After-Math

Times, April 7

IMF to say that toxic debts racked up by banks and insurers around the world could spiral to $4 trillion. The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising losses on U.S. originated assets to $3.1 trillion (subject to further revision) in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia. Banks and insurers have so far owned up to $1.29 trillion in writedowns (about $800bn in U.S., $400bn in Europe, remainder in Asia).


Loss Estimates for U.S. Banks/Brokers:

IMF in January update raised total loan and security loss estimate on U.S. originated assets to $2.2 trillion, of which about half incurred abroad. Times reports that IMF plans to raise total loss estimate to $3.1T in April Stability Report, subject to further revision.

Capitalization of FDIC banks is $1.4T, that of investment banks as of Q3 is $110bn. If projected loan and securities losses materialize, the U.S. banking system is close to insolvency despite TARP 1 of $230bn and private capital of $200bn.

Outstanding loans are $12.4T. Of these, we estimates 15% to turn bad. Of these, U.S banks and brokers are assumed to carry $1.1T at mark-to-market prices as of December which implies around $2T in writedowns on $10.8T U.S. originated securities outstanding.

Flow of funds data show that 40% of U.S. originated securities are held abroad. U.S. banks' share of writedowns is about 30-35%, or $600-700bn for U.S. banks/brokers according to weights in IMF GFSR October 2008. The problem is that estimates that put aggregate loan charge-offs for all US banks over the next 12-18 months above $1 trillion are probably more accurate. The entire banking industry only has $1.5 trillion in capital, so new equity must obviously be provided by Washington and/or private investors.

Goldman Sachs: Total loan losses will reach $2 trillion of which $1 trillion are carried by the U.S. banking system (50% mortgage losses and 50% other loan losses). Banks need a minimum of $300bn additional capital but most likely more.

Roubini: In order to restore healthy credit conditions, the banking system needs about $1-1.5T in public or private capital. This calls for a comprehensive solution along the lines of a 'bad bank' or RTC.


Loss Estimates For European Banks:

Fed Board: Flow of funds data show that 40% of U.S. originated securitizations are held abroad, so about $4.4T out of $10.8T securitizations held abroad, assume $4 T in Europe. Average writedown rate on securitization is 17%, so about $680bn writedowns apply for Europe.

Goldman Sachs: Total gross loan losses among European banks estimated at EUR 900bn, or $1.1 trillion. This figure includes EUR310bn in losses falling on foreign registered banks and EUR77bn registered in CEE ($400bn/$100bn respectively). (Note: report says that given that EU banks were slow in writing securities up (loans only)they are justified in writing securities down slowly in the downturn as well)

IMF: Expected losses on European/Asian loans at $900bn, rather than $1.1T.

Danske: European banks have $1.3T in claims on Central and Eastern European countries. Assuming that 20% of these loans turn bad, EU banks incur about $270bn in CEE-related losses, of which 70bn are already accounted for in Goldman loan loss estimate above.

Aggregating all losses, European banks expected losses amount to about $650bn on exposure to U.S. securities or $1100bn on domestic and foreign loan losses, and EUR200bn so a total of $1950bn losses.

Asia is expected to incur the remaining $200bn in writedowns for the total $4T expected by the IMF.