Tags: bank | failure

Rogoff: Expect Big U.S. Bank Failure

Wednesday, 20 Aug 2008 02:15 PM

After the bailout of Bear Stearns in March and Treasury's move to support Fannie Mae and Freddie Mac last month, most experts concluded that major financial institutions are now safe from failure.

Kenneth Rogoff, former chief economist of the International Monetary Fund, isn't one of them.

Rogoff told a recent financial conference in Singapore that the worst of the global financial crisis is yet to come, and that a big U.S. bank will go bust in the next few months.

"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps," says Rogoff.

Most bank analysts maintain that only some small financial institutions are likely to bite the dust. But Rogoff, now a professor of economics at Harvard, doesn't see it that way.

"We're not just going to see mid-sized banks go under in the next few months. We're going to see a whopper. We're going to see a big one, one of the big investment banks or big [commercial] banks," he says.

Consolidation of the financial sector will signal that the crisis is nearing an end, he says. "The financial sector needs to shrink," he told Bloomberg News.

"I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job."

Rogoff declined to name the banks he thinks will fail.

Banks already have suffered more than $500 billion of losses as a result of the housing market meltdown that began with subprime mortgage problems last year.

"The only way to put discipline into the system is to allow some companies to go bust," Rogoff says.

"You can't just have an industry where they make giant profits or they get bailed out."

The government should nationalize Fannie and Freddie, Rogoff argues. The two government-sponsored enterprises "should have been closed down 10 years ago," he says.

"They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds."

A housing bill that President Bush signed in August gives Treasury Secretary Henry Paulson the authority to purchase equity in Fannie and Freddie, which own or guarantee about half of the nation's $12 trillion of mortgages.

That Treasury backstop came after Fannie and Freddie's share prices slid to 17-year lows amid fears about their solvency. Share prices of both companies have continued to drop.

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After the bailout of Bear Stearns in March and Treasury's move to support Fannie Mae and Freddie Mac last month, most experts concluded that major financial institutions are now safe from failure.Kenneth Rogoff, former chief economist of the International Monetary Fund,...
bank,failure
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2008-15-20
Wednesday, 20 Aug 2008 02:15 PM
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