Twelve Steps to Financial Disaster

The following is digested from an article by Martin Wolf on February 19. Wolf is associate editor and chief economics commentator at the Financial Times www.ft.com.

Nouriel Roubini of New York University's Stern School of Business's 12 steps to financial disaster:

Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 percent, which would wipe out between $4 trillion and $6 trillion in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields.

Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 percent of all mortgage origination between 2005 and 2007 had "reckless or toxic features," argues Prof Roubini.

Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth.

Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn write-down of asset-backed securities would then ensue.

Step five would be the meltdown of the commercial property market. Step six would be bankruptcy of a large regional or national bank.

Step seven would be big losses on reckless leveraged buy-outs.

Step eight would be a wave of corporate defaults. Some insurers might go bankrupt.

Step nine would be a meltdown in the "shadow financial system,” dealing with the distress of hedge funds, special investment vehicles.

Step 10 would be a further collapse in stock prices.

Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets.

Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at or below fundamental prices.”