Tuesday, April 1, 2008

Banking Crisis Worse than 1987/Writedowns continue

Well today seems to be confession day for the banks in terms of announcing more write downs from assets for the 1st quarter. As these foreclosures continue to rise, Bloomberg expects this to last for up to 10 quarters:

"Banks' earnings have been hit for the past three quarters by the turmoil in the credit markets, the report said. In total, the crisis may last for eight to 10 quarters, exceeding the six- quarter duration of the Asia crisis and bailout of LTCM in 1997- 8, and the seven-quarter fallout from the bursting of the dot- com bubble, the report said."

This will make this worst crisis since the 1070's according to Bloomberg. I predict that it will take years to work this out. It took a decade of stagflation and inflation to get through the 1970's crisis. We are watching almost unprecedented losses here folks.

Lets take a look at the losses from Bloomberg:

"Zurich-based UBS AG today posted an additional $19 billion of writedowns and said it would seek $15.1 billion in a rights offering to replenish capital. Deutsche Bank AG, Germany's biggest bank, also said today it expects to book about 2.5 billion euros ($3.9 billion) in write downs for the quarter.
Separately, Merrill Lynch & Co. and Citigroup Inc. had their first-quarter earnings estimates cut by Goldman Sachs Group Inc., which said the two banks may post $14 billion in writedowns on assets linked to collateralized debt obligations."

The UBS lost is stunning and cost the banks chairman Marcel Ospel his job. UBS did announce that they raised $15 billion in capital which should help the stock. Citi's write down is expected to be $11 billion.

What is the result of all of these troubles?

"Banks' revenue from their credit businesses may drop as much as 60 percent, the analysts said, and the firms will have to provide more transparency to investors who buy their loans. At the same time, regulators will push the industry to retain more capital as a cushion, hurting banks' return on equity in the long-term, the group added."

Bottom line is the banks should dramatically reduce lending as they try to reserve capital to stay solvent. Expect the next 2-1/2 years to be full of consistent quarterly bank announcements of losses.

This will destroy the housing market because lending standards will tighten as banks start hoarding cash in order to stay solvent. This is a crisis that may take a decade to fix. The reckless lending will stop and housing prices will fall as the banks lose revenues and become more regulated.

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