Banks Look To Fourth Quarter Trouble

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Hope springs eternal. For several months now analysts and investors have believed that the fourth quarter would be a reasonable one for banks. A lot of the bad paper on their balance sheets would have been sold off or at the very least aggressively written down earlier in the year.

If wishes were horses, all the beggars would ride.

The Treasury will have to get out its checkbook again. Depending on which analyst is talking, bank losses in the fourth quarter will be as low as $20 billion and as high as $44 billion. According to The Wall Street Journal, Goldman Sachs (GS) may lose $2 billion for the period. Only recently, the number was supposed to be $400 million. Some analysts even expected that firm to make money.

The age of mortgage-backed securities write-downs may be drawing to a close, but it is being replaced by trouble with LBO paper, commercial real estate, and credit cards. This wave of problems could stretch out for the next several quarters. Certainly real estate defaults and consumer debt issues are going to get worse.

What this means is that the government has not done enough, not yet, to get banks back on a reasonable footing. Some banks, particularly Citigroup (C), could create big holes in their reserves in the current quarter. Private capital will not take the risk of solving that problem. Treasury will have to be back.

The Fed is going to need to expect that its emergency lending window is going to be hit harder and harder with each passing week. It is not clear whether all of those short-term loans are being paid back on time. It is not clear what the Fed got in exchange for the cash it passed out. It is almost certainly worth cents on a dollar.

The bailout is only just beginning.

Douglas A. McIntyre