How long will a $2 trillion collapse in the banking sector play out?
*Barron's, by Robin Goldwyn Blumenthal and Nouriel Roubini, August 4, 2008:
"Barron's: At what point does the government run out of money to
lend to troubled banks?
Many public institutions are themselves going bankrupt. The FDIC
(Federal Deposit Insurance Corporation) has only $53 billion of funds,
and has already committed almost 15% of it to bail out depositors of
IndyMac. The FDIC's deposit-insurance premiums weren't high enough, and
now it is asking Congress to raise them. Plus, the agency claims only
nine institutions are on its watch list. IndyMac wasn't on the watch
list until June, the month before it collapsed. Studies done by experts
in banking suggest that at least 8% of U.S. banks are in big trouble.
Eight percent of the roughly 8,500 that the FDIC essentially is
insuring equals about 700 banks. Another 8% to 16% also are shaky, so
some 700 potentially are going bust and another 700 eventually could
join them. Yet the FDIC is watching only nine institutions. It's a joke.
What recourse will the taxpayer have?
The taxpayer's bill is going to be huge. I estimate this financial
crisis will lead to credit losses of at least $1 trillion and most
likely closer to $2 trillion. When I made this analysis in February
everybody thought I was a lunatic. But a few weeks later the
International Monetary Fund came out with an estimate of $945 billion,
Goldman Sachs (GS) estimated $1.1 trillion and UBS (UBS) $1 trillion.
Hedge-fund manager John Paulson recently estimated the losses would be
$1.3 trillion, and late last month Bridgewater Associates came up with
an estimate of $1.6 trillion. So, at this point $1 trillion isn't a
ceiling, it's a floor. And the banks, as I've said, have written down
only about $300 billion of subprime debt.
How long will it take for the collapse in the banking sector to play
out?
It is happening in real time. Many smaller banks are going bust
already. More than 200 subprime-mortgage lenders have gone bust in the
past year alone. And many community banks will go bankrupt. Community
banks usually finance everything: the homes, the stores, the downtown,
the commercial real estate, the shopping center. If you are in a town
or a municipality where there is a housing bust, the bank is gone. Of
three dozen or so medium-sized regional banks, a good third are in
distress. That includes the Wachovias and Washington Mutuals of the
world. Half of this group might go bankrupt. Even some of the majors
could end up technically insolvent, though they might be deemed too big
to fail."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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