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:: By Lydialyle Gibson

:: Graphic by Allen Carroll

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Investigations ::


Overexposure to foreclosure

When mortgage foreclosures began disrupting American financial markets in 2007, some estimates forecast the losses at $100 billion or so. But a study coauthored by GSB economist Anil Kashyap and presented at February’s U.S. Monetary Policy Forum in New York argues that mortgage credit losses could total $400 billion and, worse, will likely wreak more economic havoc than similar losses on the stock market. The reason: roughly half the nearly $1.4 trillion in exposures to subprime mortgages—$671 billion—are among U.S. leveraged institutions like banks, whose capital is ten percent or less of total assets. These institutions compensate for depleted capital by reducing lending or selling off securities; for every lost dollar, their balance sheets shrink by $10 to $25. Altogether, lenders may shrink their assets by $2 trillion, which could reduce economic growth by 1.5 percentage points.