Friday, February 15, 2008

SUBPRIME | What the Crash Means

Deutsche Bank and the Royal Bank of Scotland are on record as warning that subprime losses could hit $400-$500 billion.

Now (yesterday) the Bank of America has put out a report that the subprime-related credit problems have reduced global stock market capitalization since last October, i.e., in three months, by $7.7 trillion or 56 percent of current-dollar U.S. GDP.  What does this mean?

  • The decline in market cap is 14.7 percent, compared with a similar loss three months later of 13.2 percent after the LTCM crisis (1998), 9.8 percent for Black Monday (1987) and 6.1 percent for the Brazil currency crisis (1999). 
  • The losses were also greater than those suffered after the 9-11, the Asian financial crisis (1997), Argentina's default (2001) or the 1994 Mexican peso crisis (1994). 
  • What does this mean? Those in the stock market, alas, already know. 
  • Local government agencies trying to raise money, like Michigan and the Port Authority of New York and New Jersey, also know there is a crisis in the municipal markets. 
  • Some of the $7.7 trillion losses are likely to be showing up in pension fund portfolios. New York City taxpayers may not know that they have to make up the shortfall below a projected 8 percent annual return on the funds' assets. Stock market losses mean that OMB and Mayor Bloomberg are going to have to go back to the City's financial plan and refigure.