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Friday, November 16, 2007

Mortgage Crisis May Reduce Lending Up to $2 Trillion

November 16 2007
The mortgage crisis could have a "dramatic" impact on the overall economy by forcing banks and other financial institutions to cut back their lending by as much as $2 trillion, a Goldman Sachs economist said. In a report dated Nov. 15, Goldman's chief U.S. economist Jan Hatzius said a "back-of-the-envelope" estimate of credit losses on outstanding mortgages could reach around $400 billion. But unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors - those that depend on borrowed money - such as banks, broker-dealers, hedge funds and government-sponsored enterprises. These losses could force these institutions to slash lending to keep capital ratios from falling.

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