Credit Crisis Viewed As Extending Into 2009
As banks write off more than $170 billion of additional reserves by the end of next year, Oppenheimer & Co. analysts led by Meredith Whitney estimate that the U.S. credit crisis will extend into and even beyond 2009, according to an article by Luo Jun on Bloomberg.com.
In a recent research note, Whitney wrote, “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. 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 cut earnings estimates for U.S. banks as a result of “strained liquidity resulting from shut down in the securitization market.” Earnings estimates were also cut based on expectations that banks may take writedowns of $88 billion in 2008 and $96 billion in 2009.
Worldwide banks and securities firms have amassed almost $380 billion of writedowns and credit losses in connection with the worst U.S. housing slump in 25 years. Regulatory filings reveal that at least $35 billion in additional writedowns on the firms’ balance sheets were not deducted from reported earnings. Analysts have since cut their 2008 earnings estimates for Bank of America Corp., Citigroup, JPMorgan Chase & Co., Wachovia Corp. and Wells Fargo & Co. by an average of 17 percent. Earnings estimates for 2009 were cut by 20 percent.
According to Whitney, banks have become reliant on securitization markets to fund consumer lending. As banks struggle to replace this funding from their balance sheets, about $3 trillion of liquidity will be removed from capital markets by the end of the year. Losses incurred by banks will worsen in the wake of consumers being unable to repay existing debt with newer loans.
“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.
Plans by U.S. regulators to increase 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 in credit card loans will be removed by 2010. Should this happen, the amount of credit available to U.S. consumers will be cut by almost half.
