Bloomberg – The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report.
The effects will be amplified as banks and hedge funds that borrowed to finance their investments scale back lending, according to the report.
“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,” Hatzius wrote. “A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10.”
Citigroup Inc., the biggest U.S. bank, and Merrill Lynch & Co. have led companies writing down more than $50 billion on securities linked to U.S. subprime mortgages. Wells Fargo & Co. Chief Executive Officer John Stumpf said yesterday that the worst U.S. housing market since the Great Depression may mean “elevated” equity losses through 2008.
Goldman’s Hatzius said his report is based on a “conservative estimate” of investors cutting lending by 10 times the loss to their capital. Investors realizing half of the potential losses, at $200 billion, would have to scale back lending by $2 trillion, he said.
