MOODY’S PREDICTS $470B IN BANK LOSSES BY 2010
A recent research report out of Moody’s is calling for further write-downs of $470B among U.S. banks. In the report Moody’s says:
“Moody’s states that it expects US rated banks will incur a total of approximately $470 billion (pre-tax) of loan and security losses and write-downs in 2009 and 2010. The lending portion of this estimated loss is $415 billion, or 8% of the industry’s outstanding loans at the end of last year.
Under more adverse conditions, numerous US banks could become insolvent by the end of 2010. More specifically, based on our modeling of such an adverse scenario we calculate that US rated banks could incur a total of approximately $640 billion (pre-tax) of loan and security losses and write-downs in 2009/2010; without additional capital, this means that more than a third would fall below investment grade on a standalone basis …
Additionally, if the US economy worsens beyond expectations US banks would need to raise significant amounts of additional equity capital. For instance, under this adverse scenario we estimate that recapitalizing all rated banks back to a B- financial strength level would require a $112 billion investment.”
Of course, this doesn’t come as a big surprise to regular readers. The banks are very likely to suffer similar cash flows problems that the Japanese banks suffered in the late 90′s as consumers fail to recover quickly, lending standards increase, commercial real estate weakens, arm loans reset and credit card delinquencies continue to surge. In all likelihood, the very worst of the credit crisis is behind us, but the balance sheet problems are as alive as they’ve ever been. We had our opportunity to hold the banks over the fire and force them to take their losses, but we chose to pour more booze down the drunk man’s throat. We are going to let the banks earn their way out of this. Those earnings of course are not sustainable.
While there are clear cut signs that the credit markets are improving banks are still hoarding the massive amount of freshly printed government cash as they buckle down for the potential losses that will come in the next 12 months. As they batten down the hatches it’s likely that lending standards will remain very high and small businesses will continue having trouble getting loans. Throw in the weak consumer and you have the perfect recipe for an inverted square root recovery.
Good call, it is looking like a Japan-style non-recovery for the US – ARMs resets are ahead in a year or so, commercial real estate is still sinking and more credit card defaults are ahead. There are also a lot of people out of work, who will neither be paying off debts too fast nor able to boost the economy by taking out new debt.
Commercial real estate is weakening. A lot of banks that avoided the residential bullet are in commercial real estate. Heard on Bloomberg that top Manhattan space that was $200 a foot is going for $50-60, but yada-yada “the way we calculate it in NY real estate, that’s only a 30% decline on average,” because the $50-60 buck space is only sublet space and not real for-rent-by-owner space. Okay.
Just my opinion.