Thursday, January 22, 2009

Nouriel Roubini estimates a total of $3.6 trillion in loan losses

How much of this -3.6 is still to come?

I susbscribe to REG Monitor, economist Nouriel Roubini's global economics newsletter. I just got the following in my inbox, an update on just how many billions/trillions of dollars the US is facing in losses due to the bad loans still clogging up our banks' balance sheets. Of the $3.6 trillion he ultimately sees being written down, he estimates the US is directly exposed to about half -- $1.8 trillion. The key question, then, is: How much of this $1.8 trillion have we already written down? Are we most of the way through? Half-way through? Have we barely begun?

Anyway, here's the email:

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.

--Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.

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