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IMF Forecasts $945 Billion in Credit Related Losses

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The IMF issued a stark forecast in its Global Financial Stability report of the damage resulting from the credit crisis, an eye-popping $945 billion. Note that unlike John Hatzius of Goldman’s $2 trillion estimate, this total does not include knock-on economic effects of reduced lending. In addition, the IMF also cited permissive regulation as one of the main culprits.

In a related development, Morgan Stanley CEO John Mack anticipates a difficult year, although his comments were almost sunny by contrast with the IMF assessment. And Wamu has raised $7 billion from a TPG-led group, as opposed to the initially reported $5 billion, suggesting some investors will have their heads handed to them take issue with the downbeat projections.

The IMF report according to Bloomberg:

The International Monetary Fund said losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a “collective failure” to predict the breadth of the crisis.

Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders’ deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

“The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,” the report said. The fund warned of the risk of “a serious funding and confidence crisis that threatens to continue for a significant period.”…

The fund, which predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited, blamed lax regulations and a lack of understanding about the risks in structured financial products for the crisis.

“Everybody has learned a lot,” Jaime Caruana, the IMF’s director of monetary and capital markets, said at a press conference in Washington, when asked how the fund underestimated the fallout. “We have all to be a little bit humble on the analysis of the crisis, because it has been a very, very complex crisis.”

Today’s IMF estimate exceeds those by other economists, including analysts at UBS AG, who projected in February that financial firms may lose $600 billion.

While financial innovations have brought some benefits, “the events of the past eight months have also shown that there are costs,” the IMF said. At the same time, the fund urged governments against a rush to increase regulation, especially changes that “unduly stifle innovation or that could exacerbate the effects of the current credit squeeze.”

Banks should improve disclosure and take writedowns “as soon as reasonable estimates of their size can be established,” the fund said. It also urged stronger supervision of capital adequacy, and said policy makers should prepare for further disruptions, the IMF said.

“Authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy,” the report said….

“Further downward pressure on the dollar, particularly if it” comes “from subprime or similar shocks, could boost liquidity and lead to an intensification of inflationary pressures in some emerging markets,” the fund said.

IMF Managing Director Dominique Strauss-Kahn, who took office in November, has conceded that the fund wasn’t as vocal as it could have been about the risks that a subprime collapse posed for the global financial system”

John Mack was almost upbeat by contrast, seeing the strains in the debt markets persisting for at least two more quarters:

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5 comments

  1. Anonymous

    “We have all to be a *little bit humble* on the analysis of the crisis, because it has been a very, very complex crisis.”

    Is that nice talk for “eat crow?”

    A “little bit humble” is probably a stretch for these guys.

  2. Anonymous

    The IMF is wrong. That $945 billion is not lost.

    Those on the right side of bets walked away $945 billion richer.

    Winners have those dollars lent and spent.

    Folks borrowed those $945 billion and with it, paid for real things like houses and big-screen TVs. That money went into the pockets of othres.

    To say that $945 billion up and vanished as if someone ripped up the dollar bills reveals idiocy.

    The winners might have bet on commodities, bought yachts or drugs and hookers.

  3. Anonymous

    Re: “
    Winners have those dollars lent and spent. “

    Yes, go ask Greenspan and his fellow whores at the hedge fund that have made billions of this frothy ittle housing mkt bubble! It isnt a conflict of interest, it’s a crime!

  4. Anonymous

    “We’re doing great!”
    “Talk of any difficulties is out of line!”
    “There’s some minor frothiness. That’s all. In truth, we’re doing great!”
    “Some of the collateral might be questionable. That’s the price of the extraordinary financial innovation that has spawned the greatest financial and economic boom in history.”
    “The naysayers are wrong. At most, we’re talking a few billion of difficulty”.
    “No more than, say, 25 to 50 billion of difficulty”
    “There is not recession. Just a minor blip in the road. At most $50 to $100 billion.”
    “The estimates of sober, responsible analysts really don’t put this difficulty at more than $100 billion or so.”
    “Thanks to the coordinated actions of central bankers around the world, we’ve stemmed the difficulties. There’s really only $100 to $200 billion of problems and most of that has already been accounted for in various write-offs.”
    “Estimates now run between $200 to $400 billion. Really a drop in the bucket.
    “IMF forecasts $945 billion in credit losses”

    What comes next from all the spokespeople and analysts who have such a fine track record in understanding the extent of current difficulties?

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