January 27, 2009
They provide the following breakdown for mark-to-market (MTM) losses:
Category |
Amount Outstanding |
RGE Est. MTM Losses as of 12/08 |
US Share of Estimated Losses |
ABS |
1,100 |
550 |
171 |
ABS CDO |
400 |
380 |
125 |
Prime MBS |
3,800 |
114 |
22 |
CMBS |
940 |
282 |
93 |
Consumer ABS |
650 |
130 |
43 |
High-grade Corporate Debt |
3,800 |
190 |
70 |
High-yield Corporate Debt |
600 |
150 |
57 |
CLOs |
350 |
123 |
48 |
Total |
11,640 |
1,919 |
629 |
All numbers are in $ billions. Estimates are from RGE.
Roubini and Parisi-Capone’s key concern relates to the solvency of the US banking system. Prior to the onset of the credit crisis, the capitalization of the US banking system was $1.4 trillion, which corresponded to the 8% capital ratio required by Basel II. Expected loan write-offs are $1.1 trillion and mark-to-market losses are $600-$700 billion, together totaling $1.8 trillion and creating a capital shortfall of approximately $400 billion. TARP 1 injected $230 billion into the banking system, with private investors and sovereign wealth funds providing another $200 billion in capital, but that still leaves the banking system “borderline insolvent,” according to Roubini and Parisi-Capone.
An additional $1.4 trillion of capital is needed to restore the banking system to its pre-crisis capitalization levels, and more if the 8% ratio is deemed insufficient. Some of this will come from TARP 2 (which has $350 billion in funds yet-to-be allocated), but future programs (e.g., TARP 3 and TARP 4) will be necessary to provide an additional $1+ trillion.
Moreover, this analysis does not include insurance companies, finance companies, and other institutions (e.g., GMAC and GE Capital).
“The US banking system is borderline insolvent in the aggregate and it will take a huge amount of public financial resources and complex and time-consuming work-out of insolvent institutions to restore its financial health and allow it to lend again in ways that support sustained economic growth,” say Roubini and Parisi-Capone.
A full copy of Roubini and Parisi-Capone’s report is available to paid subscribers of the RGE Monitor.
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