Yesterday I sat slackjawed and slumped at my desk after reading these 2 articles on the CNN Business page. Extremely unnerving.
http://money.cnn.com/2007/11/16/news/economy/mortgage_losses/index.htm$2 trillion lending crunch seen
Goldman Sachs economist says mounting credit losses could force banks to significantly scale back their lending.
By Grace Wong, CNNMoney.com staff writer
November 16 2007: 10:21 AM EST
LONDON (CNNMoney.com) -- The mortgage wipeout could result in a $2 trillion cutback in lending and have dramatic implications for the U.S. economy, according to Wall Street investment bank Goldman Sachs.
The housing slump is expected to end up costing banks, hedge funds and other lenders an estimated $400 billion as defaults on home loans rise, according to Goldman economist Jan Hatzius.
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But most stock investors don't react aggressively to capital losses the way banks and other lenders do. A bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses, the note said.
That means that if lenders end up suffering just half of the $400 billion in potential credit losses, they could be forced to reduce the amount they loan by $2 trillion. Such a drastic credit crunch could have dire consequences for the economy.
Next, read about the ABX Index, (something I had never heard of) and become scared, very scared. This is some of the best damn finance reporting I have ever seen. Grace Wong is an excellent writer - makes a complex topic very understandable.
This really seems like banks are in deep doo-doo, deeper and broader than anything I had imagined. I would be very interested in hearing any comments from those brighter than me if this is as bad as these 2 articles make it appear.