Fed Chairman said during testimony to the the House Committee on Financial Services on 20 September that losses from sub-prime mortgages have far exceeded “even the most pessimistic estimates”. This statement is disappointing because it undermines any build-up of confidence that might be encouraged by recent rate cuts and liquidity injections.
But worse, his comments do not quantify the Fed’s understanding of the losses. We shared an estimate of sub-prime exposure of $ 250 billion some months ago, although most analysts estimates are closer to $ 100 billion. If the exposure exceeds even our pessimistic number, the knock-on effect will be devastating; if, however, it exceeds the previous consensus the ramifications are already accounted for.
Whatever the number is, the adjustment process must continue for some months yet.
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