Tuesday, November 20, 2007

A BIG Concern Going Forward

From the Washington Post:

Economists increasingly worry that banks are suffering such massive losses that they will be forced to cut back their lending to consumers and businesses. That would slow the economy, much as the savings and loan crisis did in the early 1990s. Yesterday, an analyst predicted that Citigroup, the world's biggest financial services company, would suffer another $15 billion in losses in the coming six months from its exposure to exotic types of debt.

Each bank has a unique capital structure, so grand, over-arching predictions are difficult to make. But we've seen a ton of writedowns this quarter. If memory serves, we've seen $50 billion or so. That's more than chump-change; that's serious. And considering the the overall reset schedule out there, it's bound to get worse before it gets better.

At some point, these writedowns will start to impact lending ability. That was the gist of Goldman Sach's recent prediction.

The direct losses from mortgage foreclosures will be about $400 billion, economists at Goldman Sachs estimated in a report last week. If that were the extent of the losses, the financial system could easily absorb them. But because of the way banks and other institutions work, the losses could spread far more widely.

Banks are required to keep capital on hand so they can weather losses. The mortgage-related losses are cutting into their capital and thus could cause a commensurate drop in how much they can loan. Taking into account that "multiplier" effect, the mortgage problems could reduce by $2 trillion the credit available to consumers and businesses, Goldman estimated in the report.

I don't know where that line is or if we've already crossed it. But if we haven't crossed it, we're getting a whole lot closer than we would like to admit.