Total writedowns on subprime-related ABS globally are set to reach $285bn, said S&P earlier this month, with $150bn of the hit already taken. Within that, about $110bn was taken by large banks and investment banks. The bulk of writedowns are behind us, the agency gleefully suggested. The end is now in sight.
Goldman Sachs begs to differ. (HT to Yves Smith.) This week, the bank’s economists put total credit losses at just the US leveraged financial institutions - including banks, broker-dealers, hedge funds and GSEs - at $460bn.
In fairness, the two sets of numbers do not vary as wildly as their headline figures suggest. But the spin and outlook does. As Smith notes, the Goldman number is bumped by the inclusion of the the government-sponsored enterprises, whose losses are not broken out separately. Goldman adds that of the total about half the writedowns will come on residential mortgage-related securities, with about 15 to 20 per cent on commercial mortgages. The remainder comes on credit card loans, auto loans, commercial and industrial lending and non-financial corporate bonds. Focusing purely on residential mortgages, we may indeed be half way or further through the process.
The Goldman universe of US leveraged institutions has thus far suffered $120bn in losses, of which about $90bn has come on MBS and other securities, with the remainder taken through loan impairments. Including foreign banks, brokers and the like, the figure rises to $175bn.
The implication of the above analysis: although we have made considerable progress in the residential mortgage area, US leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble. There is light at the end of the tunnel, but it is still rather dim.
Those “leveraged losses” are critical, says Goldman. These companies can plunge us deeper into the credit malaise, as they tighten up on lending to preserve capital. Expect significant writeoffs and ensuing trouble, even after the first quarter.
In fact, the situation may become more, rather than less, strained. Thus far, US institutions have raised about $100bn of new capital helped by the largesse of sovereign wealth funds and slashed dividends, largely offsetting the losses booked. That will only get harder.
Whether US or foreign investors will be willing to continue this pace of investment is highly uncertain, given the disappointing return of many of these investments to date.
Related links
Panic over (or almost) - so says S&P - FT Alphaville
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