Big Banks Look Anemic

Beginning to look like nationalization is THE way to go.

Another piece from The New York Times


Under One Stress Test, Big Banks Look Anemic
February 13, 2009, 9:57 am


Treasury Secretary Timothy F. Geithner’s has been criticized in the media and by critics for failing to present a fully fleshed-out plan to tackle the nation’s financial crisis. One of the more vague points in his speech Tuesday was that the government would use “stress tests” to determine the health of banks.

Since then, some specifics surrounding the stress tests have leaked out. Regulators plan to assess the potential losses a bank could face over the next two years, rather than the typical one year, government officials close to the situation told The New York Times.

The government is also expected to look at banks’ exposure to derivatives and other assets normally carried off their balance sheets, and make sure that banks also carry an additional capital cushion. Their assumptions will be guided on a “worst case” basis.

But what constitutes a worst case in such a volatile environment?

CreditSights ran the numbers, and found that according to its “severe” case situation, all the major banks and brokerages — Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sachs and Morgan Stanley — might require further capital injections from the government.

CreditSights’ projections were driven by its own forecast for future credit losses based on how badly the market could perform over the next two years. Under these assumptions, the losses from mortgage-related products would be significantly higher than the amount the banks have set aside already. It also envisions an unemployment rate of 10 percent.

The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

If the government uses similar assumptions, it would probably need to inject all of the firms with billions of dollars in new capital to stabilize them against future losses. The idea would be to give them the money now, as opposed to later, when a huge loss could cause further instability in the banking system.

A further injection of cash by the government would force banks to comply with all the new rules and regulations the government has placed upon future recipients of government cash, including provisions capping executive pay and other executive perks like travel and entertainment stipends.

–Cyrus Sanati