The impact of the U.S. mortgage market crisis on the underlying economy could be “dramatic” as leveraged investors may need to scale back lending by up to $2 trillion, according to investment bank Goldman Sachs .
In a report dated Nov. 15, Goldman’s chief U.S. economist Jan Hatzius said a “back-of-the-envelope” estimate of credit losses on outstanding mortgages, based on past default experience, was around $400 billion.
But unlike stock market losses, which are typically absorbed by “long-only” investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government’sponsored enterprises.
And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling — A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses.
“The macroeconomic consequences could be quite dramatic,” Hatzius said in the note to clients. “If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion.”

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