Wednesday, November 19, 2008

New and improved capital loss data

World capital losses are rising. Nouriel Roubini expects $3 trillion in losses, while the IMF expects half that, $1.4 trillion. The Bloomberg data recently added insurer and government sponsored entity (GSE) losses to the list of bank and broker losses, rendering Roubini’s estimate a little less far-fetched.

Admittedly, the banks/brokers account for 73% of world capital losses, but that is not the whole story. As Fannie Mae and Freddie Mac report record third quarter losses and American Insurance Corporation writes down tens of billions, the reporting of GSE and insurer losses becomes increasingly important in gauging world capital losses.

On September 22, the reported losses were:

And on November 18 – two months later – reported losses were:

Including the GSEs (Fannie Mae and Freddie Mac) and insurers almost doubles (85% increase) world capital losses in two short months to $1 trillion. The U.S. accounts for $666 billion, or 67% of the total.

Without the GSEs and insurers, world capital losses would have increased by just 36%. The GSEs have accrued $114 billion in capital losses through November 18, which is a sizable portion of total losses in the Americas, 17%. And with losses mounting, expect the Treasury (taxpayer) to finance further capital injections.

The table above lists total insurer losses and capital raised, and the top five contributors to those losses. AIG, number one, has written down $61 billion, while the second top insurer - Ambac - has written down just $11 billion. AIG has the Fed and the Treasury in its back pocket; it holds an $83 billion loan on the Fed's balance sheet and another $40 billion loan with the Treasury. AIG is the only insurer with sufficient capital raised to meet its losses. Must be nice.

The story is still incomplete because it does not include sovereign wealth funds. Certainly, they have had losses but they have also added capital to world capital markets. If sovereign wealth funds were included, the world’s net losses, $US -139.8 billion, may be closer to zero because sovereign wealth funds are adding capital in spite of precipitously declining oil prices. From Bloomberg:

”Qatar Investment Authority, the country's $60 billion sovereign wealth fund, plans to make more real estate acquisitions in 2009 as global prices decline and investors sell assets.

``We are looking for prime properties in major cities at distressed prices,'' said Navid Chamdia, the authority's head of real estate, in an interview at the Real Estate Investment World conference in Tokyo. ``We will continue to invest in attractive assets we are comfortable with.''
Sovereign wealth funds are unlikely to report their losses, so the partial story will have to do. What do you all think? Roubini’s or the IMF’s estimate?

Rebecca Wilder

2 comments:

  1. Given that Warren Buffet's second largest holding is Ambac, I think I would go with the IMF.

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  2. Is the only reason why AIG has not posted a loss is b/c the US's numerous capital injections?

    Billions were lost in sovereign wealth funds as they got mixed up with mortgage backed securities no too long ago. That's why I'm always leery when I see sov. wealth funds mixed up with real estate investments.

    I can't really say who's estimate may be closer, but in instances like these, I say guess high, and if you've overshot it, it's a good thing -- it's not as bad as you thought. (That's my own pessi-optimism theory).

    Nice, but scary work,

    Tim

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