The large financial crisis has just begun, 1.6 trillion dollars losses
 

Ladies and Gentlements, its still time to adjust your portfolios.

U.S. study estimated losses of financial institutions at $1.6 trillion dollars

by Marco Zanchi

Those that assume the misery is coming to an end are wrong. When it comes to writedowns, losses and raising fresh capital, the crisis has only just begun for banks. Losses are expected t reach $1.6 trillion, only a fraction of which have been uncovered. This is the conclusion of a confidential study made available to (the Swiss newspaper) Sonntagszeitung.

But that is not everything. While banks give their word of honor that no further capital is needed, the paper by Bridgewater Associates says: "We have big doubts that financial institutions will be able to obtain enough new capital in order to cover the losses. This will worsen the credit crunch. "

"If everything they say is true," says Charles Wyplosz, a professor at the University of Geneva, " a number of financial institutions will face bankruptcy." The research paper is ?hot ?in professional circles not only because of its content, but also because of the originator; Bridgewater Associates is the second-largest hedge fund in the world. The people behind it are brilliant, first among them Ray Dalio, who founded the company more than thirty years ago.

$26.6 trillion of debt is considered risky

The company is one of the big names in the industry. Their macro-analyses especially have weight in central banks - some central banks are customers of Bridgewater. When asked, the Swiss National Bank replied that they do not comment on such studies on principle.

What is at risk for the banks? In order to identify the dimensions of the crisis for financial institutions, Bridgewater has calculated the expected losses on a wide range of risky credit-based U.S. assets such as mortgages, credit- or credit card-receivables. Then, one would need to know basically who had how much on the books. The total value of these risky comes to $26.6 trillion dollars. The losses on these assets would then sum to $1.6 trillion dollars, if all of the assets were valued at market prices and not marked to model, writes Ray Dalio.

Traditional credit loans are not on the balance sheet at market prices, because they are not traded. The loss, when applied to the $26.6 trillion face value of assets, is an impairment of 6 percent. If market prices rise, the size of the loss is reduced; If prices fall, the losses increase.

US credit institutions are holding the largest losses.

Bridgewater has calculated that, so far, financial institutions have only acknowledged losses of $400 billion. Non-US banks - especially UBS - have provided the lion?s share of that at $238 billion. Therefore, the greatest expected future losses should be at U.S. credit institutions. This includes names such as Citigroup, Bank of America and JP Morgan Chase and many smaller institutions unknown here in Switzerland.

Why? That?s because lending is their core business, and they hold the majority of the assets. But, it is also because a large part of the losses are in the form of traditional bank loans, and, unlike securitized mortgages, these are not traded. So, their value has not been corrected on the balance sheet. "If we assess [the validity of] current market prices, we have a long way to go, because these institutions have only acknowledged one-sixth of their expected losses resulting from the credit crisis," writes Bridgewater. Five-sixths comes to nearly $500 billion.

The big question is: Can the banks plug these holes from the losses with new equity capital? Alone for the U.S. banks named above, we are talking about $400 billion, estimates Bridgewater. The banking industry does not have enough healthy institutions to absorb the sick. Meanwhile bank shares are in freefall. And the Middle Eastern Sovereign Wealth Funds have lost the appetite.

The international interdependence makes everything much more complicated

If the banks, as Dalio fears, do not succeed in mobilizing enough fresh capital, they would be forced to sell assets - and in a cyclical downturn at that. That could trigger a classic death spiral downwards, as sales of assets would pressure their share prices, which in turn weakens the banks' balance sheets and further sales would be necessary. "Once again we have a mountain of distressed assets to sell, which is enormous in comparison with any conceivable demand [for those assets]," says Dalio.

Exacerbating the situation is the fact that, in the Spring, "smart" investors bought large quantities of securitized loans, as their prices fell - in the hope of snapping up a bargain. If the prices continue to drop, these investors will come under severe pressure, especially many who are using borrowed funds.

What?s gotten Dalio so pessimistic? The United States is stuck in a large debt-relief process, a "classic deleveraging," as Japan was in the nineties or as many countries during the world economic crisis in the 30s or developing countries during their debt crises. Only this time everything is much more complex, primarily because of the enormous international interdependence of the financial services industry. Making things worse, U.S. consumers are overly indebted and access to cheap money is blocked now.

Moreover, the United States is dependent on foreign capital in order to finance their lifestyle. "The outlook for the dollar is bleak. Very, very bleak, " a former central banker said to Sonntagszeitung.

The real downturn in the U.S. is only beginning

So far, the financial problems resulting from the financial crisis have been large, but the economic ones have been small, because economic problems follow financial ones with a time delay. After liquidity injections by the U.S. central bank induced a short uptick from March to June, the economy and financial system of the USA should now be on the threshold of a real slowdown, he says. The poor credit environment crisis in the real economy resulting from the financial crisis will now have a negative reciprocal effect on the financial sector.

Phase one of the credit crisis was marked by the collapse of the real estate market in the U.S. and the crash in the market for subprime mortgages. Phase two - a kind of calm before the storm - began with the rescue of the U.S. investment bank Bear Stearns in mid-March. This phase came to an end in June, when optimism in the financial markets waned again. Now phase three is set to start. "Bridgewater is on the pessimistic side, no question," says George Magnus, Senior Economic Adviser at UBS in London, "but Bridgewater is absolutely right."

http://www.creditwritedowns.com/2008...ritedowns.html

i agree 100%. if i didn't agree i would already have bought up a huge amount of these bank and financial stocks that are ALL at their 1 year lows, but because this is just the beginning I'm holding off because there is still more down they will go... :2 cents:

in my opinion the government should really be looking into doing something to save these institutions in the near future, but i just don't see what the government can do (if anything) to get the institutions out of the hurt they are going to be seeing within the next few years.

Debt is paper, worthless. It's just a promise.

Promise = lie.

A house of cards built on a mountain of lies. Will fall sooner or later anyway, if not during our lifetime, then later. You can't mortgage / borrow against finite resources indefinitely.

Real estate in the West is a gigantic ponzi just like retirement funds, insurance and banking.

Well... the USA could always sell off a few states to Canada

Just a thought.

I thought about this whole recession thing a bit. Ya know America could really offset the cost of gas by increasing the cost of it's food exports. America feeds alot of mouths on a global scale, many food exports goto the Middle East, Africa and Asia.

Just a thought and I am still thinking about it.

People wiht Oil can not eat it they need food and to increase the cost of food exports would certainly leave no choice to non food producing nations but to pay our prices, just like they chooses there oil prices.

You know if Canada stopped supplying the US with tuns of oil... there would be a huge problem south of the border...

We were warned long ago

"Paper is poverty,... it is only the ghost of money, and not money itself." Thomas Jefferson


This looks much like the panic of 1907
https://youtube.com/watch?v=eBqwtRubyJM

Greed and Laziness is a bitch

buy European cars they use less fuel then American ones.

:2 cents:

Dude to you ever stop with the hate? Just go strap a bomb on your self and get it all over with. Every post you make is about some evil zionist plot to rule the world.

WTF do you even do in Adult?

I understand what you are talking about. Just like Woodrow Wilson understood what he unwittingly did when he said...

so you like the fiat monetary system? you like having magic paper instead of gold and silver?

well...the banks should finance porn :)
no wonder they are losing money

Can we start with Texas?

:1orglaugh:1orglaugh

My butt hole hurts.