service economy is just another silly bogus concept by the govt and wallstreet to lure the american people into a false sense of security. you will have to rebuild your manufacturing base, you will have to save the money that you want to spend you will have to pay back debts and you will not be able any more to let the entire planet pay for your wars and for polluting the earth and for using up all the precious natural recources without caring for future generations or other people.
america has exploited half the planet for decades - but yeah - keep talking about other having taken "a free ride off the us" LMAO

[Herb S.]

Just wait until the consumer credit card bubble breaks. No wonder Visa needed $billions more in IPO capital. I wonder who was taken in as buyers due to the high yields? See background below:



ARISTOCRACIZING AMERICA
Herbert B. Siegel, Ph.D., November 2001


Beginning with The Bank Holding Act of 1956 that exempted Industrial Loan Companies from federal banking regulations except for keeping them eligible for government- sponsored FDIC insurance, these secondary lenders were a valuable source of high interest loans to a public segment otherwise unbankable. A financial stranglehold has proliferated on all citizens, however, because of misusing an otherwise well conceived statute.
Today, Industrial Loan Corporation charters are open to non-bank corporations wanting to own a financial institution without becoming subject to the provisions of the Bank Holding Company Act. These “Credit Card Companies,” with federal deposit insurance protection, are endowed by Congress with “most favored lender” treatment and “exportation” rights pursuant to the Federal Depository Institutions Deregulation and Monetary Control Act of 1980 , a statute enacted to allow a special interest group to usurp all State usury laws, and charge outrageous interest on credit card purchases that masquerade as punitive fees, elected by the card-holder, as an addition to contractually high interest rates.
Only California, Colorado, and Utah offer charters for Industrial Loan Corporations that are eligible for FDIC insurance to exempt them from abiding by bank regulatory statutes, and other State usury laws. In 1986, only the Utah legislature enacted a statute that “mandates” all Industrial Loan Corporations be insured by the FDIC, and be allowed to use the words “bank” and “savings” in their name. This act enhanced the value of their State charters for non-bank Industrial Loan Corporations (previously tainted by the failure of Utah’s privatized Industrial Loan Guaranty Corporation that resulted in numerous problems for state politicians including depositor lawsuits.)
The Competitive Equality Banking Act was passed by Congress in 1987 to change the definition of “bank” to include any institution having FDIC insurance but specifically exempted Industrial Loan Corporations from other bank regulations if, among other things, such corporation, “...organized under the laws of a State which, on March 5, 1987, had in effect, or had under consideration in such State’s legislature, a statute which required or would require such institution to obtain insurance under the FDIC Act.” Utah was thereafter prepared for the “gold rush” of domiciling credit card companies. From 1994 to 1998, at least eighteen major credit card companies obtained Utah State Charters to operate as Industrial Loan Corporations, including American Express, First USA, GE Capital Financial, and Providian Bank. Combined these accounted for over $18 billion in consumer debts in 1998. Today, these chartered “banks,” joined by almost 200 others account for $two trillion of outstanding credit card debts-- half of which constitute egregious interest charges and punitive fees (the latter a euphemism for even higher interest rates) that often double the cost of an original purchase on a revolving account every two-years. The constitutionality of State and consumer rights to fair and statutory interest is rarely challenged when federal legislation benefits the gigantism of credit card “banks” and their lobbying at all political levels, not to mention the largess of their political action committees (PACs) and soft money contributions.” (MBNA, a major company made political contributions of $3.5 million in the last election, and the credit card industry as a whole is estimated to have contributed $19.2 million, two-thirds going to the Republicans). Pernicious consumer laws become accepted doctrine by default because they are rarely tested against the metrics of our founding fathers that entitles every American citizen to freedom from legalized forms of oppression---economic, as well as religious.
Not content with the Utah lottery that entraps the American public into over-shopping then paying credit card companies twice for the privilege, or the merchant clients who also pay fees, discounts, and collection days to credit card companies for the privilege of selling merchandise, the Congress passed consumer bankruptcy law reforms(?) to prevent hard-pressed American consumers from their constitutional right of due process to declare bankruptcy and obtain relief from their accumulated and burdensome debts including credit cards, exorbitant fees, and horrendous interest. This new law raises all credit card debts to the same priority as income taxes arrearages (taxes are not dischargeable in bankruptcy). In U.S. history, no other type of indebtedness enjoyed such privileged status. Senator Orin Hatch (R-Utah), and former chair of the Judiciary Committee that created this travesty, is quoted as saying, “This bill will do an awful lot for the good people in our society”. Article 1 of The Constitution grants powers to Congress to regulate bankruptcy for the purpose of “enacting laws of hope,” but can the debtor’s stockades be far behind?
Congress is unaffected by the burdensome consequences of having American citizens pay exorbitant and no longer illegal interest and fees that masquerade as punishments, but our politicians continue to profit politically from the payback of passing the Bank Holding Act of 1956. Do we not have political aristocrats who cloak themselves as selfless public servants to further enrich their regal benefactors as well as themselves?