The BBC reports on the latest subprime writedown at a major bank. The conventional wisdom is that most of the subprime related credit losses that have to be taken already have been. Going forward, a larger problem for bank net income will likely be increasing provisions for loan losses, as opposed to straight writedowns on holdings gone South. Here’s a list of writedowns to date for major banks worldwide:
….is to sell assets. Citigroup has cut its dividend, raised billions from new stock offerings and preferred placements to foreign wealth funds, but they’re likely sitting on billions more of credit losses, depending on how the residential and commercial real estate markets perform. And credit losses will continue to be a hit to earnings (and capital) as the bank is forced to maintain higher than average credit loss provisions over the next few years.
For Central Banking junkies out there, Grep Ip is the journalist you need to read. He covers all things Fed for the WSJ. Yesterday he published a fascinating article about the Fed’s request to start paying interest on reserves held in its vaults. This would give the Fed yet more power to control the money supply, and would help avoid the consequence of pushing the Federal Funds rate toward 0% if they’re forced to act more aggressively to pump liquidity into the markets (see Economic Busts: Japan, circa the last 18 years). It would probably also discourage banks from hiding assets in off balance sheet vehicles. The more assets banks have ON the balance sheet, the more 0% interest reserves they must park at the Fed.
Two weeks ago, I said it. Now commentators are saying the same thing on the WSJ op-ed page and on SmartMoney.com (snippets below): house PRICES may still be at historical highs, but house AFFORDABILITY is not, which may mean prices don’t have to fall any farther. The crucial forgotten variable is mortgage rates.