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And, yes, I DO take it personally: Roubini sees $3.6 TRILLION Loan and Securities Losses
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Thursday, January 22, 2009

Roubini sees $3.6 TRILLION Loan and Securities Losses

pretty jaw-dropping stuff...
Up To $1.8T Loan Loss and Securities Writedowns Out of Total $3.6T: How Sound Is the U.S. Banking Sector?

* Jan 20 Roubini/Parisi: Assuming a further 20% fall in house prices and unemployment peaking at 9%, we project total loan losses to amount to $1.6T out of $12.4T loans outstanding. Of these $1.6T loan losses, about $1.1T accrue to U.S. banks and brokers.
* Mark-to-market prices as of December imply around $2T in writedowns on $10.8T U.S. originated securities outstanding. Flow of funds data show that 40% of U.S. originated securities are held abroad. U.S. banks' share of writedowns is about 30-35%, or $600-700bn for U.S. banks/brokers according to weights in IMF GFSR October 2008, table 1.1
* Total loan and securities losses amount to $3.6T, half of which accrue to the U.S. banking system, or $1.8T. Capitalization of FDIC banks is $1.4T, that of investment banks as of Q3 $110bn. If projected loan and securities losses materialize, the U.S. banking system is close to insolvency despite TARP 1 of $230bn and private capital of $200bn.
* Chris Whalen (IRA): The bad news is that estimates that put aggregate charge-offs for all US banks over the next 12-18 months above $1 trillion are probably in the right neighborhood. The entire banking industry only has $1.5 trillion in capital, so new equity must obviously be provided by Washington and/or private investors.
* Other estimates: Goldman Sachs expects a further $1.1T in loan losses alone for a total of $1.6T.
* Calculated Risk: I think the U.S. residential credit losses will be in the $1 to $1.5 trillion range and additional credit losses from corporate loans and bonds, commercial real estate, credit cards, and other consumer loans will probably add close to another $1 trillion in losses.This analysis excludes losses on securitizations.
* Roubini: In order to restore healthy credit conditions, the banking system needs about $1-1.5T in public or private capital. This calls for a comprehensive solution along the lines of a 'bad bank' or RTC.
* Krugman: 'Bad bank' problem without nationalization first is asset valuation and ongoing bail-out of existing share and debt holders. A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks' debts to make them solvent; and sold the fixed-up banks to new owners
* Roubini: in order to resolve this financial crisis it is not enough to take the bad/toxic assets off the balance sheet of the financial institutions (a new RTC); it is also necessary and fundamental to reduce the debt overhang of millions of insolvent households via asignificant debt reduction on their mortgages (an HOLC program like the one that was implement during the Great Depression); and also recapitalize undercapitalized banks with public capital inthe form of preferred shares (as the RFC did with 4000 banks during the Great Depression). An RTC scheme without an HOLC and RFC component would not resolve two fundamental problems: 1) millions of households are insolvent and unable to service their mortgages; 2) the financial system is vastly undercapitalized and needs capital to avoid an ugly credit crunch and to foster new credit creation that is needed for future growth--> That is why I proposed the creation of a HOME (Home Owners’ Mortgage Enterprise) that would be a combination of an RTC, a HOLC and a RFC.

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