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Section: Daily News
Bridgewater Sees $1.6 Trillion in Credit Losses: Report
By Jacob Bunge, Financial Correspondent
Monday, July 07, 2008 2:03:47 PM ET
WESTPORT, Conn. (HedgeWorld.com)—The $400 billion or so of credit market-related losses posted thus far is only the beginning, according to a research report from Bridgewater Associates Inc. Total losses could reach as high as $1.6 trillion before all is said and done.
The research, first reported on Sunday [July 6] in Switzerland's weekly Sunday newspaper Sonntagszeitung, was authored by Bridgewater Chief Investment Officer Ray Dalio. In it, according to the paper, he expresses doubt that financial institutions will be able to find enough new capital to cover their losses. This will further depress the credit market, according to the research, which analyzed expected losses for U.S. assets such as mortgages, credit card receivables and other forms of credit.
Bridgewater's number is markedly higher than other prognoses of credit pain to come. The International Monetary Fund in early April estimated that worldwide losses originating in the U.S. subprime mortgage market might be as high as $945 billion, though the group left the door open to adjust that estimate upward. George Soros put the estimate above $1 trillion, and hedge fund manager John Paulson, who profited handsomely in 2007 from bets against the subprime markets, last month put the number at $1.3 trillion Previous HedgeWorld Story.
But Bridgewater has a good track record on its side. The $160 billion institutional asset management firm warned of ominous signs in the debt market at the onset of 2007 Previous HedgeWorld Story. Since the credit crisis unfolded in earnest last summer, Bridgewater officials have not changed their tune. Last March, Mr. Dalio and others at the firm released a report that found U.S. investment banks were facing additional losses of about $125 billion and the string of write-offs would continue Previous HedgeWorld Story.
In the newest Bridgewater report, Mr. Dalio projected that U.S. banks do not have the financial wherewithal to absorb the losses that have yet to surface, and as these continue to appear, sovereign wealth funds and other potential saviors from Asia and the Middle East are losing their appetite for big stakes in financial institutions. The fall of Bear Stearns Cos. Inc. may have marked a turning point—China's CITIC Securities Co. backed out of a joint venture with Bear that would have valued the doomed bank's shares at $120 apiece, and sovereign wealth funds since then have become wary of the sector Previous HedgeWorld Story.
But if banks can't find new sources of capital, they may be forced to sell off assets, according to the Sonntagszeitung story about the Bridgewater report, which could touch off a downward spiral—investment banks' balance sheets would get softer, forcing further sales. Meanwhile the United States is in a large-scale de-leveraging period, further complicated by the tangled web of interdependence among financial institutions and governments, according to the report. U.S. consumers, too, are adjusting to a new reality of pricier credit and higher commodity costs.
Last year's collapse of the subprime mortgage market and the protracted decline in real estate prices was only the first phase of the credit crisis, according to the Bridgewater report. The demise of Bear Stearns in March and the subsequent buyout of the bank by JP Morgan Chase & Co.—in a deal brokered by the U.S. Federal Reserve—marked the beginning of a second phase, or "breathing room," but this came to an end in June. Now begins phase three, which could see losses spreading to corporate markets and credit card receivables.
Bridgewater, which runs the $45 billion Pure Alpha hedge fund, invests money on behalf of more than 300 clients, including pension funds, endowments, foundations, foreign governments and central banks.
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