IMF Says Financial Losses May Swell to $945 Billion
By Christopher Swann
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 of ``a serious funding and confidence crisis that threatens to continue for a significant period.''
Morgan Stanley Chief Executive Officer John Mack told shareholders at the company's annual meeting in Purchase, New York, today that the credit crisis will last ``a couple of quarters'' longer.
G-7 Ministers Meeting
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.
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.
``Everybody has learned a lot,'' Jaime Caruana, the IMF's director of monetary and capital markets, said at a press conference in Washington, when asked how the fund underestimated the fallout. ``We have all to be a little bit humble on the analysis of the crisis, because it has been a very, very complex crisis.''
Today's IMF 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 that ``unduly 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.
``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 economies ``have 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'' comes ``from subprime or similar shocks, could boost liquidity and lead to an intensification of inflationary pressures in some emerging markets,'' the fund said.
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 that ``stress-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.