Whitney: Credit Crisis Will Run Into 2009

Liz Moyer, Forbes

Bank analyst Meredith Whitney says the credit crisis will extend well into 2009, if not beyond. This means more pressure on financial stocks and bank balance sheets; banks have added $25 billion to loss reserves so far, but face mounting consumer credit losses in a second wave of the crisis that some bank executives have acknowledged will be worse than the first, which has cost hundreds of billions of dollars in write-downs and losses.

Wall Street's originate-to-distribute model, designed to mitigate risk by spreading it around, actually exacerbated those risks. It encouraged banks to loosen lending standards because more loan volume meant higher profits; then it led to over-leverage, and finally to complacency. More and more paper dollars were created for trading on the assumption that housing prices would always go up. The first wave of the crisis affected trading books, but the second will hit lending. As long as housing values were rising, borrowers could refinance in perpetuity to avoid default. Losses mounted when the refinancing option disappeared. Banks relied too heavily on the securitization markets to boost lending to consumers, particularly in the form of mortgages.

In time, some lending will return, but the sky-high revenues of recent years will be hard to reclaim, says Whitney. The banking sector's pullback in lending will cause further painful losses. Whitney believes banks will have to reserve an additional $170 billion through the end of next year just to keep up with estimated loan losses. "New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most draconian of investors," Whitney says.


Hat Tip: BMS Inc.

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