Tags: banks

Big Shoes Dropping Around the Banks

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Tuesday, 07 Apr 2009 11:33 AM Current | Bio | Archive

Doesn’t matter if we like it or not, but we are still learning how toxic assets can grow during a recession/depression. When the International Monetary Fund (IMF) estimated a year ago the size of toxic assets in the global banking system was about $1 trillion, it was considered shocking.

Now, the Times from London has the word out that the IMF will announce later this month their new toxic assets estimate of $4 trillion, of which $3.1 trillion are originated in the United States alone. These estimates keep on rising because the global malaise is now affecting the prices of some of what are considered the more-liquid assets.

If that wasn’t enough, yesterday, former top Deutsche Bank analyst Mike Mayo assigned an “underweight” rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.

He identifies one of the big problems we are facing when he says: “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

I think investors should continue to shun bank stocks. For the moment, we still have some kind of a temporary firewall around the financial sector. Question is, how long will it hold, and now these bank stress tests are due to come out shortly.

And, don’t forget, there is still that growing problem of the credit card lines. We now have about $4.6 trillion in unused credit card lines and $840 billion of used credit lines. In the fourth quarter alone, half a trillion dollars of lines were cut from the consumer and this occurred before any form of regulatory reform came online.

There is no doubt in my mind that banks will continue cutting lines because of risk aversion and because capital-ratio dependency obliges them not to hold regulatory capital against unused lines. So, we can expect that this negative situation will expand further.

Investors (not traders) shouldn’t try to be a hero in this market. If they would like to participate, they should have a very well-defined opinion of how much money they will try to make and therefore how much money they can afford to lose when they step in. For those who want to play it safe, I would remain on the sidelines until there appear signs of a positive turn-around in housing, finance, unemployment, and the consumer.

Until then, you can’t lose big money just trying to conserve what you have.

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HansParisis
Doesn’t matter if we like it or not, but we are still learning how toxic assets can grow during a recession/depression. When the International Monetary Fund (IMF) estimated a year ago the size of toxic assets in the global banking system was about $1 trillion, it was...
banks
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2009-33-07
Tuesday, 07 Apr 2009 11:33 AM
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