Trillion-dollar question

On Feb. 10, shortly after Timothy Geithner announced that the government would perform “stress tests” of major American banks, the U.S. treasury secretary was asked what amounts to a trillion-dollar question. Well, at least at half-a-trillion.

“Do you think that are largest banks are insolvent?” Sen. Jim Bunning, R-Ky. asked Geithner later that day. “What will you do if your stress test of major banks reveal that they are insolvent?”

The New York Times’ Dealbook blog published the results of an two-year, independent bank stress test:

CreditSights ran the numbers, and found that according to its “severe” case situation, all the major banks and brokerages — Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sachs and Morgan Stanley — might require further capital injections from the government….

The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

To put these numbers in context, consider the market capitalization of these companies: Wells Fargo, $67 billion; BofA, $36 billion; JPMorgan, $92 billion; Citi, $19 billion; Goldman Sachs $44 billion; Morgan Stanley $25 billion.

In other words, the owners of the banks (shareholders) have not invested enough capital to cover the potential losses in assets in most cases.

Guess what that means! If the worst comes to pass, America’s biggest banks are effectively nationalized! Only the government can cover losses of that magnitude.

The sooner we wake up to this fact, the sooner we can move forward.

One comment

  1. mccamman

    Re: Banks
    Holy Shit!

    However, this does paint the worse case scenario – something journalists ( rather, editors) do to sell papers. What worries me, and I think is the root of the problem, is that the banks need to have reserves in certain amounts relative to their obligations. If their obligations are as large as this, their actually money in the bank will be an unsustainable amount. This coupled with the economic downturn and the further eroding of market capitalization paint a bleak picture.

    I’m making this up as I go along so I may be wrong, but I see that as the potential nuclear bomb that blows these things up.

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