THE WONDERS OF REVERSE LEVERAGE

Goldman Sachs reports that the sub-prime mess may end up costing $2 Trillion because of the leverage ratios involved. $2 Trillion is a little more than 1/7th of the U.S. GDP.


Credit Market Losses May Cost Economy $2 Trillion, Goldman Says
By Kabir Chibber
Nov. 16 (Bloomberg) -- Goldman Sachs Group Inc., the largest U.S. securities firm by market value, said the impact of the slump in credit markets on the economy could reach $2 trillion.

Losses related to record U.S. home foreclosures using a ``back-of-the-envelope'' calculation may be as high as $400 billion, Jan Hatzius, chief economist at Goldman in New York, wrote in a report.

The effects of the losses on the economy will be amplified because the banks and hedge funds involved have borrowed heavily to finance their investments, Hatzius wrote. If leveraged investors realize half of the potential losses, at $200 billion, they may have to scale back lending by $2 trillion, according to the report.

``A $1 mortgage credit loss could result in a reduction in lending by significantly more than $10,'' Hatzius wrote. ``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized.''