Tags: bank | bailouts

Ashworth: Bailout Cash Will Fall Way Short

By    |   Tuesday, 11 Nov 2008 05:11 PM

Don't expect federal bailouts to help banks compensate for any losses.

Paul Ashworth, senior international economist at Capital Economics, says banks will lose an additional $450 billion of existing capital over the next two years.

According to Capital Economics' calculations, those losses would be equivalent to 3 percent of U.S. gross domestic product and 45 percent of existing bank capital.

Last month, Ashworth said he expected the U.S. economy to shrink 1.5 percent in 2009, with no growth in 2010.

He warned that the $250 billion promised by the Treasury to support the banking sector won't be enough.

"The never-ending cycle of asset writedowns and mounting loan defaults" is hemorrhaging cash from the banks, Ashworth said in a Capital Economics research note.

"They will be forced to either sell assets, seek fresh funds, or slash their loan books."

"Prospects of solid earnings plugging the funding gap are slim," Ashworth added.

According to Ashworth, U.S. financial institutions have recorded more than $380 billion in losses since the crisis began last year.

Last month, Ashworth told Bloomberg that by offering the bailout, all the Treasury will manage to do is offset further losses and prevent capital adequacy ratios from falling.

"As it stands, we still expect banks to shrink their loan portfolios by roughly 10 percent over the next couple of years, putting more downward pressure on economic activity.''

Bank, thus, will find themselves competing with each other for cash as they try to raise needed funds. He expects $350 billion to be raised by U.S. banks, with up to half of that new capital coming from the federal government.

"If banks can't raise even more capital, from either public or private sources, they will ultimately be forced to curb lending," he said.

In a worst-case scenario, if that were to happen, Ashworth estimates the fall in loans would rival the collapse in loans seen during the Great Depression.

Oppenheimer & Co. banking analyst Meredith Whitney agrees with Ashworth's assessment of banks' dire condition.

"I don't know what Goldman and Morgan Stanley will look like after they resize. I'm agnostic on those names right now. There is a lot they have to go through," she told Reuters.

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Don't expect federal bailouts to help banks compensate for any losses. Paul Ashworth, senior international economist at Capital Economics, says banks will lose an additional $450 billion of existing capital over the next two years.According to Capital Economics'...
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2008-11-11
Tuesday, 11 Nov 2008 05:11 PM
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