Goldman Projects $2 Trillion In U.S. Based Lending Losses

A recent Goldman Sachs (GS) analysis predicts that banks worldwide are slated to lose about $2 Trillion from various U.S. based loans:

Graphic courtesy of the WSJ

An even scarier notion is the fact that less than 1/2 of the projected losses have been realized so far, not to mention the fact that the so called “experts” have been several steps behind reality with many of their predictions to date, so who is to say that they’re not under-estimating things now?

The graphic comes from a larger discussion on efforts by officials at the Fed, the Treasury, the FDIC and the incoming administration to effectively create “TARP II”, in the guise of either a government bank that would buy bad assets or guaranteeing the bank’s future losses from same.

From the WSJ:

WASHINGTON — The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system.

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Also under consideration is an additional and giant government guarantee of banks’ assets against further losses.

The discussions, which are intensifying, show how the rapid deterioration of bank assets is outpacing the government’s rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy.

I read this and it just makes me think of the “powers that be” scrambling around trying to figure out a way to fix the economy by waving an “economic policy wand” that will magically make all of our problems go away.

Look: the government can buy all the bad debts or guarantee (or share) in all the losses it wants, but it won’t change the core problem of the banks being over-leveraged and undercapitalized. Especially after the write down parties of ‘07 and ‘08. While selling the bad assets will indeed raise “some” cash it won’t erase the debts those assets represent, whether they borrowed money against those assets and/or borrowed money to originate the ill-fated loans.

Furthermore there is the problem of saddling the taxpayer with what looks to be 100s of billions (if not trillions) worth of bad assets, thereby only adding to our nation’s already massive debt problems.

I understand why the incoming administration as well as the folks at the Fed, Treasury, FDIC, et al are working hard to find a solution to this mess, and are trying to find a way thy can use the power of the government to remove the toxic waste from the system and possibly get things moving again. However I believe they need to stop trying to take the “Harry Potter approach” , accept that some things have to run their course and start focusing on root cause issues as opposed to symptoms.

If you want to cure a broken leg you have to set the leg, put it in a cast and then accept that the individual is going to be on crutches for several weeks, followed by several weeks of rehab. You don’t just give them pain killers and tell them to just walk on the leg anyway.

You can read more here.

Source:

The WSJ: “U.S. Plots New Phase in Banking Bailout” — Deborah Solomon, Jon Hilsenrath and Damian Paletta, January 17, 2009.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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