Subprime as Dr. Evil

Estimates of the cost of the credit crunch recall the scene in Austin Powers when Dr. Evil, fresh from being frozen for three decades, wants to hold the world ransom for ... one million dollars.

Hang on, earlier estimates of the hundreds of billions of dollar can't be right. The toll from sub-prime is obviously rising. Let's say... one trillion dollars!

In its most extensive report on the global credit crunch to date, the International Monetary Fund has estimated that the losses and write-downs in the world economy stemming from the collapse of the American sub-prime mortgage market could ultimately total $945 billion. I.M.F. officials noted today that market conditions have improved somewhat (in other words, after the Bear Stearns rescue) since the report was completed.

The report says that "There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions--banks, monoline insurers, government-sponsored entities, hedge funds--and the associated risks of a disorderly unwinding."

"Despite unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based de-leveraging," the report warns.

The United States, the report says, "remains the epicenter" of the crisis. "But financial institutions in other countries have also been affected, reflecting the same overly benign global financial conditions and --to varying degrees --weaknesses in risk management systems and prudential supervision. Industrialized countries with inflated house price levels relative to fundamentals or stretched corporate or household balance sheets are also at risk."

The I.M.F. has issued its report just days before the spring meeting of I.M.F. and World Bank officials in Washington.

So how does the fund get to nearly $1 trillion?

The I.M.F. estimates that "falling U.S. housing prices and rising delinquencies on mortgage payments could lead to aggregate losses related to the residential mortgage market and related securities of about $565 billion, including the expected deterioration of prime loans. Adding other categories of loans originated and securities issued in the United States related to commercial real estate, the consumer credit market, and corporations increases aggregate potential losses to about $945 billion."

Thermonuclear threats seem easier in comparison.

--Jeffrey Cane