'Large US Banks on Edge of Insolvency, Experts Say
by Steve Lohr
by Steve Lohr
Some of the large banks in the United States, according to economists and other finance experts, are like dead men walking.
Nouriel Roubini, professor of economics and international business at New York University, testifies before the Joint Economic Committee in October 2008 in Washington, DC. The financial crisis may lead to 3.6 trillion dollars in losses and writedowns for the global banking sector, Roubini said Thursday. (AFP/Getty Images/File/Win Mcnamee)A sober assessment of the growing mountain of losses from bad bets, measured in today's marketplace, would overwhelm the value of the banks' assets, they say. The banks, in their view, are insolvent.
None of the experts' research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are insured by the U.S. government. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.
But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department's plan outlined this week.
The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.
It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years. Such forceful action was belatedly adopted by the Japanese government from 2001 to 2003, by the Swedish government in 1992 and by Washington in 1987 to 1989 to overcome the savings and loan crisis.
"The historical record shows that you have to do it eventually," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Putting it off only brings more troubles and higher costs in the long run."
Of course, the Obama administration's stimulus plan could help to spur economic recovery in a timely manner and the value of the banks' assets could begin to rise.
Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Meanwhile, the loss estimates keep mounting.
Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.'
Nouriel Roubini, professor of economics and international business at New York University, testifies before the Joint Economic Committee in October 2008 in Washington, DC. The financial crisis may lead to 3.6 trillion dollars in losses and writedowns for the global banking sector, Roubini said Thursday. (AFP/Getty Images/File/Win Mcnamee)A sober assessment of the growing mountain of losses from bad bets, measured in today's marketplace, would overwhelm the value of the banks' assets, they say. The banks, in their view, are insolvent.
None of the experts' research focuses on individual banks, and there are certainly exceptions among the 50 largest banks in the country. Nor do consumers and businesses need to fret about their deposits, which are insured by the U.S. government. And even banks that might technically be insolvent can continue operating for a long time, and could recover their financial health when the economy improves.
But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department's plan outlined this week.
The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.
It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years. Such forceful action was belatedly adopted by the Japanese government from 2001 to 2003, by the Swedish government in 1992 and by Washington in 1987 to 1989 to overcome the savings and loan crisis.
"The historical record shows that you have to do it eventually," said Adam Posen, a senior fellow at the Peterson Institute for International Economics. "Putting it off only brings more troubles and higher costs in the long run."
Of course, the Obama administration's stimulus plan could help to spur economic recovery in a timely manner and the value of the banks' assets could begin to rise.
Absent that, the prescription would not be easy or cheap. Estimates of the capital injection needed in the United States range to $1 trillion and beyond. By contrast, the commitment of taxpayer money is the $350 billion remaining in the financial bailout approved by Congress last fall.
Meanwhile, the loss estimates keep mounting.
Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.'
Lees verder: http://www.commondreams.org/headline/2009/02/13-5
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