[OPE] Undercapitalized banks punditry

If you read the Fed's "stress test" SCAP methodology paper http://www.federalreserve.gov/ titled "The supervisory capital assessment program: design and implementation" you will see that they say that "Most US banking organizations currently have capital levels well in excess of the amounts required to be well capitalised. However, losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks."

Mr Roubini argues: "The results of the government's "stress tests" will show even the biggest 19 American banks don't have enough capital to cope with the huge losses they'll inevitably suffer on souring loans." http://www.latimes.com/business/nationworld/wire/sns-ap-as-hong-kong-roubini,0,7103706.story

The biggest 19 US banks have assets totalling $10 trillion+. My hunch though is that the US outlook for banks is not quite as bad, as Mr Roubini says, and that there will be more mergers. It's more the escalating unemployment that one ought to be concerned about, I think Mr Roubini's bearish prediction is pretty much correct there.

The IMF states (Telegraph, 24 April 2009):

"European banks have so far written down $154bn (105bn pounds) of bad debts, or just 17pc of likely losses of $900bn by 2010. US banks have written down $510bn, 48pc of the expected damage." http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5209033/Germanys-slump-risks-explosive-mood-as-second-banking-crisis-looms.html

Newsweek (Ann Lee, "US Banks will Only get stronger", 18 April 2009):

In fact, many of these institutions are currently gaming the U.S. administration's new "public-private partnership" program to buy and sell toxic assets to their own advantage. Citigroup, for example, has been one of the most active buyers of toxic assets such as Residential Mortgage-Backed Securities (RMBS). These products are probably marked at inflated levels of 80 cents on the dollar on Citigroup's balance sheets, yet Citigroup can buy them at, say, 20 cents on the dollar in the secondary market. Thus, when it has to eventually sell them back to the government at, say, 60 cents on the dollar, it stands a chance to turn a nice profit at the expense of taxpayers. (....) Even now, in their weakened state, the U.S. banks control the majority of global capital flows, which are well over $11.2 trillion, having grown more than 11,000 percent since 1990. By the end of 2007 (the latest available statistics), banks accounted for 80 percent of the capital outflows and inflows, and American banks in particular are dominant. The U.S. banks hold 31 percent, or $61 trillion, of the world's $196 trillion in financial stock. By comparison, all of Latin America had a mere $5.9 trillion, and China and India combined had only $21 trillion (Europe was in second place with $52 trillion). Global wealth distribution, ironically in a global banking economy, is lopsided. This enormous wealth is concentrated in fewer hands as a result of the crisis. The biggest American banks have consolidated by snapping up the assets of failed competitors like Bear, Lehman, Merrill and Wachovia. The survivors will be unstoppable now. Back in 2008, the top 10 firms underwriting global debt, equity and equity-related securities controlled 59 percent of that business. They were (in descending order) JPMorgan, Barclays Capital, Citigroup, Deutsche Bank, Merrill Lynch, Goldman Sachs, Morgan Stanley, RBS, Credit Suisse and UBS. Emerging from this crisis, it is very likely that the top five firms will now control 60 percent of worldwide capital. http://www.newsweek.com/id/194612

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Received on Sat Apr 25 17:28:03 2009