What Is the Damage Scorecard to Date

How Big Is the Black Hole? The Estimates Grow...

In a report dated Nov. 15, chief U.S. economist Jan Hatzius [Goldman Sachs] said a 'back-of-the-envelope' estimate of credit losses on outstanding mortgages could reach around $400 billion.

"Mortgage Crisis May Slash Lending Up to $2 Trillion" CNBC

November 16, 2007

We use several methods to estimate the ultimate losses on these securities. Our best (very uncertain) guess is that the losses will total about $400 billion, with about half being borne by leveraged U.S. financial institutions.

David Greenlaw, Jan Hatzius, Anil K. Kashyap, Hyun Song Shin "Leveraged Losses: Lessons from the Mortgage Market Meltdown" U.S. Monetary Policy Forum Conference Draft February 29, 2008

(Continued)

Financial firms are likely to face at least $600 billion of losses as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said.

Abigail Moses and Yalman Onaran

"Financial Firms Face $600 Billion of Losses, UBS Says"

Bloomberg

February 29, 2008

The continuing decline in the U.S. housing market and wider economic slowdown is contributing to new loan deterioration—delinquencies on prime mortgages and commercial real estate as well as corporate and consumer loans are increasing. With default rates yet to peak and the recent heightened market distress, declared losses on U.S. loans and securitized assets are likely to increase further to about $1.4 trillion

"Financial Stress and Deleveraging Macrofinancial

Implications and Policy"

Global Financial Stability Report

International Monetary Fund

October 2008

"There are significant downside risks still to the market and the economy," [Nouriel] Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. "We're going to be surprised by the severity of the recession and the severity of the financial losses." ... Roubini said total credit losses resulting from the meltdown of the subprime mortgage market will be "closer to $3 trillion," up from his previous estimate of $1 trillion to $2 trillion. Bloomberg

October 14, 2008

Table 4.1 Estimates of Losses from the Crisis in Mortgage and Credit Markets (June 30, 2007—October 7, 2008)

Date

Estimate

Source

Note

6/30/2007

7/19/2007

10/9/2007

10/17/2007

11/12/2007

11/22/2007

1/17/2008

1/31/2008

2/11/2008 2/11/2008 2/29/2008 3/3/2008

  • 250 billion $50-$100 billion $100-$150 billion $100-$200 billion $300-$400 billion $300 billion $100-$500 billion $265 billion
  • 400 billion $125-$175 billion At least $600 billion $600 billion

Institutional Risk Analytics

Ben Bernanke, Chairman of Federal Reserve Board David Wyss, Standard and Poor's

William C. Dudley, Federal Reserve Bank of New York Deutsche Bank AG analysts

Organization for Economic Cooperation and Development Ben Bernanke, Chairman of Federal Reserve Board Standard & Poor's

Peer Steinbruck, German finance minister at G7 meeting Bear Stearns analyst UBS AG analysts

Geraud Charpin, head of European credit strategy at UBS in London

Subprime losses Credit losses Subprime losses Subprime losses Subprime losses Subprime losses Subprime losses Subprime and collateralized debt obligation losses Subprime losses Credit losses Credit losses Credit losses

3/8/2008

$325 billion

JPMorgan Chase & Co

Credit losses

3/10/2008

$215 billion

Head ofjapan's Financial Services Agency

Subprime losses

3/13/2008

$285 billion

Standard & Poor's

Subprime losses

3/25/2008

$460 billion

Goldman Sachs

Credit losses

4/8/2008

$945 billion

International Monetary Fund

Credit losses

4/15/2008

$350-$420 billion

Organization for Economic Cooperation and Development

Credit losses

4/29/2008

$800 billion

Barclays Capital

Credit losses

5/14/2008

$400 billion

Krishnan Ramadurai, Fitch's Financial Institutions Group

Subprime losses

5/19/2008

$379 billion

Bloomberg

Credit losses

5/20/2008

$170 billion

Oppenheimer & Co.

Credit losses

8/4/2008

$l-$2 trillion (later

Nouriel Roubini, New York University

Credit losses

revised to $3 trillion

on 10/14/2008)

10/7/2008

$1.4 trillion

International Monetary Fund

Credit losses

Sources: Various news media, Milken Institute.

Note: For more details about sources of these estimates, see Appendix Table A.32.

Sources: Various news media, Milken Institute.

Note: For more details about sources of these estimates, see Appendix Table A.32.

Table 4.1 provides estimates from various sources of the likely subprime and credit losses; they range from a low of $50 billion to a high of $3 trillion. By comparison, the savings and loan crisis of the 1980s cost $408 billion in 2007 dollars, of which 82 percent was borne by taxpayers. About half of the costs, moreover, were associated with problems in Texas, while the current problem is nationwide. The estimates have ballooned quite substantially over time, as observers trying to quantify the costs of the crisis have assessed the snowballing effect of the subprime mortgage market meltdown across the broader financial sector and the real economy.

Worldwide through October 31, 2008, financial institutions have taken cumulative losses/write-downs of $685 billion, according to Bloomberg data and as shown in Figures 4.1 and 4.2. They have raised $688 billion in capital and cut 149,220 jobs. More recently, Citigroup announced it was cutting another 52,000 jobs. The numbers are continuing to grow.

Figure 4.3 shows the sources of the capital raised by firms worldwide from July 2007 to December 2007 and from January 2008 to July 2008. Public investors have been the dominant source of funds for the most recent period, accounting for slightly more than two-thirds of the $300 billion raised. Figure 4.4 shows the types of financial instruments used to

Figure 4.1 Losses/Write-Downs, Capital Raised, and Jobs Cut by Financial Institutions Worldwide through October 31, 2008

US$ billions Number ofjobs cut

Figure 4.1 Losses/Write-Downs, Capital Raised, and Jobs Cut by Financial Institutions Worldwide through October 31, 2008

US$ billions Number ofjobs cut

Prior Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

quarters

Sources: Bloomberg, Milken Institute.

Note: Number for Q4 2008 is through October 31, 2008.

Prior Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008

quarters

Sources: Bloomberg, Milken Institute.

Note: Number for Q4 2008 is through October 31, 2008.

raise capital. North American banks have relied most heavily on issuing preferred stock, while European banks have relied most heavily on rights issuance.

Table 4.2 shows that the top 10 financial institutions accounted for 63 percent of the losses/write-downs, 58 percent of the capital raised,

Figure 4.2 Cumulative Losses/Write-Downs, Capital Raised, and Jobs Cut by Financial Institutions Worldwide through October 31, 2008

US$ billions Number ofjobs cut

Figure 4.2 Cumulative Losses/Write-Downs, Capital Raised, and Jobs Cut by Financial Institutions Worldwide through October 31, 2008

US$ billions Number ofjobs cut

quarters

Sources: Bloomberg, Milken Institute.

Note: Number for Q4 2008 is through October 31, 2008.

quarters

Sources: Bloomberg, Milken Institute.

Note: Number for Q4 2008 is through October 31, 2008.

Figure 4.3 Worldwide Capital Raised by Source (July 2007-July 2008)

July 2007-December 2007 Total = $56 billion

Other institutional investors 28%

Public investors 12%

Sovereign wealth funds 60%

Sources: International Monetary Fund, Milken Institute.

January 2008-July 2008 $300 billion

Total

Other institutional investors 24%

Sovereign wealth funds 60%

Sovereign wealth funds 7%

Public investors 69%

Sources: International Monetary Fund, Milken Institute.

Figure 4.4 Worldwide Capital Raised by Type of Instrument (July 2007-August 2008)

North American Banks Total = $178 billion

Deeply subordinated bonds 10%

subordinated Perpetual

I Right issue

Convertible ^ 38% 1

13% shares

European Banks Total = $153 billion

Preferred shares 3%

Othe^ ^Perpetual

Asset sales

Convertible bonds

Deeply subordinated bonds 10%

Sources: International Monetary Fund, Milken Institute.

and 68 percent of the jobs cut. More detailed information on these issues is provided in Appendix Table A.33. The table also shows that financial institutions beyond the United States are struggling.

Figures 4.5 and 4.6 show the percentage change in stock price and total loss in market value of selected financial firms from December 2006 to October 2008. Of the 15 firms listed in Figure 4.5, 7 have either failed or been acquired as of that date. Figure 4.6 shows that those firms still in business have suffered substantial declines in market value. The status of the top 25 subprime lenders and private-label issuers of mortgage-backed securities (MBS) in 2006 is detailed in Appendix Tables A.34 and A.35.

Table 4.3 shows the losses and write-downs of selected financial firms since the second quarter of 2007, and their cumulative net income from 2004 to the third quarter of 2008. Overall, the total losses and write-downs exceed the cumulative net income for the firms by roughly $86 billion. However, four of the firms (Citigroup, Washington Mutual, Merrill Lynch, and Wachovia) account for all the net losses and writedowns. The cumulative profits for the other firms more than offset their losses and write-downs, with Bank of America showing the most positive result, over this time period.

Table 4.2 Losses/Write-Downs, Capital Raised, and Jobs Cut by the Top 10 Financial Institutions Worldwide through October 31, 2008

Losses/Write-Downs Percentage of (US$ Billions) Total

Wachovia, United States

Citigroup, United States

Merrill Lynch, United States

Washington Mutual, United States

UBS, Switzerland

HSBC, United Kingdom

Bank of America, United States

National City, United States

JPMorgan Chase & Co., United States

Wells Fargo, United States

45.6 6.7

  1. 2 6.5 27.4 4.0
  2. 4 4.0 26.2 3.8

17.7 2.6 253.1 37.0

Grand total

684.8 100.0

Capital Raised Percentage of (US$ Billions) Total

Citigroup, United States

Bank of America, United States

Royal Bank of Scotland, United Kingdom

JPMorgan Chase & Co., United States

UBS, Switzerland

Wells Fargo, United States

Merrill Lynch, United States

Barclays, United Kingdom

HBOS PLC, United Kingdom

Morgan Stanley, United States

291.1 42.3

Grand total

688.3 100.0

Jobs Cut Percentage of (Number) Total

Citigroup, United States

Lehman Brothers, United States

Bank of America, United States

Bear Stearns, United States

UBS, Switzerland

Commerzbank, Germany

Wachovia, United States

Royal Bank of Scotland, United Kingdom

Merrill Lynch, United States

National City, United States

Others

23,660 15.9 13,390 9.0 11,150 7.5 9,159 6.1 9,000 6.0 9,000 6.0 8,393 5.6 7,200 4.8 5,720 3.8 4,900 3.3 47,648 31.9

Grand total

149,220 100.0

Sources: Bloomberg, Milken Institute.

Sources: Bloomberg, Milken Institute.

Figure 4.5 Financial Stock Prices Take Big Hits Percentage change in stock price, December 2006-0ctober 2008 -99.9 -99.9 -98.5 -98.4 -97.3

Sources: Bloomberg, Milken Institute.

Notes: The stock price for Bear Stearns is to May 2008. Countrywide's stock price is to June 2008. The stock price for Lehman Brothers is to August 2008.

Lehman Brothers Washington Mutual Freddie Mac Fannie Mae AIG

Bear Stearns Countrywide Wachovia Merrill Lynch Morgan Stanley UBS

Bank of America Goldman Sachs JPMorgan Chase Wells Fargo

Sources: Bloomberg, Milken Institute.

Notes: The stock price for Bear Stearns is to May 2008. Countrywide's stock price is to June 2008. The stock price for Lehman Brothers is to August 2008.

Figure 4.6 Financial Market Capitalization Takes Big Hit Total loss in market value: $857 billion, December 2006-0ctober 2008

Figure 4.6 Financial Market Capitalization Takes Big Hit Total loss in market value: $857 billion, December 2006-0ctober 2008

US$ billions

Sources: Bloomberg, Milken Institute.

Notes: The stock price for Bear Stearns is to May 2008. Countrywide's stock price is to June 2008. The stock price for Lehman Brothers is to August 2008.

US$ billions

Bank of America

Wachovia

Morgan Stanley Merrill Lynch Fannie Mae Goldman Sachs Freddie Mac Washington Mutual Lehman Brothers Countrywide Bear Stearns JPMorgan Chase Wells Fargo

Sources: Bloomberg, Milken Institute.

Notes: The stock price for Bear Stearns is to May 2008. Countrywide's stock price is to June 2008. The stock price for Lehman Brothers is to August 2008.

Table 4.3 Income, Losses, and Write-Downs at Selected Financial Institutions (US$ Billions)

Net Income

Cumulative Net

Losses and Write-Downs

Income Minus

Q1-Q3

Cumulative

(Q2 2007-0ctober 31,

Losses and

2004

2005

2006

2007

2008

(2004-Q3 2008)

2008)

Write-Downs

Bank of America

13.9

16.5

21.1

15

5.8

72.3

27.4

44.9

Goldman Sachs

4.6

5.6

9.5

11.6

4.4

35.7

4.9

30.8

JPMorgan Chase

4.5

8.5

14.4

15.4

4.9

47.7

20.5

27.2

Wells Fargo

7

7.7

8.4

8.1

5.4

36.6

17.7

18.9

Morgan Stanley

4.5

4.9

7.5

3.2

4

24.1

15.7

8.4

Citigroup

Washington

17

24.6

21.5

3.6

-10.4

56.3

68.1

-11.8

Mutual

2.9

3.4

3.6

-0.1

-4.5

5.3

45.6

-40.3

Merrill Lynch

4.4

5.1

7.5

-7.8

-11.8

-2.6

58.1

-60.7

Wachovia

5.2

6.6

7.8

6.3

-33.3

-7.4

96.5

-103.9

Total

64.1

83

101.4

55.3

-35.4

268.4

354.5

-86.1

Sources: Bloomberg, Milken Institute.

Sources: Bloomberg, Milken Institute.

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