Is it only a year since Nouriel Roubini, aka. Dr. Doom, was derided for projecting outsized US financial sector losses in excess of a trillion dollars? The consensus then, including within the IMF, was that such losses would "only" be in the hundred of billions of dollars and largely limited to subprime mortgage securities. Since then, the writedowns have rapidly spread to higher-rated mortgages, commercial real estate, credit cards, auto loans, student loans, industrial and commercial loans, corporate bonds, sovereign and lower level government bonds, and all of the collateralized debt obligations and other complex credit derivatives which securitized these loans.
Roubini and other analysts have since been forced to ratchet up their estimates every few months. IMF loss estimates for US, European, and Japanese banks, insurance companies, hedge and pension funds, and other financial institutions have jumped from just under a trillion last year to 1.4 trillion to 2.2 trillion at the beginning of this year to 4.1 trillion yesterday. I am not sure if it is a misprint or an inaccuracy, but according to the Wall Street Journal report below, the IMF projects that roughly 8% of US loans will have gone bad by next year - more than twice the level at the peak of the Great Depression. The Fund's semi-annual Global Financial Stability Report urges "bolder steps" by the OECD governments - specifically more extensive nationalization of the financial sector. -MG =========================================== IMF puts financial losses at $4,100bn By Sarah O’Connor in Washington Financial Times April 21 2009 The deteriorating global economy means financial institutions now face total losses of $4,100bn on loans and other assets, the International Monetary Fund said on Tuesday, urging governments to take “bolder steps” to shore up institutions – including nationalising them where necessary. The IMF said in its Global Financial Stability Report that many loans sitting on institutions’ balance sheets were eroding in value, not just the toxic sub-prime securities which first triggered the crisis. The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added. Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest. Efforts to cleanse these bad assets from balance sheets and replenish viable institutions with capital had so far been “piecemeal and reactive”, the IMF said, calling for more decisive government action. “The current inability to attract private money suggests the crisis has deepened to the point where governments need to take bolder steps and not shrink from capital injections in the form of common shares even if it means taking majority, or even complete, control of institutions,” it said. Financial sector losses The report is likely further to unnerve investors, even though the writedown estimates are lower than those of some private economists. On Monday traders were so alarmed by news of rising delinquencies on consumer and business loans at Bank of America that they triggered a stock market sell-off. US banks have so far taken about half of the writedowns they face, while European banks – particularly vulnerable because of their exposure to emerging European markets – have only taken one-fifth. But if banks took all the writedowns they face immediately, the IMF calculates it would wipe out their common equity altogether. That highlights the urgent need to inject more capital into many banks and other institutions. To restore their balance sheets to the state they were in before the crisis – defined by the IMF as a tangible common equity to tangible asset ratio of 4 per cent – US banks need $275bn in capital injections, euro area banks need $375bn and UK banks $125bn. But the IMF expressed concern that taxpayers were becoming weary of supporting the financial sector. “There is a real risk that governments will be reluctant to allocate enough resources to solve the problem,” the report said. One possible step would be for governments to convert their preferred shares in banks into common equity, the IMF suggested. This is something that the US government is considering, a senior official has told the Financial Times, though some have criticised such measures as “nationalisation by the back door.” Even if governments do take bold action to shore up the system, the credit crisis will be “deep and long-lasting”, the IMF warned. It said that deleveraging and economic contraction would cause credit growth in the US, the UK and the eurozone to contract and even turn negative in the near future, and only recover after a number of years. The IMF was also gloomy about the prospects for emerging markets as foreign investors and banks withdraw funds. It estimated the refinancing needs of emerging markets are around $1,800bn, while net private capital will flow out of such economies this year. Reshaping global financial regulation was another major topic in the IMF report. It suggested creating two tiers of regulatory oversight: one to gather information, and a smaller one for systemically important institutions with “intensified” regulation. It also mooted the idea of levying an extra capital surcharge as a way to deter companies from becoming “too-connected-to-fail” in the first place. * * * Banks Need $875 Billion in New Equity, IMF Says By BOB DAVIS and DAVID ENRICH Wall Street Journal April 22 2009 WASHINGTON -- U.S. and European banks need to raise $875 billion in equity by next year to return to levels similar to the years before the current crisis -- and twice that amount to match the levels of the mid-1990s, the International Monetary Fund said. The steep funding requirements reflect a financial crisis that continues to deepen, the IMF said. The banking sector's woes have spread from the housing sector to commercial real-estate loans and emerging-market debt. Overall, the IMF estimates the U.S., European and Japanese financial sectors face losses of about $4.1 trillion between 2007 and 2010. Of that, banks are confronting $2.5 trillion in losses, insurers $300 billion and other financial institutions $1.3 trillion. The banking sector has written down $1 trillion of those losses, said the IMF; it didn't estimate how much other financial firms have written down thus far. "Without a thorough cleansing of banks' balance sheets of impaired assets ... risks remain that banks' problems will continue to exert downward pressure on economic activity," said the Global Financial Stability Report, the IMF's twice-yearly review of the financial sector. While problems in the U.S. mortgage sector are blamed for the financial crisis, the IMF report shows that other regions played a big role. About $2.7 trillion of the losses from 2007 to 2010 were attributable to the U.S. market, the IMF said, while $1.2 trillion came from bad loans and securities losses in Europe. The IMF projects that 7.9% of U.S. loans will have gone bad by next year. In a report, Calyon Securities analyst Mike Mayo predicted that losses will crest at 3.5% of loans, a level that he said will slightly eclipse the peak rate during the Great Depression. Mr. Mayo estimated that U.S. banks are about a third of the way through accounting for losses on nonmortgage consumer loans, while losses on business loans "seem in the early stages." Despite the grim message, some IMF officials said improvements in a few markets in the past month point to the possibility that write-downs could come in below the report's projections. Market improvements have not been significant enough to alter the overall outlook, said Jan Brockmeijer, deputy director of the monetary and capital-markets department. Some of the biggest improvement has come from emerging-market spreads. On Tuesday, Colombia became the third country, after Mexico and Poland, to seek new IMF credit lines. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
