Tan Kin Lian's Blog: Subprime losses could reach USD 400 billion

Friday, March 07, 2008

Subprime losses could reach USD 400 billion

I saw a few estimates that put the subprime losses as USD 400 billion.

Here is my guess about how this number is arrived:
number of houses in USA - 100 million
proportion that are subprime, say 20%
number of subprime mortgages: 20 million
proportion in default: 50%
defaulted mortgages: 10 million
average loss per default: USD 40,000
total subprime losses: USD 400 million

My guess could be wrong. For example, it may be fewer mortgages with a larger average loss, or more mortgages with a smaller average loss.

The large financial institutions have reported losses under subprime mortges in the magnitude of USD 10 million. If this is the average loss, a total of 40 financial institutions would make up the total of USD 400 billion.

4 comments:

Anonymous said...: Thank you for your analysis.

Your guess is not wrong.

However, I would like to multiply your figure by 50 times. I estimate the loss is about 20 trillion.

It is not so simple where it is defaulting on mortgage. It is buying multilayered premium prices on margin. The best thing is, the value of the underlying asset is zero or near zero. Compounded effect. The financial firms were buying thin air with billions of dollars borrowed on nothing and the very asset they are sitting on is depreciating in value. The whole US and Europe will take at least 5 ~ 6 years to restart afresh properly.
(originally I would like it takes 10 years, but based on further analysis, the recovery cycle may be shortened because of growing middle class in Asia)

That's why I have been warning your readers that this is not a simple case of bull or bear or cyclical turns. The very foundation that the current market is built from, is crumbling. As I term it - it is the Great Depression of the 21st Century.

You cannot run or hide from this terrible tsunami. Please keep your cash in your saving bank. You will need it for the next 3 to 4 years and also to start bottom fishing then. I am not surprised to see STI sink to below 1500.

If you managed to save $200/mth or $300/mth for 3~4 years, you would have about $10,000 and you can start looking for bottom and buy good quality equities at heavily discounted prices. remember to buy in phases.

R.; March 07, 2008 12:02 PM
Anonymous said...: it is not abt subprime only.

prime loans will also be affected by

So is car loans, credit cards loans, etc etc.

I think the media uses the 'subprime' term for easy association with readers.

I think the better term would be 'credit' losses.

Using 'subprime' may mislead lay people to believing only small segment are affected and have been 'ring-fenced'

I think all troubles coming.; March 07, 2008 12:07 PM
Anonymous said...: So how will these affect Singapore?
Will the high property and rental prices come down?
Will there be more foreign money park in Singapore?
Will there be more stagflation - ie high inflation but a slowing or stagnant economy?
Will Singapore become more or less crowded with FTs?
In short will things be better or worse for ordinary Singaporeans than now? I think that' s what
they are really interested.
Hope readers can shed some light.; March 07, 2008 2:34 PM
hongjun said...: US household wealth falls by US$532.9b
http://www.businesstimes.com.sg/sub/news/story/0,4574,270497,00.html?; March 08, 2008 8:42 PM