Financials in Trouble, Part 1-Minyanville

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Financials in Trouble, Part 1

John Mauldin Aug 25, 2008 9:45 am


		Bank failures could total $850 billion.

Sometime in the next few quarters, the President and Congress (either the current administration or the next one) are going to have to address that potential shortfall - and before we see bank runs from people who fear FDIC insurance reserves may not be enough.

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.

You can’t make up the shortfall just by raising fees. Chris points out that raising fees right now isn’t really a winning option, since that just makes the financial books of marginal banks even worse. You can raise rates as the banking system returns to health.

If Congress and the President wait too long, there could be a very serious problem. Depositors could start moving funds under $100,000 (the insured amount) to what they perceive may be a safer bank. Rumors could run rampant.

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.

If you’re worried about your bank, you can go to Chris’s website and pay $50 for a brief analysis and an update for the next 4 quarters. If you have less than $100,000 in your accounts, you shouldn’t worry. But for businesses with large deposits and large cash flows, it might be worth checking on the health of your bank.

$500 Billion and Counting

We’ve seen some $505 billion in bank write-offs so far in this credit crisis. It’s serious naiveté to assume that this will be the extent of it. Most of the write-offs have been mortgage-related.

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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.

Sober-minded analysis from the IMF suggests that the total write-offs by all banks may be $1 trillion. Dr. Nouriel Roubini is much more alarmed; he puts potential losses at closer to $2 trillion.

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.

It’s a vicious spiral. Banks have less capital, so less able to lend to the very businesses that need the money; without said money, businesses will be less able to pay their current loans, which means that banks have less capital. Rinse and repeat.


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