Will the global financial losses hit beyond US$2 trillion?

According to Bridgewater Associates one of the top analytical firms in the world, the estimates for losses in the international banking system are beyond the US$1.6 trillion mark, more than enough to pose a grave risk to the global financial system. This time last summer, the losses were estimated around US$400 billion.

It seems the credit crisis is going to get worse and the issue now is whether financial institutions will be able to obtain enough new capital to cover the losses. According to some estimates, lenders would have to curtail loans by roughly 10-to-1 to preserve their capital ratios, suggesting a cut back of credit by up to US$12 trillion.

One thing to note is that these losses are not all sub-prime. More than half of it is coming from corporate liabilities, estimated around US$800 billion. Of the US$800 billion, some US$500 billion of the corporate losses have yet to be written off. According to Bridgewater Associates, there are losses lurking from the prime and Alt-A loan portfolios that could be much bigger than the sub-prime problems, as those loans are more than six times the size of sub-prime. Going by that estimates, there are about US$1.1 trillion of losses that will have to be written off, including very large potential write-offs from insurance companies.

Another US$400 billion may also be needed by banks and investment institutions worldwide for capital infusions. In short, those sovereign wealth funds or large investors, who have put money will have to watch their investment taking large losses in a very short time, meaning that this could be very dilutive terms to current shareholders.

Bear Stearns is not a one-off deal and the constituency may perhaps go beyond US and it is a life-threatening for more than one major institution in Europe.

The trend towards lower lending is highly plausible and that could be a major headwind for the global economy that is already struggling.

What this means is that there will be a major global bailout. Treasury Secretary Paulson said that no bank is too big to fail, but that is for public consumption. In 1980, when every major US banks had large amounts of Latin American bonds in their portfolio, they were allowed to keep the bad bonds on their books at face value, otherwise, they were technically bankrupt as the exposure was at a size far larger than their capitalization. It took them more than 6 years of profits and capital raising to get to where they could deal with the problems without imploding themselves and the world at the same time.

Goldman Sach published a report recently in which they suggest the most probable scenario for the next 12 months is GDP between -0.25% and 0.25%, or basically zero. Earning estimates are being cut with each passing month, meaning that more pain for the stock market. Check this out - http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS?GXHC_gx_session_id_=5350992f205e73e4&.