Financials in Trouble, Part 1 John Mauldin Aug 25, 2008 9:45 am |
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The very sad fact is that taxpayers are going to be on the hook for some time. What’s likely to happen is that a loan facility will be made to the FDIC, so they can borrow as much as they need and pay it back from future bank insurance payments.
This is something that needs to be addressed now. Frankly, this should be addressed right after the elections AT THE LATEST, in consultation with Congress and the new President.
We haven’t yet seen the write-offs that will come as consumers start defaulting on credit cards, auto loans and other consumer debt. Nor have we seen the losses that will come from commercial real estate or corporate loans as the recession progresses.
You can’t write off something until it goes bad, although you can increase your loan loss provisions. This of course hits earnings and your stock price and thus your ability to raise new equity. It presents a very difficult dilemma for bank managers and investors deciding whether to invest or go away.
That means that banks are going to have to increase their loan loss provisions, hitting both earnings and capital. And that means they’ll have to raise more investment capital and equity at a time when their stock prices are low.
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