Lending losses could add up to $2 trn
Goldman Sachs Group, the largest US securities firm by market value, said losses from slumping credit markets may reduce lending by $2 trillion.
By Agencies |
LONDON: Goldman Sachs Group, the largest US securities firm by market value, said losses from slumping credit markets may reduce lending by $2 trillion.
Losses related to record US home foreclosures using a “back-of-the-envelope” calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief economist at Goldman in New York, wrote in a report. The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report.
“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognised,” Hatzius wrote. “A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10.”
Citigroup, the biggest US bank, and Merrill Lynch & Co have led companies writing down more than $50 billion on securities linked to US subprime mortgages.
Wells Fargo & Co chief executive officer John Stumpf said on Thursday that the worst US housing market since the Great Depression may mean “elevated” equity losses through 2008.
Goldman’s Hatzius said his report is based on a “conservative estimate” of investors cutting lending by 10 times the
Goldman’s US economic forecasts already assume lending will fall by $1 trillion over the next two years, or half of the potential loss to the economy, the report said. The New York-based bank expects US growth to slow to 1.9% in 2008, less then the 2.4% median forecast of 70 economists surveyed by agencies this month. Deutsche Bank, Germany’s biggest bank, also said in a report this week that credit losses may be $400 billion. That’s equivalent to “one bad day in the stock market,” or 2.5% of the value of US equities, Hatzius wrote.
“No serious analyst would argue that a 2.5% equity market decline will make an important difference to the economic outlook,” Hatzius wrote. “So what’s different about the mortgage credit losses? In a word, leverage.”
Losses related to record US home foreclosures using a “back-of-the-envelope” calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief economist at Goldman in New York, wrote in a report. The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report.
“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognised,” Hatzius wrote. “A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10.”
Citigroup, the biggest US bank, and Merrill Lynch & Co have led companies writing down more than $50 billion on securities linked to US subprime mortgages.
Wells Fargo & Co chief executive officer John Stumpf said on Thursday that the worst US housing market since the Great Depression may mean “elevated” equity losses through 2008.
Goldman’s Hatzius said his report is based on a “conservative estimate” of investors cutting lending by 10 times the
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loss to their capital. Investors realising half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said.Goldman’s US economic forecasts already assume lending will fall by $1 trillion over the next two years, or half of the potential loss to the economy, the report said. The New York-based bank expects US growth to slow to 1.9% in 2008, less then the 2.4% median forecast of 70 economists surveyed by agencies this month. Deutsche Bank, Germany’s biggest bank, also said in a report this week that credit losses may be $400 billion. That’s equivalent to “one bad day in the stock market,” or 2.5% of the value of US equities, Hatzius wrote.
“No serious analyst would argue that a 2.5% equity market decline will make an important difference to the economic outlook,” Hatzius wrote. “So what’s different about the mortgage credit losses? In a word, leverage.”
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