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US banks and brokerage firms have written-off approximately $572 billion in loan losses since the onset of the credit crisis.  But at least another $500 billion will be written-off over the next two years, as housing prices plummet and unemployment rises, according to a report issued by Nouriel Roubini and Elisa Parisi-Capone, colleagues at the RGE Monitor.  Roubini is a Professor of Economics at the NYU Stern School of Business, and has gained wide-spread notoriety for his highly prescient predictions, beginning in 2006, of the current crisis.

“US banks and brokerage firms are a about one-half way through the process of writing off bad loans,” said Parisi-Capone in an interview on January 26.

On a global basis, total loan losses on securities originated in the US will reach $3.6 trillion, consisting of $1.6 trillion in write-offs and $2.0 trillion in mark-to-market losses, based on market prices as of December 2008.  US banks and broker dealers will incur about half of these losses, or approximately $1.0 to $1.1 trillion in write-offs and $600-$700 billion in securities writedowns.  The $1.0-$1.1 trillion estimate includes the $572 billion already written-off.

Roubini and Parisi-Capone’s estimates rely on two key assumptions: housing prices will decline by an additional 20% (implying a peak-to-trough decline of 38%-40%) and unemployment will peak at 9%.  They also assume GDP will contract by 5% in the current recession.  But their model is most sensitive to housing prices, and Parisi-Capone explained that the relationship is not linear.  As housing prices decline, delinquencies and defaults accelerate at a faster rate.  If housing prices decline by more that the 20% they estimate, the consequences for loan write-offs will be severe.

Housing prices will bottom in 2010, according to Roubini and Parisi-Capone.  They forecast that the remaining $500 billion will be written off by banks and brokerage firms in 2009 and 2010.

Mark-to-market losses are harder to quantify than loan write-offs, for two reasons.  First, as Roubini and Parisi-Capone note, they have been offset by “increased activity in the government-sponsored sectors” (i.e., government purchases of mortgage backed securities have, to some degree, artificially inflated the prices of those securities).  More importantly, mark-to-market losses may be overstated because illiquidity in these markets has driven down prices.  But, Roubini and Parisi-Capone say even if this illiquidity overstatement resulted in a 20% undervaluation, total global exposure would still be extreme - $3.2 trillion instead of $3.6 trillion.

Roubini and Parisi-Capone provide the following breakdown for loan write-offs:

Category	Amount Outstanding	Current Losses	RGE Estimated Total Losses	US Exposure
Sub-prime	300	57	150	120
Alt-A	600	64	150	105
Prime	3,800	105	266	95
Commercial Real Estate	2,400	142	408	285
Consumer Loans	1,400	102	238	180
Corporate Loans	3,700	96	370	295
Leveraged Loans	170	6	51	35
Total	12,370	572	1,633	1,115

All numbers are in $ billions.

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