The Second Dropped Shoe? Credit-Market Losses May Hit $1.6 Trillion

The $400 billion or so of credit market-related losses posted thus far is only the beginning, according to a research report from Bridgewater Associates Inc. Total losses could reach as high as $1.6 trillion before all is said and done.

The research, first reported July 6 in Switzerland’s weekly Sunday newspaper Sonntagszeitung, was authored by Bridgewater Chief Investment Officer Ray Dalio. The report expresses doubt that financial institutions will be able to find enough new capital to cover their losses. This will further depress the credit market, according to the research, which analyzed expected losses for U.S. assets such as mortgages, credit card receivables, and other forms of credit.

Bridgewater’s number is markedly higher than other prognoses of credit pain to come. The International Monetary Fund in early April estimated that worldwide losses originating in the U.S. subprime mortgage market might be as high as $945 billion, though the group left the door open to adjust that estimate upward. George Soros put the estimate above $1 trillion, and hedge fund manager John Paulson, who profited handsomely in 2007 from bets against the subprime markets, last month put the number at $1.3 trillion.

But Bridgewater has a good track record on its side. The $160 billion institutional asset management firm warned of ominous signs in the debt market at the onset of 2007. Last March, Dalio and others at the firm released a report that found U.S. investment banks were facing additional losses of about $125 billion and suggested that the string of write-offs would continue.