Ghastly Losses

Posted by Dave Fratello on Friday, October 26th, 2007 at 4:58pm.


Halloween is coming early this year. This has been a week in which huge dollar losses related to the deflation of the RE bubble were impossible to ignore.

Scroll through one of our favorite economics blogs, Calculated Risk, and it's an absolutely grim parade of news. Culling some data from CR and some from other sources:
  • Merrill Lynch wrote off $7.9 billion in mortgage-backed securities, nearly twice the amount the firm said it would write off only three weeks before. Why the change? A more honest look at the value of those mortgage-related holdings. The reward for such honesty? The CEO may well be fired, or worse.
  • Speaking of re-rating mortgage-related assets, Moody's today announced it is in the process of re-rating huge numbers of CDOs full of subprime mortgages – well, that's the headline, but you know they're wondering about all mortgage values – which will, in turn, force the holders of those CDOs to re-value them. And when that happens, see the Merrill Lynch story above – just fill in some other big names instead.
  • By contrast to all that news, Countrywide's announcement today of $1.2b in losses – the company's first-ever quarterly loss, but what a way to do it! – actually pales in comparison.
And then there's this very, very big picture news: Americans stand to lose $2 trillion to $4 trillion in the value of their homes over the next few years. (Do we hear $8t? Yes we do.)

As CR notes in this story (with a great graph), total household RE values were rated at $21 trillion as of mid-September by the Fed. So a decline of $2t-$4t is a decline of 10% to 20% – certainly imaginable. (We can imagine the 10-20%, but it kinda hurts to imagine the trillions.)

That's a lot of paper wealth going poof, all over the place. Do you get the sense that it's all settling out now?
"The trend is not in the direction of 'This is over,' " said Richard X. Bove, an analyst at Punk Ziegel & Co. "The trend is in the direction of 'This is building.' "
Bring on the ghosts and goblins – something more familiar, and less scary.
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