Goldman: Total Leveraged Credit Losses = $1.2 trillion

Barron’s Alan Abelson praised Goldman Sachs 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."


"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 . . .

The True Contrarians
Barron’s, March 31, 20080

Everett Dirksen



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  1. UrbanDigs commented on Mar 30

    ehh, nothing a few more rate cuts cant fix! KEEP THEM BONUSES HIGH BABY!!

    By the way, a slice of pizza now costs $2.75 here in the UES at my favorite pizza joint! Apparently, commodity inflation means something

  2. Winston Munn commented on Mar 30

    An insolvency problem cannot be solved with liquidity, that is evident. The crux of the matter is that eventually asset values will have to be marked-to-market; the question is who will be holding the bag when that happens?

    Lending institutions cannot afford the kind of fallout projected without contracting balance sheets via sale of assets and/or tightening credit. As consumer credit availability is the key to economic growth, the end result of those markdowns would be a long and protracted recessionary event – if the banks take the hit.

    Therefore, the only viable solution will be for a new government enterprise to be created to buy and dispose of all illiquid assets. This is the only way to free bank balance books for lending.

    A nationalizaton of that sort would leave the dollar in danger of collapse.

    It appears we have created our own perfect Catch-22.

  3. JustinTheSkeptic commented on Mar 30

    Why don’t we just create a whole new currency, and let the old one rot? Maybe even a whole new treasury department, and a whole new Federal Reserve. Ah hell, why not just a whole new system; one that works – one that lets downturns happen.

  4. Ross commented on Mar 30

    What Winston said!

    How bout we name it mortgage assistance government insurance corp MAGIC for short.

    Mis resolution trust? MRT?

    Feel free to pile on!

  5. barack hillary mccain commented on Mar 30

    the bull in me says: with so much bad news, everyone who’s bearish has to have sold/gone short by now. how low can you go?!?

    the bear in me says: some poor schmuck probably said the same thing on 1/1/74 after stocks declined 25% (nominally) in ’73. Rationalized an all-in and then lost his shirt as the NYA lost another 35% from 1/1/74 to 1/1/75.

  6. Florida commented on Mar 30

    In other news:

    “LOS ANGELES (AP) — Countrywide Financial Corp.’s chief executive and president will receive a combined $19 million in stock next week as part of the company’s pending takeover by Bank of America Corp., according to a regulatory filing.

    “The payments of stock valued at $10 million for chief executive Angelo Mozilo and $9 million for President David Sambol were disclosed in a regulatory filing late Thursday by Bank of America.

    “The payments, described as “performance-based” stock rights and grants, are required by agreements the executives struck with Countrywide less than a year before the sub-prime meltdown forced the mortgage lender to sell itself, according to the filing.”

    I wish I could get paid that kind of money every time I screwed up in my job.

  7. lurker commented on Mar 30

    nice Ross! don’t mind if I do.
    Mortgage Unloading Governmental Generosity Excess for Republicans—MUGGER!

  8. R. Timm commented on Mar 30

    Interest rate cuts can and are helping the solvency of banks. While everyone is talking subprime defaults the bigger looming crisis has been ALT-A. The 12-month LIBOR is all the way down to 2.39% from over 5.5% not too long ago. This will take much of the sting out of ALT-A resets and will keep borrowers from defaulting propping up the valuation on hundreds of billions in MBS.

    There is still a non-negligible risk of bank failures with the potential to cause the entire financial system to collapse. In my opinion the falling interest rates have reduced that risk considerably. As for the dollar collapsing I believe that is unlikely given that countries with competing currencies have similar housing bubbles that are likely to deflate and foreign banks own US MBS. Foreign central banks will continue to cut rates helping preserve whats left of the dollar.

  9. Estragon commented on Mar 30


    Why not. Germany tried it in 1923-24, and it actually worked pretty well for a while.

    Interestingly, the new currency was backed by mortgages because there was no gold available to back it with.

  10. Winston Munn commented on Mar 30

    How about Securities Corporation Resolved to Enslave Wage-earners and Eradicate Deleveraging, better known as SCREWED.

  11. Winston Munn commented on Mar 30

    R. Timm wrote, “The 12-month LIBOR is all the way down to 2.39% from over 5.5% not too long ago. This will take much of the sting out of ALT-A resets and will keep borrowers from defaulting propping up the valuation on hundreds of billions in MBS.”

    While this is without doubt accurate, does it address the heart of the problem? The valuation of hundreds of billions of MBS appears to me to be due to the underlying collateral value more so than potential defaults.

    With inventory supply at 9-10 months, there is no way house prices will not decline further – and this is not even considering that the ABCP market also includes securities backed by auto loans, credit card loans, and commercial loans, all of which are only now starting to come undone. Corporate defaults will also revert to mean.

    In these circumstances, borrowers are reluctant to borrow while lenders are reluctant to lend.

    The basis of the problem is pychological and not monetary – a change in mindshift from borrow-and-spend to save-and-survive.

    There is more damage to come – 12-18 months is my best guess.

    But I could be wrong and you could be right. That’s what makes a conversation.

  12. Estragon commented on Mar 30

    Winston Munn – “While this is without doubt accurate, does it address the heart of the problem?”

    Yes, and for the reason you’ve mentioned. The lower s/t rate takes income from savers and gives it to reluctant lenders in the form of a steeper yield curve.

    Savers are chumps. Spenders and lenders are being supported directly through fiscal means too.

    This probably goes on until China takes away the credit card.

  13. Shane commented on Mar 30

    Yes the low LIBOR is helping somewhat right now . . . but everyone does realize those are 3/1, 5/1 ARMS . . . meaning once they start resetting they reset EVERY YEAR. So by dropping interest rates and the LIBOR we are kicking the problem down the road a few years.

    It doesn’t address the fundamental problem. Housing was/is overvalued and People bought houses they could not afford!

    There are only two solutions to that problem. 1) prices drop/continue to drop dramatically 2) we devalue our currency, inflate dollars and generate a new bubble (a la commodities in the next 5 years).

  14. Ross commented on Mar 30

    “Related Comment” Everett Dirksen.

    He was a fine old Senator who’s first Senate speech every session was an ode to the marigold. Some were classics. I am at pity to find no-one of his calibre in our current political establishment.

    Decipline gone wanting.

  15. RNL commented on Mar 30

    UrbanDigs: I’ve noticed it up here on the UES as well. I do like to get a pie from Nina’s every so often or a slice from Delizia, but it seems like the price goes up every week these days.

    Don’t worry, though. If Mish is right, pizza will eventually cost $1 again like in the 80s!

  16. m3 commented on Mar 30

    R. Timm-

    i agree with shane. yes, the resets are being helped somewhat by the low rates, but this is unsustainable. at some point, the fed is going to have to raise rates. then what? even if they could engineer that, the mortgage paper won’t rise in value; it’ll just temporarily stop the bleeding.

    also, in order to get LIBOR down to these levels, Bernanke has had to pull some *major* rabbits out of his hat (TAF, TSLF, PDCF, etc.)

    i don’t know how much longer he can keep this up.

    regarding other central banks keeping pace with US rate cuts, the ECB has made it clear they aren’t cutting. so have central banks in Australasia, and most emerging nations.

    there is far more political pressure in those nations to curb price inflation than there is to prop up the dollar; politicos are far more worried about losing their jobs over rising food prices. i just don’t see your scenario happening.

  17. drey commented on Mar 30

    I’ve lost track of how many times I’ve heard Paulson say “the administration has a strong dollar policy” on CNBC and various Sunday morning talking head shows. Unfortunately that policy seems to consist of uttering those seven words with zero action behind them but I guess it makes for a good sound bite in an election year.

    Sorry to say, hoping for a strong dollar is not the same as having an actual policy to strengthen (or support) the dollar. Were they serious about this the administration would be making at least a token effort to curb govt spending which they are not…

  18. 12th Percentile commented on Mar 30

    There is a large crop getting ready for harvest out there. They have neg am ARM’s. Lower interest rates help them but many of these people have been paying less than interest on their loans while their home value goes down. So you owe 115% of the original loan value on something that has lost 20% of the original value. And then the reset kicks in. Even if it is a 5% rate these people can’t afford it.

    They asked for creative new products. They got them.

  19. Jim commented on Mar 30

    How about the:

    Mortgage Assistance and Fiscal Intervention Administration

    Who could possibly object to the MAFIA?

  20. Winston Munn commented on Mar 30

    Jim, I think that’s a winner. And the MAFIA slogan would be, “We’re gonna make you an offer WE can’t refuse.”

    12th percentile – Not only are the neg ams in jeaopardy, but keep in mind that it takes some degree of e-q-u-i-t-y to refinance any loan type. The second lien-holders have a dim view of the primary mortgage holder refiinancing and leaving them holding the bag – that plus the HELOCs that have been added to many loans.

    Rates don’t mean much to the drowning – the next bubble could well be in scuba gear.

  21. Owner Earnings commented on Mar 30

    Abbey Joseph Cohen? That Barrons writer must have forgotten about Cohen.

  22. AGG commented on Mar 30

    All I can say is that 2008 has certainly been a fun year so far. It’s like watch a film of a tap dancing juggler on fast forward.
    Winston and Estragon are right. Although I think what we have is more of a catch-22 suckrs than a catch-22. Our currency isn’t current.

  23. JustinTheSkeptic commented on Mar 30

    Estragon, but if “originary” interest has a low value because of rising prices, yet interest rates are declining, why should any business/entrepreneur take any risk in such an environment?

    (or did I not understand any of that stuff back in my money and banking class?)

  24. UrbanDigs commented on Mar 30


    I vote: MAFIA: Mortgage Assistance and Fiscal Intervention Administration

  25. Winston Munn commented on Mar 30

    I concur that MAFIA is it – and suggest the head of MAFIA should be known as the Director Of Numismatics, or…(rimshot insert)…The DON.

  26. AGG commented on Mar 30

    The termites in the money center banks:
    A toxic pipe (private investment in a public entity). The investor buys a stake of the private placement and shorts the stock (the conversion ratio is floating) as the investor shorts more and more of the stocks the share price decreases and the conversion ratio increases.

    To bring things to an end, normally private equity companies enter the company when its already distressed buy the bonds at a large discount and if their investment represents 2/3 of the individual asset class prevent the restructering plan of the company and try to execute their own, with the clear intention to see asset prices to rise again.
    Greed on steroids. I hope somebody in government “gets religion” enough to curb this.

  27. zell commented on Mar 30

    The fed’s constructionswhile they may stop an immediate implosion, the Gold Sack’s numbers are beyond the Fed’s reach. That’s alot of razzle dazzle which is a distraction from the but steady erosion that is taking place on Main Sreet, which is what will take us down for a long time.

  28. John Borchers commented on Mar 30

    It’s only a matter of time before Goldman starts missing forecasts just like all the others. No one can predict the future reliably over time.

  29. Jessica commented on Mar 30

    Do these calculations include any feedback effects?
    I see two inter-related problems unfolding, one on main street (over-leveraged, under-incomed consumers) and one on wall street (over-leveraged, over-incomed shadow banking system). As each one declines, it will increase the decline by the other, but by how much?
    Concretely, if the credit contraction/runs on the shadow financial system lowers GNP and employment, this reduces housing prices (putting more consumers under water on their mortgages) and reduces income (increasing the number of those who cannot pay their mortgages regardless of the current value of the house. As the number of mortgages that cannot be paid back and the number of walkaways increases, this makes the situation worse for mortgaged-backed securities, making the situation the shadow financial sector worse. Rinse and repeat.
    Is this feedback loop accounted for in anyone’s estimates? (My guess is that it is not and could not be, not too precisely anyway.)
    Is this an accelerating feedback loop (like margin calls) or a damping out feedback loop (like oil prices, which will be dragged down if high oil prices help deepen the recession, thus softening the decline somewhat)?

  30. John Borchers commented on Mar 30

    As for the housing comments:

    For those who borrowed 100% of the homes value what bank wants to adjust the interest rate lower when the home price is falling?

    That would create even larger risk. I believe the people that have good credit don’t need credit or won’t pay for credit at a high interest rate. This leaves banks holding those large coupon rates screwed for the bonds/convertables they issued.

  31. paul griffith commented on Mar 30

    CREDIT is the ultimate drug for those chasing leverged mortgage deals — ask any bondtrader.

  32. rj commented on Mar 30

    “Interest rate cuts can and are helping the solvency of banks. While everyone is talking subprime defaults the bigger looming crisis has been ALT-A. The 12-month LIBOR is all the way down to 2.39% from over 5.5% not too long ago. This will take much of the sting out of ALT-A resets and will keep borrowers from defaulting propping up the valuation on hundreds of billions in MBS.”

    So the Federal Reserve and the American financial system have a position currently where the Federal Reserve’s interest rate for the next five years will need to be at current levels or lower to ensure that a good number of the outstanding mortgages created from the past few years will not default?

    That strikes me as quite the house of cards.

  33. Winston Munn commented on Mar 30


    Yes, it looks like the name of the SIV is The Federal Reserve, LLC.

  34. tom a taxpayer commented on Mar 30

    How about the:
    Federal Reserve-backed Bear Stearns High Grade Enhanced Leverage Master Liquidity Enhancement Mortgage Conduit Lend-Lease-or-Rent-a-room Hope-and-Rescue Mission Treasury Facility.

  35. Troy commented on Mar 31

    Sky, you present a good example of how to deceive yourself with numbers (assuming they’re accurate). Comparing the least-populous 39 states vs. the most populous 12 state (since when were there 51 states, anyway?) would be a prime example.

    To analyze the extent of the damage you need to look at the largest markets. LA: down 20-40%. SF Bay Area: down 10-30%. San Joaquin Valley: down 10-50+%. Las Vegas. Phoenix. Denver. Cleveland. Nashville. Atlanta. Florida. Baltimore. Boston. Detroit.

    The Federal Flow of Funds report indicates there was $5.2 TRILLION dollars of net consumer mortgage lending 2002-2006, which was more than all the net mortgage lending for 1976-2001.

    This debt binge is prove to be ONE HELLUVA pig through the python in two ways:

    First, most of the private sector growth was driven by housing.

    Second, up to half of that FIVE TRILLION in lending 2002-2006 is going to prove to be unrecoverable. GONE WITH THE WIND because the valuations of 2002-2005 were supported with suicide loans and not actual income gains. This is pure ASSET DESTRUCTION and not somebody’s bottom-line gain somewhere — the gain was already booked when the money was spent by the borrower.

  36. Troy commented on Mar 31

    Oh, sky, here’s a graph of consumer mortgage lending, 1976-2007.

    I call it “Flight of the Challenger (II)”.

    Sweet dreams.

  37. Francois commented on Mar 31

    “How about Securities Corporation Resolved to Enslave Wage-earners and Eradicate Deleveraging, better known as SCREWED.”

    It’s headquarters shall be located in the Securities Headquarters of International Transactions, better known as the SHIT.

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