Bloomberg News reports that hedge fund Bridgewater Associates has estimated that the total write-downs from the current credit crisis will total $1.6 trillion. With $400 billion in write-downs taken so far, this $1.6 trillion estimate would put us about a quarter of the way through the crisis. So far, banks have raised $321 billion in capital to buffer those write-downs.
And Teddy Forstmann, a private equity veteran, agrees with this assessment. In an interview from Saturday's Wall Street Journal, he said the current credit crisis is the worst he's seen. As he said, the problem started after 9/11 with the Fed giving away money at negative real interest rates. This created so much cash that banks could not find ways to lend it out where risk and reward were in balance.
So they created new ones which mis-priced risk. These include loan syndication -- in which banks originate loans and take a fee for selling them to someone else -- and securitization -- in which banks packages lots of loans as securities and sell those to hedge funds and other institutional investors. Unfortunately, these only work when the prices of the underlying assets are going up.
Thanks to the way hedge funds and brokerage firms are interconnected, a point I made on CNBC last Thursday with Maria Bartiromo, the inability to value the complex securities that result from securitization is creating a problem with the financial system. Forstmann also estimates that we are in the second inning of the financial crisis.
I am not sure how this will end, but as I've posted, I hope that securitization is never allowed to rear its ugly head again in our financial markets.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
7-07-2008 @ 1:49PM
David Huston said...
Whatever happened to those credit default swaps said to total more than $56 Trillion in this country, and far more abroad? How are the counterparties holding up?
7-07-2008 @ 2:27PM
speculator said...
This is the phae where the consumer gets hurt and if there are more write downs which I think there is-the market is going a lot lower.
www.theinvestingspeculator.com