IMF Says Financial, Economic Losses May Swell to $945 Billion

By Christopher Swann

April 8 (Bloomberg) -- The International Monetary Fund said financial losses stemming from the U.S. mortgage crisis may approach $1 trillion, citing a ``collective failure'' to predict the breadth of the crisis.

Falling U.S. house prices and rising delinquencies may lead to $565 billion in mortgage-market losses, the IMF said in its annual Global Financial Stability report, released today in Washington. Total losses, including the securities tied to commercial real estate and loans to consumers and companies, may reach $945 billion, the fund said.

The forecast signals the worst of the credit crunch may be yet to come, because banks and securities firms so far have posted $232 billion in asset writedowns and credit losses. Policy makers, concerned that lenders' deteriorating balance sheets will hobble economic growth, are pushing companies to raise capital.

The current turmoil is more than simply a liquidity event, reflecting deep-seated balance-sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,'' the report said. The fund warned of the risk ofa serious funding and confidence crisis that threatens to continue for a significant period.''

Today's report comes days before finance ministers and central bank governors from the IMF's 185 members gather in Washington for spring meetings of the fund and World Bank. Group of Seven policy makers meet April 11.

Casting Blame

The fund, which predicted a year ago that any ripple effects from a subprime mortgage crisis would be limited, blamed lax regulations and a lack of understanding about the risks in structured financial products for the crisis.

Today's estimate exceeds those by other economists, including analysts at UBS AG, who projected in February that financial firms may lose $600 billion.

While financial innovations have brought some benefits, the events of the past eight months have also shown that there are costs,'' the IMF said. At the same time, the fund urged governments against a rush to increase regulation, especially changes thatunduly stifle innovation or that could exacerbate the effects of the current credit squeeze.''

Banks should improve disclosure and take writedowns ``as soon as reasonable estimates of their size can be established,'' the fund said. It also urged stronger supervision of capital adequacy, and said policy makers should prepare for further disruptions, the IMF said.

`Contingency Plans'

``Authorities may wish to prepare contingency plans for dealing with large stocks of impaired assets if writedowns lead to disruptive dynamics and significant negative effects on the real economy,'' the report said.

The fund added that policy makers should ``stand ready to promptly address strains within troubled financial institutions.''

Federal Reserve officials prevented a disorderly failure of Bear Stearns Cos. last month by agreeing to lend against $30 billion of the company's assets, as part of a takeover agreement with JPMorgan Chase & Co.

The fund noted in the report that while risks to financial stability remain elevated'' worldwide, emerging market economieshave been broadly resilient.'' Still, the lender highlighted the risk of faster inflation should the subprime rout cause the dollar's slump to accelerate.

Further downward pressure on the dollar, particularly if it'' comesfrom subprime or similar shocks, could boost liquidity and lead to an intensification of inflationary pressures in some emerging markets,'' the fund said.

Strauss-Kahn

IMF Managing Director Dominique Strauss-Kahn, who took office in November, has conceded that the fund wasn't as vocal as it could have been about the risks that a subprime collapse posed for the global financial system.

In April 2007, the fund said there was little risk of a serious systemic threat.'' It also said thatstress-tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitization will not face losses.''

At least 14 banks and securities firms have sought cash from outside investors in the past year.

Since credit markets seized up in the U.S. in August, the Standard & Poor's 500 stock index is down about 7 percent, the trade-weighted dollar index has dropped more than 9 percent and the yield on two-year U.S. Treasury notes has fallen to 1.88 percent. Home prices tracked by S&P Case-Shiller have slumped in every month.

``There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions -- banks, monoline insurers, government-sponsored entities, hedge funds -- and the associated risks of a disorderly unwinding,'' the IMF concluded in the report.

To contact the reporters on this story: Christopher Swann in Washington

Joe Klein's conscience | Homepage | 04.08.08 - 10:47 am

Yun is our nation's best economists.

Oy.

Hee hee what is the world comming to a Realestate agent lying?

You know, maybe if people could afford the houses, people would buy them! Hmmm... nah... let's get back to giving out toxic loans to strawberry pickers making $15,000 a year so they can buy the $750,000 house they deserve!

Unreal - the numbers are terrible and are only going to get worse.

Lawrence sleeps very well because he knows that confronting reality would be harmful to his employment situation. If he came out and said "Folks, housing is in the crapper and it will take until lat in 2009 at the very earliest for the situation to stabilize" he'd be boxing up his office stuff before the end of the day. The upside of that is that the NAR could then hire Baghdad Bob, who I'm sure is hunkered down somewhere in the Sunni Triangle just waiting for his chance in the big leagues.

"If he came out and said "Folks, housing is in the crapper and it will take until lat in 2009 ..."

bluestatedon | 04.08.08 - 11:03 am | #

And he'd still be waaaay off.

"And he'd still be waaaay off."

True enough, but his doctors have told him it wouldn't be prudent for Lawrence to embrace reality 100% all at once. They say it needs to be a step-by-step, gradual process, otherwise his head will explode from the pressure of all that real data rushing in.

Yun is rational. He is a paid shill with a credentials that are supposed to lend him credibility. It is in his interest to use extra "optimistic" assumptions in order to insure his continued employment....something wise when facing a recessionary employment environment.

Don't hate the player...hate the game.

Personally, I would rather be pennyless. But I am a fool....and a rather poor one at that. It is the price I pay for having a conscience.

I agree Yun is overly optimistic. However, I still expect sales activity to pick up going forward as lenders drop prices and FHA gets their leash lengthened.

A note to the press.
After every quote by Yun this caveat should be placed directly folowing;
"During this housing boom and bust Mr. Yun and his predecessor were wrong in their predictions 100% of the time."

Don't hate the player...hate the game.

COMMUNIST!

I'm sort of wondering what sort of magic event is going to happen so that Q3 and Q4 take off as most economists and analysts are predicting. Because from where I sit, nothing is going to provide a lift for quite some time. Not housing, not tech, not spending...what's left?

Yun = You Understand Nothing

If you have'nt enjoyed your life up to this point, your phugged

For all you critics of Lawrence Yun please go to:

Lawrence Yun Watch - Follow the NAR's hack as he denies the housing bubble and crash

ipodius - You're back I see

I tried the other side just to see what it was like. But I tossed and turned all night and didn't sleep

I'm not saying catastrophe, just realism here. It's funny how the tables have turned...before it was the bears that kept saying "everything is going to fall apart" and called the recession way too early. Now the bulls are calling a recovery way too early.

And as far as Yun goes, he's the spokesperson for a trade group first, an economist second. He's supposed to take what he sees, and put a nice smiley face on it no matter how dire. Just like Bush administration press folks. Why anyone even listens is beyond me.

ipodius | 04.08.08 - 11:24 am

War.

REAL War.

Home On, Deranged

Oh, give me a loan where the buffaloed moan
Where the fear and the antacid hold sway
Where seldom is heard a discouraging realtor word
And the streets are not crowded all day

ac, thanks for the tip on Econoday and for the link to the Bloomberg calendar.

Wait. He's partially correct:

"Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure."

Thats a BIG UNLESS.

Maybe Yun is forecasting these numbers because of the "SUNSHINE" tax. You know, if he believes in global warming, then everywhere in the U.S. will become more desirable to live. It's not just L.A. or San Diego anymore.

We're all So Cal now!