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When Will the Credit Crisis End?

Written By Brian Hicks

Posted June 23, 2008

The credit crisis will not peak until the first quarter of 2009, said Goldman Sachs. 

And, according to the latest Goldman forecast, global financials will need to raise another $65 billion by this time next year to deal with losses.

But they’re wrong.  They’re failing to account for the losses when Option ARMs reset. 

Alt-A loans were given to borrowers with credit scores of between 620 and 700, and included the option of interest-only loans, option ARMs, and no documentation loans that required little if any documentation for loan approval. Ninety percent of those that got an Option ARM in 2006 provided little or no documentation.

Ninety percent!

And it’s estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%.  Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years.

Option ARM resets won’t peak until 2011.

Even Meredith Whitney believes, “the real harrowing days of the credit crisis are still in front of us,” predicting that banks could write off another $170 billion by the end of 2009.

But not every one is as pessimistic 

Richard Fuld, for example, tells us the worse of the crisis is “behind us.” 

JP Morgan Chase’s Jamie Dimond believes the market debacle is “maybe 75 percent to 80 percent over.”

And, while it may sound great, remember that last summer we heard similar forecasts from the banking community.  Remember when the Merrill Lynch CEO said the subprime crisis was “reasonably well contained”?

FDIC Chairman Sheila Barr said we’re in the 7th inning.

Morgan Stanley said we’re in the 3rd inning.

Morgan Stanley CEO John Mack says the 8th inning… maybe even top of the 9th.

But if you ask me, we’re in the top of the 6th inning of a double-header. 

Option ARM resets will be tougher for the economy to handle than subprime.  And we will see greater numbers of bank failures, job losses, foreclosures, delinquencies, and economic hardship.

Listen, I’m not economically pessimistic.  But I prefer to be a realist.  Prepare your portfolios for downside risk and a weaker dollar knowing the reality of what’s ahead. 

Banks will not bottom until housing bottoms.

P.S.  We came across an interesting Jim Cramer “flip-flopping” piece on YouTube.  Enjoy.