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$1 Trillion in Losses?


Experienced investors know that the market hates uncertainty. The market can handle bad news as long as it can understand and digest the gloomy information quickly, adjust stock prices to reflect it, and then move on.

That’s why the slow-motion credit and housing crisis has been so unnerving. “When will it end?” the talking heads kept asking as the crisis unfolded last year. If only, they said again and again, we knew how much damage all this bad debt is causing — a number in dollars that everyone on Wall Street could just accept and then adjust to.

Well, that number has arrived, but it hasn’t satisfied anyone. Because how do you adjust to losses of $1 trillion? How does the market wrap its collective head around a number that large?

The International Monetary Fund issued an estimate on Tuesday of losses from the U.S. mortgage crisis. Its estimate: $945 billion. The IMF admits its estimate is based on some imprecise information, but still it helps quantify the massive size of the problem. "The current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted," the IMF says.

The IMF estimate was the largest such estimate I had seen. At least until today, when hedge fund legend George Soros -- a man who certainly has a head for numbers -- said the IMF estimate might be low. "I think that is a fair estimate, but that number is likely to still grow," he reportedly said, citing falling home prices.

Eventually, the world economy will absorb losses this large, but it might take a very long time. Let's hope Soros and the IMF are wrong.


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