The safe-house for money center banks closed and locked its doors long ago. The mortgage-related paper crisis rolls on like a mighty river and its latest victim is RBS (RBS). But, victim is the wrong characterization. RBS and other banks did create and buy these securities. They also failed to assess their risks.
RBS lost $1.35 billion in the first half, driven by a a $5.9 billion write-down in assets. According to Reuters, RBS said difficult conditions in financial markets "look set to be compounded by a deteriorating economic outlook". Stated another way, things will get worse.
Based on numbers predicting mortgage delinquencies rising in the second half, weakening consumer credit, and the cost of settling auction-rate securities claims. the performance of the banking industry will almost certainly be worse in the second half than it was in the first.
Banks with modest balance sheet strength including Bank of America (BAC) and Citigroup (C) will probably make it through another few bad quarters. Banks like Wachovia (WB) and Washington Mutual (WM) may not.
Douglas A. McIntyre
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