Thursday, July 19, 2007

Bernacke --- "$50 to $100 Billion" I guess more

This is a follow-up on my recent post concerning the containment post I wrote concerning the question of whether or not the subprime mortgage meltdown is limited only to subprime mortgages or whether or not the problem expands further up the ratings scale. I think it expands further up into both the Alt-A and A markets as the combination of irrational exeburance, short term and pervese fiscal incentives, inexperience and greed was not limited solely to the subprime originators or borrowers.

Fed Chairman Bernacke has long been arguing that the problems in subprime are just that --- problems in subprime. He is starting to give an estimate on the size of the problem. In testimony to Congress, he stated that he believes the probable subprime losses will be $50 to $100 billion dollars (from BBC News):

The credit losses associated with sub-prime have come to light and they are fairly significant," Mr Bernanke told a Senate Committee.

"Some estimates are in the order of between $50bn and $100bn of losses....."

The Fed remained "alert" for any signs that housing weakness may destabilise the economy as a whole, Mr Bernanke added.

It has already acknowledged the impact of reduced activity in the housing market on consumer spending, cutting its forecast for economic growth this year.

I think he is wrong on this one, and that the problem will start spreading up the credit ladder. Mish Shedlock at his place caught an Alt-A lender going under. Right now, any single Alt-A lender is a random data point. However if we start seeing a half dozen or more Alt-A focused lenders go under, or major financial comapnies increase their write-off reserves for their Alt-A portfolios, then the non-containment story becomes a whole lot stronger.

Something to keep an eye on.

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