Obsolete Certainty

Bill Gross, who manages the world’s biggest bond fund, estimates that the total write-downs related to the current mortgage mess will hit a trillion dollars.  Gross, manager of the Pacific Investment Management Company (often referred to as PIMCO) states that the total investment in “risky assets”, such as subprime and Alt-A mortgages, total $5 trillion. He estimates that 25 million U.S. homes are at risk for negative borrower equity.

Gross wrote that “The problem with writing off $1 trillion from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth.”

It appears that losing billions of dollars on bad mortgage loans wasn’t enough for Washington Mutual. The large thrift has decided to jump head first in the subprime credit card business in an attempt that could be best described as essentially playing a double or nothing bet. According to an article by Ari Levy in Bloomberg, WaMu has increased their credit card business by 56% since acquiring Providian Financial Corp. WaMu stated in its annual report that it seeks customers who “are often underserved by large prime/superprime-oriented credit-card issuers and who satisfy its underwriting criteria”.

Moshe Orenbuch, an analyst at Credit Suisse Group in New York is quoted in the article saying, ‘Lower earnings in the credit-card business are going to compound their earnings issues.” Well Duh!