How bad can the 'credit crunch' get?

[c1ue]

From Jim Willy:

http://www.kitco.com/ind/willie/jan242008.html

The total of all US$-based mortgage bonds is $10.4 trillion. A conservative estimate of the prime mortgages within this giant mass is $7 trillion. We all know it is more, so bear with my lowball for argument sake. The prime mortgage bond index measures an aggregate of prime rated bonds scattered across the beleaguered fifty states, varying over loan size from large to medium to small. The ‘AAA’ mortgage bond index has lost a whopping 30%, a fact that continuously eludes the big bankers and their legion of obsequious monitoring mavens. Simple math, within the grasp of a 9-year old kid, results in prime mortgage losses amount to at least $2.1 trillion.

The size of the subprime mortgages in the United States is estimated at $1.4 trillion. The ‘BBB’ mortgage bond index has lost 80% of its value. It too measures an aggregate of such mortgage bonds across the US, of various size loans. So subprime mortgage bonds have lost over $1.1 trillion.

Add the two numbers from subprime and prime together to reach a $3.2 trillion in their bond losses.

On top of this, add somewhere between 50% (2004), 250% (2006), and 400% (2007) in equivalent dollar value credit default swaps - and you get a whole heaping of pain.

It is safe to say that losses will wind up running in the $5T to $10T range, perhaps as high as $15T.

Compare to the internet losses: total market capitalization lost between March 2000 to October 2002 was about $9T.

But the 'credit crunch' losses are to cash as opposed to market capitalization...

Note also this does NOT count losses due to falling house prices. That is likely to be in the $5T to $10T range.

As for the next bubble - it would need to generate at least the amount of money lost in the real estate/'credit crunch' bubble to operate correctly.

Food for thought.

[icm63]

Re: How bad can the 'credit crunch' get?

The most bearish of all economist is saying losses of $1 Trillion

http://rs.rgemonitor.com/blog/roubini/240131

"The debate today is not any longer on whether we will experience a soft landing or a hard landing in the US; it is rather on how hard the hard landing will be. In other terms on whether the current recession will be relatively mild - say lasting two quarters until the middle of 2008 - or rather be much longer, deeper and uglier and lasting at least four quarters. My view is that the recession will be protracted and painful as a shopped-out, saving-less and debt-burdened consumer is on the ropes and now faltering; while the financial system is on the verge of a systemic crisis that will cause a severe credit crunch...
Indeed the delinquencies and losses in the financial system are spreading from subprime to near prime and prime mortgages; to credit cards and auto loans; to commercial real estate loans; to leveraged loans that financed reckless LBOs; to the losses of the monolines that are effectively bankrupt and at risk of spreading furher massive losses to money market funds and other financial institutions once they get properly downgraded; and soon enough to corporate defaults and junk bonds that will in turn trigger massive losses on credit default swaps; eventual losses in the financial system may add up to more than $1 trillion...
As for decoupling there is no way that the rest of the world can decouple from a US recession. When the US sneezes the rest of the world catches the cold; and unfortunately this time the US will not experience just a case of a mild common cold; it will rather suffer of a painful and protracted episode of pneumonia; thus the real and financial contagion to the rest of the world will be serious...
The Fed will ease aggressively but whatever it does now is too little to late; this easing will not prevent a recession as monetary policy can deal with illiquidity problems but it cannot resolve the deep credit and insolvency issues that plague the US economy; also when there is a glut of capital goods - in 2001 tech capital goods, today a glut of housing, consumer durables and autos the demand for these goods becomes relatively interest rate inelastic; it takes years to clean up this glut and monetary easing does not work as it is like pushing on a string...
U.S. and global equity markets will enter a serious bearish market as a US recession and sharpl global economic slowdown take a toll on investors' risk aversion and firms' earnings and profitability...all risky assets will be under serious pressure in 2008".

[icm63]

Re: How bad can the 'credit crunch' get?

In the UK in the 1990s the median UK house price index FELL 25% from 1991 to 1996. The Bank Of England was bailed out by the UK Govt for bad loans.

BUT the difference btw then and now, is that these loans were not secruitised and borrowed on 10 to 1, so a group of $1,000K loans is now $10,000K invested some where in the market place.

Thats the curve ball...

[grapejelly]

Re: How bad can the 'credit crunch' get?

I'm more in Jim Willie's camp on this one. This is not a subprime issue it's a no equity issue. Anyone who purchased in the last several years probably is underwater and anyone who refinanced in that period is highly likely to be underwater. As prices decline more and more walk away.

My perception is that there are a lot of houses $600K - $1 million or so in very desirable areas that have a long way to fall...sellers are planning on selling next spring or whatever, and as times turn worse they will be forced to sell.

The majority of purchasers and refinancers will have negative equity and therefore ony credit rating issues keeping them in their houses. A very bad picture.

The US government's proposals are to make loans easier to get. But why should anyone want to buy a house that is losing $5000 per month in equity? That makes no sense and it won't have much effect.

[Jeff]

Re: How bad can the 'credit crunch' get?

My education in real estate investing came in my first buy. I bought a modest $150,000 house on a few acres 30 miles outside Boston in 1998. When the the bank seized it they sold it at auction in 1992 for less than $100,000, in spite of my $25,000 in investments.

There's a house in the foothills in Santa Barbara, California, near where I got married that famously sold for $100,000 in 1929 and $5,000 in 1939. My Dad had been telling my that story since I was a kid growing up in nearby LA. I thought I was being cautious on my first house, but markets fluctuate.

My former UUNET employees (then WorldCom) were literally laughing at me on the golf course one day in 1999, because I'd sold all my WorldCom stock, and it had continued to rise. I was investing in residential apartment buildings, gold, bonds and US waterfront older single family residences.

"I'm not stupid," I remember one saying, and he wasn't. But he bought into the conventional wisdom. He told me, "I can handle a drop of 10 or 20 percent in any one equity." I asked, "How about 90% How about 100%"

It was a little embarrassing that they turned from me because obviously the old retired fool was off his game. And I had given them the stock option packages that had made them (oh so briefly) millionaires.

And WorldCom did go to zero. And 19 out of 20 lost everything to margin calls. And I'mm still not working.

The moral of the story is to try to spread the story of the moral hazards of bubbles with those you care about, knowing full well they probably won't listen. That's why Eric started iTulip. It's still the right thing to do.

[sadsack]

Re: How bad can the 'credit crunch' get?

My education in real estate investing came in my first buy. I bought a modest $150,000 house on a few acres 30 miles outside Boston in 1998. When the the bank seized it they sold it at auction in 1992 for less than $100,000, in spite of my $25,000 in investments.

There's a house in the foothills in Santa Barbara, California, near where I got married that famously sold for $100,000 in 1929 and $5,000 in 1939. My Dad had been telling my that story since I was a kid growing up in nearby LA. I thought I was being cautious on my first house, but markets fluctuate.

My former UUNET employees (then WorldCom) were literally laughing at me on the golf course one day in 1999, because I'd sold all my WorldCom stock, and it had continued to rise. I was investing in residential apartment buildings, gold, bonds and US waterfront older single family residences.

"I'm not stupid," I remember one saying, and he wasn't. But he bought into the conventional wisdom. He told me, "I can handle a drop of 10 or 20 percent in any one equity." I asked, "How about 90% How about 100%"

It was a little embarrassing that they turned from me because obviously the old retired fool was off his game. And I had given them the stock option packages that had made them (oh so briefly) millionaires.

And WorldCom did go to zero. And 19 out of 20 lost everything to margin calls. And I'mm still not working.

The moral of the story is to try to spread the story of the moral hazards of bubbles with those you care about, knowing full well they probably won't listen. That's why Eric started iTulip. It's still the right thing to do.

I appreciate the general advice of a (chastened, i think) soul who has been in the trenches.

I'm possibly too young to comment on this, but I'm of the opinion that humans are fundamentally irrational - the advent of the scientific method is too recent to have been sufficiently internalized among a critical mass of "movers and shakers."

The vestiges of experience, encoded in various aphorisms such as "what goes up must come down," "fools rush in where wise men fear to tread," etc., are an imperfect attempt to encode wisdom through future generations.

In regard to the last paragraph, a more recent meme, "Freedom is just another word for nothing left to lose" conveys particularly ominous connotations . . .

[jk]

Re: How bad can the 'credit crunch' get?

jim willy makes a mistaken assumption in equating aaa mortgage bonds with prime mortgages. a mortgage bond could get a aaa rating even if it included less than prime paper by throwing in some extra mortgages to provide "a margin of safety." be careful of "aaa" - ratings are not what they seem.

[c1ue]

Re: How bad can the 'credit crunch' get?

jim willy makes a mistaken assumption in equating aaa mortgage bonds with prime mortgages.

Jim Willy is using AAA mortgage bonds as a proxy for the expected performance of prime mortgages - since the bonds are the other side of the coin of the mortgages.

Note these are not MBS's; the exact numbers may not be equal, but saying a AAA mortgage bond is not equal to a prime mortgage is also not a correct statement.

[touchring]

Re: How bad can the 'credit crunch' get?

As for the next bubble - it would need to generate at least the amount of money lost in the real estate/'credit crunch' bubble to operate correctly.

Food for thought.

Can't imagine another dot com bubble can do that? I think the world has run out of ideas! Trading moon land? :eek: