Families Struggle As Loan Losses Could Top Great Depression Levels

Weather Report: The Economy–Bank Loan Losses Huge, Four Things Seem Clear

Bank Loan Losses Huge: “Mayo Gives Banks ’Underweight’ Rating on Loan Losses (Update 2)” is the Bloomberg.com for 4/07/09 (updated NY @ 00:18) by Michael J. Moore. We chose Mr. Moore’s piece over several from 4/06/09, while reading late 4/06, because we thought it the most comprehensive and because it included the views of former Oppenheimer analyst Meredith Whitney; a bank analyst almost without equal.

Here are some of the articles key points:

• “CLSA analyst Mike Mayo assigned an underweight rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.”
• “While certain mortgage problems are further along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” said Mayo…” and “New government actions might not help as much as expected especially given that loans have been marked down to only 98 cents on the dollar on average.”
• “‘Nationalization of banks remains a possibility because government policy remains unclear,’ Mayo said on a conference call after releasing his report.”
• “Mortgage related losses are about halfway to their peak, while credit-card and consumer losses are only a third of the way to their expected highest levels.”
• “The nations largest banks may be transitioning from a financial crisis marked by write downs of capital to an economic crisis featuring large loan losses,” Mayo wrote, “The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.”
• “Meredith Whitney, who left Oppenheimer & Co. to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. ‘Home prices are not done falling and will ultimately drop 50 percent from their peak,’ Whitney said today in a CNBC interview.”
• “The unemployment rate also has exceeded banks’ projections and could lead to further loan losses,” Whitney told Forbes.

Four Things Seem Clear: Our view here at Prudent Home leads us to the believe that, while the future is cloudy and uncertain, there are four things that currently appear to be pretty clear:

1. The people in charge of this financial/economic crisis really don’t know what they’re doing. (after all, they’re pretty much the same folks that got us into this mess) and although they’re doing their best: they’re just guessing.
2. Things are actually much worse, especially at the street level, than those “in-the-know” are aware of and/ or are willing to admit .
3. Americans in general are going to take a substantial cut in their standard of living and it’s probably going to be permanent.
4. The American people can expect a number of additional changes in government projections, pronouncements, and policies as regards this crisis as it continues to unfold. Most of these will be on the downside in the short run.

Until next time, keep your eyes on the horizon; the weathers changing fast.