The guys over at The Baseline Scenario don’t agree with the idea of nationalizing and then splitting up the Too Big to Fail Banks. They have an alternate plan to fix “the total mess that our banking system has become”. To be honest, I don’t think it matters which approach is taken, what is important is that dramatic, massive action be taken soon to fix “the total mess”.
As noted in The Economist, the financial sector is “in ruins”.
Fixing this will take a lot of work over the next 18 months or so … but already a picture of a new finance is becoming clearer: smaller, better regulated, more conservative.
Without clear steps in this direction, recovery is no where in sight. In fact, it may be a more desperate situation than we have been considering.Nouriel Roubini (the all-too accurate Dr. Doom) released the below today. If his analysis is correct, the banking system is not just “in ruins” it is insolvent.
RGE Monitor Estimates $3.6 Trillion Loan and Securities Losses in the U.S.
Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on U.S. originated securitizations:
- Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, U.S. banks and brokers are expected to incur $1.1 trillion.
- Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion ($1.92 trillion.) About 40% of these securities (and losses) are held abroad according to flow-of-funds data. U.S. banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.
- Total loan losses and securities writedowns on U.S. originated assets are expected to reach about $3.6 trillion. The U.S. banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns.)
- FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize.
- In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.