Wolfensohn: ‘We’re Not through the Woods Yet’

Financial luminaries, including Goldman Sachs CEO Lloyd Blankfein and fund gurus Mark Mobius and Bill Miller, say the worst of the financial market woes are behind us.

Former World Bank President James Wolfensohn disagrees.

Wolfensohn, now an advisor to Citigroup, told Bloomberg he’s pessimistic on the outlook for financial markets.

He believes that global bank losses from the credit market crisis could reach $1 trillion.

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"I’m more pessimistic than optimistic,” Wolfensohn says. "That doesn’t necessarily mean a crash, but it means we’re not through the woods yet. There are continued dangers.”

So far, financial institutions have reported $310 billion in losses resulting from the credit market crisis that began with subprime mortgages in the U.S.

"It does seem to be a major adjustment on any level,” Wolfensohn says. "There may be $1 trillion worth of losses in it somewhere…. I can’t recall anything similar, certainly in the last 30 to 40 years that I’ve worked.”

Wolfensohn’s loss estimate is close to the International Monetary Fund forecast of $945 billion. Wolfensohn notes that $1 trillion now represents a "consensus estimate” for the losses.

The IMF predicts global growth will reach 3.7 percent this year, the slowest rate since 2003 and down from 4.95 percent last year.

The European Commission estimates that Europe’s economic growth will slow to 1.5 percent next year, thanks to the continuation of the credit crisis. That forecast constitutes a 29 percent decrease from the commission’s previous prediction of 2.1 percent growth.

Wolfensohn says the damage suffered by financial institutions surpasses any other episode he has witnessed in his career.

"I’d have to say in my working experience this is a different sort of crisis, largely because of the extent of the overhangs in financial markets,” he says.

"I don’t think in my working lifetime I’ve seen challenges to the major institutions in terms of write-downs and impact on market capitalization. The crisis that you observe is never the same as the last one. We have a capacity to invent new ones.”

Torrid growth in emerging markets such as China and India will cushion the damage for the world economy, Wolfensohn points out. The IMF forecasts growth of 9.3 percent in China this year and 7.9 percent in India.

Emerging markets "have enormous internal growth and are expanding in other markets, such as Africa,” Wolfensohn says. "When you’re walking around Beijing or Shanghai, it’s hard to feel pessimistic, if you can breathe.”

That won’t help the developed world much, though, he says. The damage from the credit crisis "is likely to be substantial” in the U.S. and U.K., Wolfensohn maintains.

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