Not exactly breaking news. This is really just a confirmation of a few posts I have seen here concerning how the hedge funds and others are so leveraged that a pull back must similarly be leveraged in reverse. So, as we stated somewhere in these posts, when they are leveraged by 10, then a pull back in lending really is multiplied by 10 as well.
Incidentally, the government sponsored enterprises mentioned in this article, are the state pension funds. These funds are VERY exposed to the CDO market. Curiously, no one is talking about this right now. However, if some of them are overexposed, start looking for the news reports of how the fund managers played fast and loose with state retirement money!!
Again, it is off topic, but it does suggest that lending will be tightened going forward. Just think about that as you plan on refinancing and such. It will certainly have an impact...
U.S. could face $2 trillion lending shock: Goldman
LONDON (Reuters) - The impact of the U.S. mortgage market crisis on the underlying economy could be "dramatic" as leveraged investors may need to scale back lending by up to $2 trillion, according to investment bank Goldman Sachs (GS.N: Quote, Profile, Research).
In a report dated November 15, Goldman's chief U.S. economist Jan Hatzius said a "back-of-the-envelope" estimate of credit losses on outstanding mortgages, based on past default experience, was around $400 billion.
But unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises.
And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling -- A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses.
"The macroeconomic consequences could be quite dramatic," Hatzius said in the note to clients. "If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion."
"This is a large shock," he said, adding the number equates to 7 percent of total debt owed by U.S. non-financial sectors.
Hatzius said such a shock could produce a "substantial recession" if it occurred over one year, or a long period of sluggish growth if it occurred over two-to-four years.
One of a number of caveats outlined in the report was that baseline economic forecasts may already include significant reductions in the pace of mortgage lending.
But the conclusion remained a gloomy one regardless.
"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," he wrote. "While the uncertainty is large, the associated downward pressure on lending raises the risk of significant weakness in economic activity."
(Reporting by Mike Dolan, editing by Mike Peacock)