'Kitchen-sink' bank write-offs may loom this quarter

From Times staff writer Walter Hamilton in New York:

Another wave of red ink is likely for U.S. banks in the current quarter, despite -- or in some cases, because of -- the federal bailout program for the industry.

That was the message today at a financial industry conference in New York, where several experts said banks, which already have written off hundreds of billions of dollars of loans because of the housing meltdown, are on course to record massive losses again this quarter.

The crumbling economy is exacerbating the effects of the housing collapse, while new loan woes may be creeping up in the corporate and commercial real estate sectors, which thus far have been relatively immune.

"We're going to see some enormous losses coming up in the fourth quarter," said Gerard Cassidy, an analyst at RBC Capital Markets.

The conference was sponsored by a Wall Street trade group to analyze the effects of the federal bailout effort known as the Troubled Asset Relief Program, or TARP. Neel Kashkari, who runs the TARP program for the Treasury, was one of the conference speakers.

The $700-billion bailout plan has helped to calm credit markets and pull down some key short-term interest rates. The first part of the plan involves direct investment of taxpayer funds into banks to bolster the lenders’ capital. The second part, yet to begin, will involve Treasury purchases of bad loans.

The infusion of capital under TARP may speed bank loan write-offs because it gives lenders more of a cushion to absorb hits, analysts said.

"Many bank management teams will use the fourth quarter as that proverbial kitchen-sink quarter," Cassidy said. "This is going to be a very big kitchen sink."

Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co., predicted that global credit losses would reach $1.4 trillion in this economic downturn. Banks so far have taken $800 billion in write-offs and loan-loss provisions, leaving $600 billion yet to come, Hatzius said.

No one, it seemed, had a good answer for one of the biggest questions in the financial crisis: When will banks deploy the capital investments they’re getting from the government to boost lending?

Randal Quarles, managing director at private-equity firm Carlyle Group, grinned and laughed nervously when asked that by an audience member. He stammered for a moment before jokingly telling the questioner to ask Kashkari, who was to speak next.

Kashkari wasn’t much more help.

"As confidence returns to our institutions and our markets, we believe banks will put this capital to use by extending loans to creditworthy businesses and consumers," he said. "The last thing we want, however, is to encourage banks to resume the poor lending practices that are the cause of the current economic problems."

See the text of Kashkari's speech here.

Photo: Assistant Treasury Secretary Neel Kashkari (Mark Lennihan / Associated Press)

Comments

[mr.bilko]

Easy credit for high risk candidates is history. Like Kashkari said, banks will resume lending, but only to the qualified. As I've posted numerous times during the last couple of months, 4th qtr 2008 results should be quite ugly however plunging gas and oil prices is doing a very good job of easing the pain of this recession. 4th qtr 2008 appears to be the bottom. Expect zero GDP growth for 2009 and beyond since much of the GDP growth during the mid-2000s was due to loans to people with shoddy credit.

[Tad]

Plummeting stocks, rising unemployment, investment houses, once thought to be bastions of high finance, closing shop one after another, and a general feeling of alarm among the American people only support the inescapable fact that indeed, the US is facing an economic crisis such that has not been known since the Great Depression.