In the Eye of the Credit Crunch Storm

Last week at the Sovereign Society Emergency Money Summit in St. Kitts, I spoke extensively about the ongoing subprime credit crunch market shock. Several thousand miles away on Wall Street, respected analyst Meredith Whitney was sounding the alarm too. Make no mistake, more financial sector losses are on the way.

As I wrapped up an hour-long presentation on Saturday in St. Kitts, one of the conference attendees pointed out that he had seen total financial sector loss estimates over one-trillion! I have seen those numbers too.

This estimate seems to me on the high side. But when you include all the collateral damage done by this credit crunch including: prime loan defaults, auto and credit card delinquencies, and growing write-offs in commercial real estate – $1 trillion doesn’t sound like such a long shot.

Direct and Indirect Losses Due to Credit Crunch Market Shock

Most of the well-reasoned estimates I have seen, based on independent research from multiple sources, seem to indicate about $500 billion as the right number. These are the direct losses of one sort or another that Wall Street will be taking for years (NOT months) to come.

Of course the overall damage to the economy could be quite higher. There is after all an “opportunity cost” at work here too. The biggest investment and commercial banks have already tightened lending standards significantly in the wake of the credit crunch.

Commercial real estate deals aren’t getting funded. Standard business loans to small, mid-size, and even large firms are getting much harder to qualify for.

Even hedge funds are feeling the pinch, since Wall Street is running short of cash to finance their leveraged bets. These represent indirect losses from the credit crunch – but they’re nevertheless real.

As the big financial firms cobble together a rescue plan for bond-insurer Ambac, the biggest bank of all, Citigroup, is said to be facing more steep losses of its own this quarter. Oppenheimer analyst Meredith Whitney, who correctly forecast Citigroup’s massive fourth-quarter losses and dividend-cut, is now predicting more of the same.

Big Banks Face the Biggest Risks

According to a story in Bloomberg, Whitney believes that Citigroup faces additional write-downs this quarter, including “losses on more than $43 billion of junk or ‘leveraged’ loans.” Oh, and Citi also faces potential charge-offs on more than $50 billion of residential mortgages too. Yikes!

Citigroup may also be forced to “sell $100 billion of assets” at distressed prices just to free up capital for business operations. I wouldn’t be surprised to see more massive dilution of shareholder value, as Citi desperately raises additional capital. Forecasts like this only reinforce my belief that it’s Citigroup, and the other major investment and commercial banks, that face the most risk of loss going forward.

The firms at the center of the securitization process are now at the eye of the credit-crunch storm. We may see a brief period of calm weather, but watch out for the back-side of this market shock maelstrom as it blows through Wall Street!

At this rate, the Citigroup board may soon be considering second citizenship in St. Kitts as an alternative to facing angry stock holders at the next shareholder’s meeting!