Meredith Whitney drops another forecast bombshell on Wall Street. What makes it even more compelling is that it sounds like 'common sense' based on the facts as they are at present. Certainly more believable than empty assurances that 'the worst is behind us.' Where have we heard that one before?
The Fed and Treasury are going to have to take radical steps to change this, and we think outright monetization of debt to the extent that the bonds and dollar can bear will be the path of action they will take. This is where it gets interesting.
A newly elected charismatic Democratic president trying to lift the country out of a terrible economic slump created by a decade of Republican excess and corrupt insider business dealings. Despite slack demand, the dollar falls hard on international exchanges and is devalued by fifty percent. A Republican minority in Congress and more importantly a Supreme Court packed with Republican appointees blocks the efforts to reform the system and alleviate the intense suffering of a large portion of the public.
A forecast? No, just a thumbnail summary of the 1930s. It doesn't have to happen this way (again). But right now it sure looks like a possibility. We still think the game plan is a hard stagflation as the most likely probability, with a big devaluation of the dollar, with a purge and a recovery after about six years. We think the Russian experience in the 1990s is a good model, but we don't have their natural resources, so we will be lifted out by something else. What? who knows. We will fall. We will get back up. There is no way for anyone to know for certain how it will happen. No one. There are too many exogenous variables.
Whatever does happen is going to hit a lot of Americans hard, very hard, because they are not expecting it and are completely unprepared. This is because they know little of history, and what they do know, they think happened on some other planet.
Credit Crisis Will Extend Into 2009, Oppenheimer Says
By Luo Jun
May 20 (Bloomberg) -- The U.S. credit crisis will extend into and even beyond 2009 as banks will write off more than $170 billion of additional reserves by the end of next year, according to Oppenheimer & Co. estimates.
``The real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet seen,'' analysts led by Meredith Whitney wrote in a research note today. ``Just as strained liquidity pushed so many small and mid-sized specialty finance companies to beyond the brink, we believe it will do the same with the U.S. consumer.''
Whitney, together with Kaimon Chung and Joseph Mack, cut earnings estimates for U.S. banks ``significantly'' due to ``strained liquidity resulting from shut down in the securitization market'' and on expectations that banks may take provisions of $88 billion in 2008 and $96 billion in 2009.
Banks and securities firms worldwide amassed almost $380 billion of writedowns and credit losses following the worst U.S. housing slump in a quarter century, according to data compiled by Bloomberg. At least $35 billion of additional writedowns included in their balance sheets weren't deducted from reported earnings, regulatory filings show.
Whitney, 38, correctly predicted on Oct. 31 that New York- based Citigroup Inc. would cut its dividend to shore up capital after mortgage-related writedowns.
Shrinking Consumer Credit
The analysts cut their estimates for 2008 earnings for Bank of America Corp., Citigroup, JPMorgan Chase & Co., Wachovia Corp. and Wells Fargo & Co. by an average of 17 percent, and reduced their 2009 estimates by 20 percent. In all, the banks earnings will be 72 percent lower than the Thomson First Call consensus forecast, Oppenheimer estimates.
Banks have become reliant on securitization markets to fund consumer lending, Whitney said. With that market shut down in the wake of the credit crunch, banks will struggle to match the funding from their own balance sheets, she added. That will remove about $3 trillion of liquidity from capital markets by the end of the year, and banks' losses will worsen as consumers will be unable to repay debt with fresh loans, she added.
``As the securitization market remains effectively closed for most asset classes, we believe more consumers will face the threat of default and banks will simply face far higher loss rates,'' Whitney said in the report.
U.S. regulators' plans to boost oversight of the credit card industry will force banks to raise borrowing rates and cut the amount of credit available to consumers. Whitney estimates about $2 trillion of credit card lines will be removed by 2010, cutting the credit available to U.S. consumers by almost half.
To contact the reporter on this story: Luo Jun in Shanghai at jluo@bloomberg.net;
Last Updated: May 20, 2008 06:38 EDT
