Foreclosure-gate is just showing the cracks from a much bigger crisis coming next year, says Risk Analytic’s Chris Whalen.
The real problem is the inability of banks to cover subprime losses, which have been hiding on balance sheets since the housing crash. Banks have only survived this long thanks to extremely beneficial Fed policy.
Whalen made these conclusions in a must-see presentation that continues to get a ton of buzz:
“The US banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than 1/4 of the way through the foreclosure process.“
As the government stalls the clear out of toxic assets, bank liabilities will rise even more.
Efficiency ratios (the cost of generating revenue) spikes after recessions... but the trendline had already reached dangerous highs
If zero interest rate policy continues, bank interest income (thus cash flow) will fall to inadequate levels
But the real red flag is in non-interest income, which peaked during the subprime frenzy -- and has not yet bottomed
Non-interest expenses will soar as foreclosures accelerate. Non-interest income will fall as the economy stalls
Big banks are already losing control of the foreclosure wave -- which may knock out as many as 1 in 5 mortgages
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