The biggest bear in foreclosure-gate is Institutional Risk Analytic’s Chris Whalen.
At a conference Wednesday, Whalen said the foreclosure crisis would make 2008 look like a cakewalk (via Prag Cap):
“The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process.”
Whalen says subprime losses never really showed up on balance sheets. But a coming wave of foreclosures will make them a reality. At a time when banks are already stressed, these rising operational costs will cause bankruptcy.
Even without foreclosure-gate banks were screwed. 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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