Saturday 6 December 2008

'Massive Destruction of Capital': Roubini Sees $3T in Bank Losses, More Bailouts

1 comment:

Guanyu said...

‘Massive Destruction of Capital’: Roubini Sees $3T in Bank Losses, More Bailouts

It’s gotten to the point where you can’t tell the bailout programs without a scorecard, so here goes (with a nod to Fox’s Brian Sullivan):

* TARP: Troubled Asset Relief Program. This is the Treasury’s big $700 billion ($850B including pork) program that has been used to prop up financial institutions.
* TAF: Term Auction Facility (or TAFfy). Program by which the Fed auctions funds to financial institutions — allowing them to use their toxic assets for collateral.
* TALF: Term Asset-Backed Lending Facility (or “son of Taffy”). Recently announced Fed program designed to help the market for student, auto and other consumer loans.
* CPFF: Commercial Paper Funding Facility. Buys commercial paper directly from corporations.
* AMLF: Asset-Backed Money Fund Lending Facility. Fed program designed to buy short-term paper (including commercial paper) to prevent money market funds from “breaking the buck.”
* TSLF: Term Securities Lending Facility. Fed program that lets banks swap bad mortgage and other debt from their books in exchange for Treasuries.
* SLF: Special Lending Facilities. Originally designed to loan money to fund JPMorgan’s purchase of Bear Stearns in March. Also used to back AIG’s balance sheet to avoid total collapse.
* PDCF: Primary Dealer Credit Facility. This is the Fed program that allowed broker/dealers and other non-banks to tap the Fed’s discount window (back when there were independent broker/dealers).

“Desperate times call for desperate policy actions,” says Nouriel Roubini, economics professor at NYU Stern School and chairman of RGE Monitor.

Roubini, who predicted the government would need to do many of the programs above long before they were announced, says there are “much more” bailouts and related programs ahead. “We are facing the risk of global deflation,” he says (as discussed in more detail here). “The risk is if [policymakers] do too little you end up in a serious depression.”

Although concerned there is “some government giveaway” happening, Roubini’s big worry is the TARP funds are not being dispersed quickly enough to recapitalize the banks, which he forecasts will ultimately suffer credit losses approaching $3 trillion. This is a “massive destruction of capital,” says the famously bearish economist. “If you don’t recapitalize the banks, the credit crunch will be much, much worse.”