Nouriel Roubini's Nightmare Scenario Options

Hold on to your hats
by Evan Cooper
February 27, 2008

from MiscInvestStocksGoogleGroup Website


Evan Cooper is the senior managing editor and online editorial director of InvestmentNews.

As a rule, Wall Street’s rosy prognosticators see any glass as three- quarters full, while journalists see it as one-quarter empty. Let me introduce you to Nouriel Roubini—he sees the glass as bone dry and about to shatter.

A professor of economics at the Stern School of Business at New York University and the founder of Roubini Global Economics LLC, an independent research service in New York that publishes the online RGE Monitor (, Mr. Roubini is the Ursa Major of economic bears. He believes the United States is headed for a whopper of a financial collapse, leading to a deep recession.

Since economic reality often turns out to be a middle ground between the utopian highlands and the chasms of ruin, you might want to put Mr. Roubini into the “Why listen to that nut?” category.

But since he predicted our current economic problems as early as July 2006 -- and because many institutional investors pay for his insights—perhaps his opinions are worth noting.

Mr. Roubini offers a 12-step scenario for what he sees as “a rising probability of a catastrophic financial and economic outcome.”

He starts with the assumption that a recession began in December and that it will be worse than recent recessions because housing prices are likely to fall 20% to 30% and because the ongoing credit bust will lead to a severe credit crunch, hurting over-indebted consumers.

“So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters,” he recently wrote. “What will be the consequences of it?”

Here comes the gore, according to Mr. Roubini:

The recession will lead to more credit card and consumer debt defaults. Next, the credit- rating insurers will lose their AAA ratings, which will lead to further, massive write-offs of asset-backed securities portfolios. This, in turn, will lead to losses at the banks and money market funds that hold ABS paper. Add a drop in the commercial real estate business and he predicts that at least one major commercial bank is likely to fail.

Next, some highly leveraged loans will fail, further limiting banks’ lending ability and leading to bankruptcy among some overleveraged companies. The nation’s non-bank financial system will be stressed, leading some mutual funds, hedge funds and investment banks, among others, to go belly up.

Once investors realize that this is no ordinary recession, the gloom will infect stock prices. Credit will contract further and there will be fire sales of assets.

“In this meltdown scenario, U.S. and global financial markets will experience their most severe crisis in the last quarter of a century,” Mr. Roubini wrote.

Anything we can do about this, Mr. Roubini?

“One should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst—a systemic financial crisis.”




A Sobering 12-Step Scenario
February 25, 2008

from DealJunkieBlogSpot Website

Legendary bear Nouriel Roubini's case for a global financial meltdown:

  1. At this point it is clear that U.S. home prices will fall between 20% and 30% from their bubbly peak

  2. Losses to the financial system from the subprime disaster, estimated to be as high as $300 billion, are now spreading to near-prime and prime mortgages

  3. The recession will lead—as it is already doing—to a sharp increase in defaults on other forms of unsecured consumer debt

  4. While there is serious uncertainty about the losses that monoline insurance companies will take on their insurance of residential mortgage-backed securities, collateralized debt obligations and other toxic asset-backed securities products, it is now clear that such losses are much higher than the $10 billion-to-$15 billion rescue package that regulators are trying to patch together.

  5. The commercial real estate loan market will soon enter into a meltdown similar to the subprime one

  6. It is possible that some large regional or even national banks that are very exposed to mortgages, residential and commercial, will go bankrupt.

  7. Banks' losses will grow

  8. Once a severe recession is under way, a massive wave of corporate defaults will take place.

  9. The “shadow banking system” (as defined by Pimco), or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions), will soon get into serious trouble.

  10. Stock markets in the U.S. and abroad will start pricing in a severe U.S. recession

  11. The credit crunch that is affecting most credit markets and credit derivative markets will lead to a drying up of liquidity in a variety of financial markets

  12. A vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue, leading to a mounting cycle of losses and further credit contraction.

The perfect storm!




Financial Meltdown - Your 12 Step Guide

by Alex Evans

February 11, 2008

from GlobalDashBoard Website

Time to remind ourselves that while we’ve all been cooing over Obama and fretting over NATO cohesion, the small matter of the security of the world’s financial system has continued to smoulder.


At dinner with a group of hedge fund analysts last week, it was abundantly clear that just because the issue has disappeared from the front pages for a time doesn’t mean it’s gone away: au contraire, one analyst was bluntly stating that all we’ve seen so far has been no more than the trailer.

Nouriel Roubini, bearish as ever (though let’s remember that he’s been consistently right so far), asks the big question:

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January? It is true that most macro indicators are heading south and suggesting a deep and severe recession that has already started. But the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.

So to cheer you on your way on a foggy London morning in February, here’s Roubini’s 12-step, “‘nightmare’ or ‘catastrophic’ scenario that the Fed and financial officials around the world are now worried about” - which “has a rising and significant probability of occurring”.


Here’s the executive summary for those of you too lazy to set up a free subscription to read the whole thing:

  1. This is already the worst housing recession in US history; prices will fall 20-30% from their peak. That would imply about 10 million homes in negative equity.

  2. Financial system subprime losses are now estimated at $250 to $300 billion; and now spreading to near-prime and prime, through the same lax lending criteria: “this is a generalized mortgage crisis and meltdown, not just a subprime one”. And don’t forget all the off-balance sheet Structured Investment Vehicles etc., and the fact that “because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global”.

  3. “The recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans.” All of which makes the credit crunch even more severe - and takes it from large banks through to smaller banks. [Loan companies are already scrambling to tighten up lending criteria in the UK, as the FT set out over the weekend.]

  4. “While there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up.” As a result, their debt rating will probably get downgraded; which will lead to large losses for funds that invested in them, and another sharp drop in US equity markets. [For more background, here's a story about monolines from last week that made the front page of the FT.]

  5. Next, “the commercial real estate loan market will soon enter into a meltdown similar to the subprime one”, thanks to - guess what? - similarly reckless lending criteria. So, “the housing crisis will lead – with a short lag – to a bust in non-residential construction as no one will want to build offices, stores, shopping malls/centers in ghost towns”. [FT last week: outflows from UK commercial property up 76 per cent from third quarter.]

  6. It’s entirely possible that a large regional or even national bank will go bust. “The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions.” [Sound familiar?]

  7. Bank losses on leveraged loans are already large, and rising - “leading to a freezing up of the CDO market and to growing losses for financial institutions”.

  8. “Once a severe recession is underway a massive wave of corporate defaults will take place.” Roubini adds, “in a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%.”

  9. The “shadow financial system” - non-bank financial institutions - will shortly get into serious trouble. And unlike proper banks, “these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions”.

  10. Stock markets in the US and abroad will start pricing in a severe recession rather than just a slowdown. Roubini notes that “in a typical US recession the S&P 500 falls by about 28%”.

  11. Liquidity in financial markets will dry up all over again; the easing pf the liquidity crunch after central banks’ massive interventions in December and January will reverse.

  12. “A vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction”.

All in all:

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt.


A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems.


The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch…

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night?


The answer to this question – to be detailed in a follow-up article [here] – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible.


I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.






The Current U.S. Recession and the Risks of a Systemic Financial Crisis
by Nouriel Roubini

February 26, 2008

from UnitedStatesHouseOfRepresentatives Website


Professor of Economics at the Stern School of Business,
New York University
and Chairman of RGE Monitor
Written Testimony for the House of Representatives’ Financial Services Committee
Hearing on February 26th, 2008

A vicious circle is currently underway in the United States, and its reach could broaden to the global economy.


America’s financial crisis has triggered a severe credit crunch that is making the U.S. recession worse, while the deepening recession is leading to larger losses in financial markets, thus undermining the wider economy.


There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.

At this point the debate in the U.S. is no longer about soft landing versus hard landing (recession); it is rather on how hard the hard landing will be. An analysis of the macro data published in recent weeks suggests that the economy has already entered into a recession in December 2007. So the question now is whether this recession is going to be relatively short and shallow (lasting two quarters in Q1 and Q2 of 2008 as several analysts suggest) or much longer, deeper and more protracted (four to six quarters).

The fact that the US is now in a recession is, at this point, without much doubt even if the consensus forecast – always behind the curve – now gives only even odds (49% according to the WSJ panel of forecasters, 50% according to the Bloomberg panel) to a recession outcome.


The latest data point to a severe recession ahead lasting at least four quarters rather than mild recession that most forecasters are now predicting:

  • a fall in employment in January

  • very high and elevated levels of initial and continued unemployment claims

  • a non-manufacturing ISM that literally plunged

  • the Philly Fed report and other forward looking indicators being in recession territory

  • falling – in real term – retail sales in the holiday season; mediocre results and falling sales for most retailers in January

  • plunging auto sales

  • very weak and further falling consumer confidence

  • a credit crunch that is becoming more severe in credit market as measured by a variety of credit spreads

  • the beginning of a severe recession in commercial real estate

  • a worsening housing recession; sharply falling home prices

  • evidence of a serious credit crunch in the banking system based on the Fed survey of loan officers

  • a correction in all major stock markets and the beginning of a bear market in the NASDAQ

  • serious evidence of a global economic slowdown, especially in Europe, with outright recession ahead in some European countries

All these indicators points towards a severe recession.


(Keep reading this article here  )








The Alex Jones Show

Feb 29, 2008

from YouTube Website


Prof. Nouriel Roubini


Part 1





Part 2




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