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Warning: This Post May Cause Insomnia

Written By Brian Hicks

Posted November 19, 2007



While the subprime slime has managed to ding one bank after another these days, if there was a catbird seat to be had it would definitely belong to Goldman Sachs.

That’s because not only was Goldman short mortgages this summer–adding 79% to its 3rd quarter profit thank you– the Wall Street powerhouse said on Tuesday that it doesn’t expect any big write-downs now related to the lending meltdown.

So while fellas like Stan O’Neal and Chuck Prince are sleeping in late these days, it turns out that Goldman was home in bed long before the music stopped playing.

In short, Goldman sort of nailed it… far anyways.

But here’s the part that could have you staring at the ceiling all night: Goldman thinks its going to get a lot worse.

From a story in the Telegraph by Ambrose Evans Pritchard entitled: Goldman warns of a substantial US recession

"Goldman Sachs has sent a shudder through the debt markets, warning that sub-prime mortgage losses could force banks to slash lending by $2,000bn (£980bn) and push the United States into a deep recession.

Jan Hatzius, US chief economist for the Wall Street bank, said potential losses of $400bn from the whole debacle did not begin to capture the scale of any squeeze on bank lending.

"The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," he wrote.

"It is easy to see how such a shock could produce a substantial recession or a long period of very sluggish growth," he wrote.

Mr Hatzius said banks would have to shrink their lending by $10 for every $1 in losses in order to maintain capital ratios, vastly magnifying the effects as lending multiples kick into reverse.

"The macroeconomic consequences could be quite dramatic. If leveraged investors see $200bn of the $400bn aggregate credit loss, they might need to scale back their lending by $2 trillion. This is a large shock," he said."

Those losses would match the assessment pitched by Deutsche Bank in a research report published on Monday. Deutsche Bank’s call is $300-$400 billion. It’s based on their conclusion that 30 to 40 percent of subprime debt will default.

Now if those figures and that call by Goldman don’t have you thinking I don’t know what will.

$2 Trillion less to borrow is a ton of money. That makes me wonder how Ben Bernanke is sleeping these days.

By the way: The banks have already begun to pull up the ladders in a big way in the mortgage world. According to Friedman Billings Ramsey, only $3.8 billion in subprime mortgages was securitized in October. That amounted to a 91% drop year over year. Meanwhile Alt-A loans fell to $6.1 billion marking a 75% plunge.