Thursday, July 24, 2008

PIMCO's Gross: $5 Trillion Risky Mortgage Loans, Projects $1 Trillion in Mortgage Losses

by Bill McBride on 7/24/2008 02:21:00 PM

From PIMCO's Gross: Mooooooo!

PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”
I still think $1 trillion in mortgage losses is pretty much the worst case. But we have definitely come a long way since last December when I first projected $1 trillion in possible losses.

Last December from the WSJ:
... recent prediction from Barclays Capital that losses from the subprime-mortgage meltdown could hit $700 billion. That would top Merrill Lynch’s recent estimate of $500 billion. The Australian newspaper notes that a $700 billion “bloodbath” — potentially leading the U.S. economy into “the blackest year since the Great Depression” — would top the GDPs of all but 15 nations.

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”