Banking System Losses to Hit $1.6 Trillion?

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Paul Kedrosky posted on a report published in a Swiss paper (he courteously provided the English translation) of the results of a study prepared for hedge fund Bridgewater Associates that projects that total losses to the financial system from the credit crisis will reach $1.6 trillion. Note that losses taken to date are only $400 billion. This is consistent with the off-the-cuff view of Ted Forstman in an interview with the Wall Street Journal that we are only in the second inning of the credit crisis.

The IMF has forecast total losses from the credit contraction of $945 billion, and that included damage to hedge funds and other investors, not to the financial intermediaries that are an integral part of the functioning of advanced and even not so advanced economies. By contrast, Goldman Sachs has put the likely damage at $1.1 trillion, George Magus of UBS at $1 trillion, and hedge fund manager John Paulson at $1.3 trillion. So this is far and away the grimmest estimate to date, particularly given its focus on financial intermediaries.

Reader Dwight, who pointed out this post to us, wonders if this report (or perhaps thinking along similar lines) is the basis for recent apocalyptic calls from RBS, Barclays, Fortis. SocGen, and the BIS.

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  1. Anonymous

    With regard to what inning we’re in, some credit should be given to Santyajit Das, who has written some reference books on derivatives published by Wiley, dating back to 1989 at least. In Sept. 2007, a reporter asked Das what inning of the credit crisis we’re in: third? Second? Das laughed and said that they’re still just singing the national anthem. If of further interest, the interview where he made this prescient comment is at MSN Money

  2. Edward Harrison

    I caught this article in Sonntagszeitung as well because there was an especially explosive one regarding the lack of capital at UBS and Credit Suisse in the same paper. See my translation here:

    Anyway, the article I saw was much longer and in depth than the one Paul Kedrosky translated. I am probably in for the night but I might be able to translate it tomorrow if someone hasn’t already. Here’s the link:

    I’m not sure how long the link will last, so I’ll put it up on my site in original language for tonight before I go to sleep.

    Ed H

  3. jdd

    Does the 500 billion+ or whatever the number is in worthless, or low-value to par, paper that the Fed, BoE and EBC have assumed in exchange for treasuries count in this figure or are we talking about 1.6 billion + the socialized losses?

  4. Tom Lindmark

    I was put a bit off stride this morning when I read the UBS/Credit Suisse news and wrote the following- Nothing more than musings at the time. Now I log on and see this. The full translated report would be helpful but the implications are stunning.

  5. Anonymous

    Does this include all the trash The Fed has taken in as collateral since JPM, Bernanke & Paulson married off Bear? I would think that pile of garbage is at least another trillion by now and rocketing daily!

    The Fed had it so backward, i.e, they wanted to save the market before Japan opened on a Monday, and then they overlooked the rest of the year — and the price of being crooked versus honest!!!!!!!!!

  6. semar

    Nice article you got here :)

    It’s quite interesting that even if the markets (somehow) found a base, the financial didn’t. Probably large trade desks are still shorting them, knowing things can be much worse.

    $1.6 trillion…how many countries have a smaller anual GDP? Many I think

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