Goldman Sachs: The Energy Collapse Isn't Even Close to the Subprime Crisis

Four reasons the comparison doesn't hold.
Photographer: Matthew Lloyd/Bloomberg

Don't even try to compare current troubles in the energy patch with the subprime crisis.

That's the message from credit analysts at Goldman Sachs Group Inc.

According to the team at Goldman, led by Charles Himmelberg, head of global credit strategy, there are four key reasons that similarities between the 2007 housing bust and the recent collapse in oil prices don't go very far. 

First, the amount of debt outstanding isn't nearly as large.

"For one, the magnitude of the subprime mortgage problem in 2007 was much larger with total mortgage debt outstanding rising $5 trillion from 2002 to 2007, while the growth of debt in the oil and gas sector (globally) increased by just $1.5 trillion from 2006 to 2014," the team says. "At the risky end of the market, subprime mortgages totaled $800 billion in 2007, whereas [high-yield] debt exposed to the energy sector in the US, including both bonds and loans, is estimated to be about $300 billion today."

The second reason, per Goldman's analysis, is that the drastic fall in home prices was completely unexpected while the drop in oil prices wasn't totally unforeseen.

"The recent decline in oil prices, though large, was hardly 'unthinkable' given the magnitude of past declines," the analysts write. (Of course, one might wonder why analysts and economists at Goldman and other Wall Street firms were quite slow to lower their forecasts for oil prices and refused to believed it would fall below even $75 a barrel until the markets proved otherwise.)

Third, leverage in the energy market isn't as high due to oil's volatile nature.

"In the run-up to the subprime crisis, the market tolerated extremely high levels of leverage embedded in mortgage-backed securities because house prices and hence mortgage losses were viewed as highly predictable," the team points out. "In the energy sector, by contrast, the historical volatility of oil prices was well known (even if bond markets failed to foresee the collapse), and thus prevented issuers from pursuing anywhere near the same level of leverage or complexity that was encouraged by the faulty, 'AAA' assessments of credit risk in mortgages."

Finally, bank balance sheets are healthier than they were in 2007-08, and their exposure to energy is much smaller than it was to subprime.

"Bank balance sheets have far less exposure to energy risk today than they had to mortgage risk in 2007," Goldman says. "In 2007, for example, mortgages and mortgage securities comprised 33 percent of all bank loans in the U.S. Today, by contrast, commercial loans to the energy sector are relatively modest at just 2.5 percent of total bank loans."

Concerns over the safety of debt in the energy sector have been a key factor in the continued underperformance of financials since the start of 2016, with some investors worrying that banks may prove unprepared for energy-related losses though precious few have been forecasting anything like a subprime-style debacle. 

So far this year, the MSCI World/Financials Index is down 14 percent, while the broader MSCI World Index is down 7 percent. 

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