Monday, November 12, 2007

RBS Analyst Estimates Total Losses From the Credit Crunch of $250B - $500B

I heard these numbers tossed around before. The question that I continue to have is can the financial system take losses this large. An automatic “Yes” is probably not the right answer. If the answer is yes it would be good to see how this is done. From the WSJ:

That is how much one analyst thinks the tally of the carnage in the fixed-income markets ultimately could be. Royal Bank of Scotland Group chief credit strategist Bob Janjuah put out a report today estimating that the credit crunch will cause $250 billion to $500 billion of losses at banks and brokers around the world.

As Bloomberg points out, the estimate includes not just losses on subprime mortgage-related bonds but also the effect of a new accounting standard that goes into effect Nov. 15 known as Financial Accounting Standards Board’s rule 157. It will force companies to put values on opaque securities and could lead to write downs of as much as $100 billion at firms including Morgan Stanley and Goldman Sachs Group, according to Janjuah.

Should the estimate prove accurate, it would mean the credit-market storm that began this summer is just beginning. The total of write-downs already announced by Citigroup, Merrill Lynch and the other Wall Street firms is only about $30 billion to $40 billion.

Big as those numbers are, they still don’t come close to the last major crop of write-downs, when another accounting change prompted eye-popping losses at companies including AT&T and AOL Time Warner in 2002. The media-and-Internet conglomerate had write-downs that year for goodwill and soured Internet assets of roughly $100 billion.

Still, Janjuah’s number is in a league by itself. Not only is the upper end of his range roughly what the U.S. has spent on the Iraq War, it is about equal to the market caps of the three largest U.S. banks, Citigroup, J.P. Morgan Chase and Bank of America, combined.

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