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And do you realy think Bailout Cash will be enough? Wake up and smell the coffee..... - by Ziad
Morning folks:
I personally don't expect federal bailouts to help banks compensate for any losses as I am afraid that the $250 billion promised by the Treasury to support the banking sector won't be enough.
I am also afraid that banks will lose an additional $450 billion of existing capital over the next two years; which is basically equivalent to 3 percent of U.S. gross domestic product and 45 percent of existing bank capital.
Overall, we are talking about the U.S. economy shrinking 1.5 percent in 2009, with no growth in 2010.
It is a fact that the never-ending cycle of asset write-downs and mounting loan defaults is hemorrhaging cash from the banks and sooner than later they will be forced to either sell assets, seek fresh funds, or slash their loan books.
U.S. financial institutions have recorded more than $380 billion in losses since the crisis began last year and any prospects of solid earnings plugging the funding gap are very slim.
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, it is expected banks to shrink their loan portfolios by roughly 10 percent over the next couple of years, putting more downward pressure on economic activity.
Banks, thus, will find themselves competing with each other for cash as they try to raise needed funds.
I personally expect $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.
In a worst-case scenario, if that were to happen, the fall in loans would rival the collapse in loans seen during the “Great Depression”.
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 and don’t seem to have a clue of how to position themselves yet.
Talking about the best and brightest on Wall Street??? Go figure ….
Your feedback is always greatly appreciated.
Thanks much for your consideration.