Monday, May 05, 2008

Credit crisis receding?

Warren Buffett has sounded bearish earlier- he was among those quoted as saying the crisis was the worst since the Great Depression. But he's among those who think the crisis is showing signs of receding at least for Wall Street.

The worst of the crisis in Wall Street is over,'' Buffett said on Sunday. ‘‘In terms of people with individual mortgages, there's a lot of pain left to come.''

A number of Wall Street CEOs have said much the same thing (although some still sound grim). The Bank of England has weighed in on the side of optimists. The Bank echoed what I had said several times in my posts: the credit markets are overstating the losses because of inaccurate mark-to-market accounting practices.

The Bank joins issue with the IMF, which swung from an extreme of optimism last year to an extreme of pessimism in its most recent update. The IMF estimated financial sector losses at $945 bn. This, as the Bank points out, confuses "true credit losses and losses implied by market prices". If the marked-to-market losses are taken at face value, that would imply that 76% of prime loans would default with a recovery of less than 50% !- something that not even the gloomiest types subscribe to.

I stick to my forecast made at the beginning of the year: the market crisis and its real economy effects should start receding from the second half. This may well go down as the crash that never was.

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