October 10, 2009

How banks will get customers to cover a round of big losses

John Dizard:
This, they toss off with the certainty of wine-fuelled genius, also explains the rise in the gold price.

Actually, I do not think that is how the bank risk paradox will play out.

There are going to be much larger write-offs and reserves taken at all the big banks, with the peak in reported bad news probably coming next year. However, the taxpayer will not be asked for more capital, and the Federal Reserve and Treasury will gradually dismantle the temporary support structures, just as they say.

How is this possible? Because the public will pay through usury, not taxation. There is a big difference, of course. Usury is less visible, and you cannot effectively vote against it.

Blood will flow, but it will do so not as a catastrophic bath for the banks, but as a gradual transfusion to them from their customers.

There will be headline risk for the banks' management and public securities, which is why I think that their CDS protection is too cheap at the moment.

One source of headline risk is the spectre of Federal Government reform of the financial system. God knows there is a good case to be made for de-cartelising the industry, but that is not going to happen.
Bank spreads are at record levels. Their cost of funds is nearly 0, while they lend it out at 4.99% or (much) greater. Plus, the fees. Posted by James Zellmer at October 10, 2009 10:09 PM | Subscribe to this site via RSS:
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