45 Percent of World’s Wealth Destroyed

Private equity company Blackstone Group LP CEO Stephen Schwarzman said on Tuesday that the global credit crisis has so far destroyed up to 45 percent of the world’s wealth.

“Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half,” Schwarzman told an audience at the Japan Society. “This is absolutely unprecedented in our lifetime.”

U.S. Treasury Secretary Timothy Geithner is one of the men tasked to reversing the destruction of wealth. Geithner plans to unfreeze credit markets through a new program that will combine public and private capital in a fund that would buy bank toxic assets of up to $1 trillion. However, so far Geithner has not restored any level of confidence in investors and financial markets.

“In all likelihood, that will have the private sector buy troubled assets to clean the banks out in terms of providing leverage … so that we can get more money back into the banking system,” Schwarzman said.

Schwarzman expects the private sector to end up making “some good money doing that,” but added there were complex issues on how to price toxic assets. If assets are priced too high, as in the case of earlier bailouts, that is good for the banks but terrible for the taxpayers.

If assets are priced at what they are really worth in today’s market that is terrible for the banks and perhaps terrible for the taxpayers as well, as there is little evidence that artificial pricing mechanisms established by the government can differentiate between investments that can in time recover value and investors that will eventually be worth zero. Odds are that whatever Geithner decides to do the taxpayer will end up getting hosed.

The government still hasn’t learned that many of the toxic investments held by the banks will never regain much if any value. A good example of this is a loan secured by a foreclosed vacant house. A house sitting empty quickly deteriorates. It is also subject to thief with anything of value being ripped out. Banks have so many foreclosed properties on hand that they are overwhelmed with ongoing vacant house maintenance requirements. The underlying security in these cases, the houses, lose value vary fast.

The long crisis continues. With trillions of dollars of derivatives still to be marked to market and a rapid fall in the value of real estate continuing huge challenges remain. I expect that those, like Secretary Geithner, who continue to be overly optimistic, will eventually be completely discredited and looked upon more as cheerleaders for the Obama administration than as far sighted policy makers.