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Extremely scary math - U.S. banks are faced with losses of up to $1.375 trillion - close to their total capital
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 292 days ago (www.truthout.org). Views: 317
Tags: housing bubble credit bubble credit crisis federal reserve |
| Related Tags: economics wall street banks gold recession stock market inflation |
Mortgage-backed securities in circulation total $11,000 billion. US real estate is overvalued by 20 to 30 percent. If a quarter of the wealth of US households vaporizes, that represents $2,750 billion worth of debt that will probably not be repaid and will become losses for the financial system.
The total capitalization of United States' banks, government agencies and savings banks amounts to $1,681 billion.
Their direct exposure to mortgage securities totals $5,591 billion, or half of the outstanding amount. They are, consequently, potentially faced with write-downs of up to $1,375 billion - close to their total capital.
These figures do not take into account possible losses in other credit sectors: consumption, auto loans and commercial real estate.
The central banks, lenders of last resort, can help healthy establishments meet a strained liquidity situation by supplying an interim loan. But the situation in which the financial system finds itself does not result from a lack of liquidity. It's an insolvency - that is, bankruptcy - crisis.
The market will only recover stability and confidence on three conditions: That the insolvent enterprises disappear and the bad paper they are holding along with them; that the companies that can survive receive a capital infusion to offset their losses; and that falling real estate assessments reach true prices, at the same time restoring a reliable value to the securities backed by those assets.
That's a great deal of ground to cover. Especially when the tool for intervention - the central bank - is absolutely not adapted to the mission of the day: saving Wall Street.
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