There Is No Comparison between Energy Collapse and Subprime Crisis: Goldman Sachs Group Inc (GS)
Global credit strategy team of Goldman Sachs Group Inc (NYSE:GS) believes that the current crisis in the energy sector was nowhere nearer the subprime crisis witnessed in the year 2007. Its head, Charles Himmelberg, found at least four important reasons that the similarities between the current oil price collapse and the 2007 housing bust did not go in tandem. He said that investors should not even try to compare the two situations.
The first key reason pointed out by Goldman Sachs Group Inc (NYSE:GS) was the outstanding debt amount, which was not a big one. Himmelberg said that the high-yield debt exposure towards the energy sector in the America was predicted to be approximately $300 billion. That included loans, as well as, bonds. In comparison, subprime mortgages were $800 billion in the year 2007. He pointed out that the mortgage debt outstanding jumped to $5 trillion between the periods 2002 and 2007 whereas the debt growth in the oil sector advanced by $1.5 trillion only between the years 2006 and 2014.
The second reason was that the drop in oil price was not an unexpected one whereas dramatic drop in home prices was totally an unexpected one. However, the analyst indicated that the recent drop was hardly unthinkable due to the past declines magnitude. It was a different matter that most of the analysts were slow in forecasting oil prices to drop or failed to see the drop in advance.
Energy Market Was Not High
Goldman Sachs Group Inc (NYSE:GS) team pointed out that energy market was not as high as the housing prices in the year 2007. Before the subprime crisis, the housing market witnessed extremely higher levels due to house prices. As a result, mortgage losses were also expected highly. On the other hand, history suggested that there was nothing wrong in the volatile oil prices. Therefore, there was no similarity in the ‘AAA’ assessments of risk in mortgages and energy sector.
The last factor pointed out by Goldman Sachs Group Inc (NYSE:GS) was the balance sheet of the banks, which were healthier than in 2007-08. The team pointed out the exposure towards the energy sector was much smaller than the subprime.
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