[KevO]

Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn (£800bn), four times official estimates and enough to pose a grave risk to the financial system.

The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by "mark-to-model" methods of valuing structured credit.

"We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," said the group in a confidential report, leaked to the Swiss newspaper SonntagsZeitung.
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Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn worldwide unless banks could raise fresh capital.

It would be almost impossible to attract or even find such sums from investors. While sovereign wealth funds command roughly $3,000bn in funds, this money is mostly committed already. The funds have grown extremely wary of Western banks with sub-prime exposure after burning their fingers so many times already.

Bridgewater said true losses would mushroom if the banks were compelled to use "mark-to-market", which foretells a much crueller haircut for investors in the outstanding pool of structured debt from mortgages, credit cards, car loans and such like, together worth $26.6bn.

FULL ARTICLE

[Concerned]

Ahh we are now swimming in doomer porn. And yet we are in act 1 scene 1.

[KevO]

Ahh we are now swimming in doomer porn. And yet we are in act 1 scene 1.

act 2 coming in September

[eXpat]

And another prediction of a crash like the ones or RBS, Fortis Bank, Barclays and Morgan Stanley. BTW my money is on September/ October too for really bad news. The fundations of our economic system are being eroded as we speak.

[mrobert]

Honestly ... $1600 billion doesn't mean that EVERYBODY simply stopped paying their mortgages? I don't think it's true. Or you can create a massive panic to write off (sell) mortgage based securities for nothing, and pick them up for a nice profit.

If we take the average price of a house being $500.000, it means that 3.2 million people simply stopped paying their mortgages? Sounds a bit unbelievable.

[jbrovont]

I can't tell from the article, but they're probably counting the repackaged 'assets,' that banks then counted as collateral. If the value of the collateral evaporates, a lender may choose to demand payment. If the bank that borrowed against the asset can't pay, they're technically "bankrupt" and the bank that lent them money has to write that loan down as a "loss."

For instance, if I'm a bank and I say "Hey mrobert, I have $3 million in assets here, how about you lend me $3 million and you can hold on to these until I pay you back?"

If you give me the money, but then later you find out my collateral is all smoke and mirrors, you might decide to demand payment. Being the fine pillar of financial responsibility and stability I've proven my bank to be, I've probably used your cash as collateral against borrowing 10x that much money and loaning it out so I can take a 2 pt rip on the interest rates.

So um, sorry about your $3million, but I don't really have any cash on me at the moment, but I PROMISE as soon as this next deal works out - I mean, you can count on me for it!

Honestly ... $1600 billion doesn't mean that EVERYBODY simply stopped paying their mortgages? I don't think it's true. Or you can create a massive panic to write off (sell) mortgage based securities for nothing, and pick them up for a nice profit.
If we take the average price of a house being $500.000, it means that 3.2 million people simply stopped paying their mortgages? Sounds a bit unbelievable.

[Fiddlerdave]

Honestly ... $1600 billion doesn't mean that EVERYBODY simply stopped paying their mortgages? I don't think it's true. Or you can create a massive panic to write off (sell) mortgage based securities for nothing, and pick them up for a nice profit.
If we take the average price of a house being $500.000, it means that 3.2 million people simply stopped paying their mortgages? Sounds a bit unbelievable.

You ignore the magic of leverage! Remember the Crash of 29 from buying on margin? Nothing ever changes.

Divide your 3.2 million people by 35, or 70 or 100 or more (no one knows exactly), this being the value of the paper derivative assets banks hold that the mortgages are the sole security for. Many of those trillions of derivatives are insured, of course, by insurance companies. Unfortunately, these insurance companies themselves only have reserves measured in a handful of billions, some of which is in the same leveraged derivate assets that are failing. So sorry!

You might take note that your 3.2 million defaults divided by any of the leveraged figures has already occurred. The outcome is not in doubt, the system is ALREADY insolvent!

We are just waiting for the repo agent to knock on the door.

[mrobert]

Sorry, I forgot about the leverage effect, now being used everywhere.

This why in a recent article, a banker was asking the government to bail them out. Actually, he was socially responsable in his statement: The government should help people pay they mortgages to avoid loosing their home, [and also avoid our bankruptcy]

What happens if nobody bails out the banks?
I bet my entire assets that the world won't go to hell. Some huge hedge funds / wealthy individuals, etc who loaned the liquidity to the bank, will loose their money. Big deal really. Some big banks will tank, and their staff loose their well paid positions, etc.

From an economical point of view? It will perhaps lead to a crash in home prices, thus making home prices more affordable for everyone. People can use the extra cash on something else, boosting the economy.

[manu]

Going, going, gone!

[shortonoil]

Fiddlerdave said:

Honestly ... $1600 billion doesn't mean that EVERYBODY simply stopped paying their mortgages? I don't think it's true.

If it is only $1.6 trillion it will be a miracle! We are about to see 1/2 $trillion in Option Arms implode along with a massive number of foreclosures in other loan categories and tranches. These are homes where the owners have no equity in their homes and the homes have decreased in value by 23% to date. They will mostly all walk.

Adding the 30x leverage that we see in the likes of J.P. Morgan, Countrywide, Citi, and most hedge funds, loses will reach 10s of trillions.

Expect to witness the death of the debt based fiat currency system and most of the financial system that has been built around it. 10s of millions will lose almost everything that has been founded on paper assets.

[mrobert]

This is so sad. It breaks my hearth.
We should make a special place in a PO world, for all those investment bank employes

[Fiddlerdave]

Sorry, I forgot about the leverage effect, now being used everywhere.

This why in a recent article, a banker was asking the government to bail them out. Actually, he was socially responsable in his statement: The government should help people pay they mortgages to avoid loosing their home, [and also avoid our bankruptcy]

What happens if nobody bails out the banks?
I bet my entire assets that the world won't go to hell. Some huge hedge funds / wealthy individuals, etc who loaned the liquidity to the bank, will loose their money. Big deal really. Some big banks will tank, and their staff loose their well paid positions, etc.

From an economical point of view? It will perhaps lead to a crash in home prices, thus making home prices more affordable for everyone. People can use the extra cash on something else, boosting the economy.

Well, what is lost is not just the banks, but the money those banks hold over $100,000 per indivdual depositor. This means pension funds, IRA's, all the various uninsured CDO's , aside from all the bank's stock people and investment funds hold.

An additional complication is huge numbers of businesses will collapse instantly without the day to day credit they receive from those banks for their operations.

There will be no money for people to spend, and few jobs at which to earn any. That's why its called a credit crunch. There is no credit, and that's because there is no money. Much of it will go where-ever those 1's and 0's in your RAM goes when you turn off your computer.

[mrobert]

That is so sad.

[Electric_Economy_2025]

My mom is 70 should I tell her to cash out her 401k while she still can ?
Who knows what banks an funds its connected to right ?

[BigTex]

Fractional reserve banking systems are INHERENTLY unstable. They're always at risk of "bank runs" for which there is NEVER enough money available.

Add to this inherently fragile nature a dramatic re-pricing of the underlying assets on which credit was extended and it could be "The Mother of All Cascading Failures."

In other words, I don't see a logical point at which this un-winding would stop, since each level of default would presumably trigger another default and/or each increment of asset devaluation would trigger an un-winding or re-pricing of the downstream debt.

[KevO]

My mom is 70 should I tell her to cash out her 401k while she still can ?

YES.

We should all by now, on here at PO.com, with the exception of the few Santa believers, realise that the economic crash that has begun will have no end. This isn't a 2 to 5 year blip and then all things will go up again. This is essentially the beginning of the end. House prices will never increase again. Why? because we are past peak oil, we have no alternatives, we now have no money to invest, climate change has got to tipping point. This really is it. This is not a rehearsal. This is the last recesssion.
You will all look back on 2008 as they year that the jury came in.
You'll know this is true by 2009 0r 2010 at the latest but unless you've seriously got a plan A, then you'll probably be screwed so yes withdraw your 'investments' because they are not by default 'investments' anymore. Cash in your stocks, buy your own stock such as none power tools. Move away from suburbia, get into real communities that have foresight and intelligence, start growing your own food NOW. Start making useful things to barter or trade NOW. If we don't do this en masse then a WW3 scenario is inevitable as countries go to war to keep us in our lifestyles.
This is the time. We have to essentially become hippies and for the rest of our lives. I'll say it again, this is it.
We all collectively F***** it. Too late now.
Kunstler, Heinberg, Hopkins and now Simmons are all telling us. They're all correct.
Oil price goes up to $200 - global crash
Oil price goes down to $50 - global crash
Bird Flu pandemic - global crash
Sea level rise more than 1 metre (7 now likely) - global crash
Resource wars - global crash

Let's all stop yawning. Get your grannie's 401K out, build an eco, self sufficent house on raised land far away and survive or leave it there and watch it disappear. We'll always have a choice! of sorts

[mrobert]

That is why I am starting to build

[shortonoil]

KevO said:

We should all by now, on here at PO.com, with the exception of the few Santa believers, realise that the economic crash that has begun will have no end. This isn't a 2 to 5 year blip and then all things will go up again. This is essentially the beginning of the end. House prices will never increase again. Why? because we are past peak oil, we have no alternatives, we now have no money to invest, climate change has got to tipping point. This really is it. This is not a rehearsal. This is the last recesssion.

This is the last recession.

So few of us, or our pundits have yet to embrace this inevitable concept.

Reality, as opposed to the blue pill, is still far in the recesses of our awareness.