In an article on Bloomberg.com, Jody Shenn reported that, contrary to some predictions, many experts believe that the credit crisis is far from over. During a conference hosted by the Securities Industry and Financial Markets Association on June 24, BlackRock president Robert Kapito likened the credit crisis to a baseball game: “Some people think it’s in the eighth, I think it’s in the fourth inning. Wait until you see the quarterly losses people are going to report this quarter.” Kapito believes that the losses on positions taken to hedge against souring debt will aid in extending the pain for financial firms.
To date, the world’s largest banks and securities firms have reported over $399 billion of write downs and credit losses since the housing market crashed in early 2007. Earlier in June, Lehman Brothers reported a first-quarter net loss of about $700 million on commercial-mortgage holdings and opposite derivative bets. Morgan Stanley reported about $500 million in net losses from hedging meant to offset potential write-downs on high-yield company loans.
Kapito said that the losses from derivatives used as hedges may well exceed the losses on the underlying debt. Various investors just piled into the positions without considering that other investors might deliver securities to them to settle the contracts. “If you think about it, inflation is up, food-and-energy is up, housing is down, the consumer is hurt,” Kapito said. “We’re looking at a much bigger slowdown in 2009 and I think that’s coming across the world.”
Kapito also said that economic damage from the credit-market slump will worsen. “No one remembers when they made money but they remember every single time they lost money,” he said. “This leverage is going to take longer to come out of the system and we’re just going to have to be patient about it.”
If Kapito is correct, then investment losses will substantially increase and market conditions are almost certain to deteriorate. In short, investors are looking at a lot more pain to come in this market.
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