This morning, Citicorp, previously America’s largest bank, wrote down the value of its security holdings by an additional $22B, following massive multi-billion-dollar write-downs in previous quarters. The total market value of Citicorp has now been cut in half. Merrill Lynch, America’s largest brokerage firm, has followed a similar financial trajectory. Well over $150B of market value has thus disappeared in just these two firms alone.
A week or so ago, Brad DeLong, a mainstream Berkeley economist and blogger, crudely estimated that the total decline of the value of American mortgage securites over the next couple of years might total around $500B. So far, approximately $100B of this write-down has occurred and been recognized by various financial institutions holding the securities.
If one-fifth of the total projected write-down has cut the market value of America’s largest bank by half, the further projections become “interesting” to say the least.
It appears that the main remaining prop of the American consumer economy and much of the advertising industry has been the continued strong spending by the ultra-wealthy, with the spending of everyone else, including the merely wealthy having recently plummeted.
One special characteristic of the ultra-wealthy is that a disproportionate share of their wealth in invested in the endless arry of secretive hedge-funds.
One special characteristic of these secretive hedge-funds is that tend to invest in high-risk, high-return strategies, such as the mortgage/derivative securities whose value has sharply declined or vanished completely. Another special characteristic of these secretative hedge-funds is that since they are secretive and non-public, they can much more easily hind any decline in their assets for an extended period of time, in contrast to the strict reporting requirements of publicly-traded banks and brokerage firms.
Several large hedge-funds run by highly sophisticed trading firms such as Goldman Sachs and Bear Stearns have announced that nearly their entire value has disappeared. One wonders how many large hedge-funds will gradually start to admit that they, too, no longer exist in financial terms.
It seems to me that over the next year or so, quite a large number of ultra-wealthy individuals in America will discover that their wealth has declined by 90% or 99% or more. $500B in lost value can swamp quite a number of people.
If a truly vicious cycle of consumer spending collapse and economic decline gets started, I’d suspect that the projected $500B of financial losses would begin to seem very, very conservative.
I’ve recently been digitizing quite a number of periodicals from the 1929-1931 period. Many of their headlines have an uncanny ring.