Monday, January 14, 2008
the severity of subprime loss beat Great Depression
--Banks haven't lost this much money, in relative terms,since the Great Depression, said Richard Sylla, a professor ofthe history of financial institutions and markets at New YorkUniversity's Stern School of Business. --U.S. banks, insurers and real-estate companies earned about $1 billion a year during the 1920s until the stock marketcrash of October 1929. The industry lost about $500 million in1930, $1.7 billion in 1931, and $2 billion in 1932, Sylla said. --Within days of being inaugurated in March 1933, President Franklin Roosevelt issued an emergency order declaring a ``bankholiday'' to stem a run on deposits. About 7,000 banks, or a third of the U.S. total, failed and financial companies didn't return to profitability until 1936, Sylla said. --Last year's collapse of the subprime mortgage market was worse than the third-world debt crisis of the early 1980s, when soaring oil prices and surging interest rates pushed Mexico and other developing countries into default on their loans, said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, and author of ``100 Years of Wall Street.'' --Citigroup, Bank of America and Merrill probably wereprofitable in 2007, earning about $23 billion on a combinedbasis, even after the second-half writedowns, according toBloomberg data. The banks earned about $50 billion in 2006. They may earn $44.8 billion this year, analyst surveys byBloomberg show. --Even with the Abu Dhabi investment, Citigroup's so-calledTier 1 capital ratio, which regulators monitor to assess banks'ability to withstand loan losses, may fall to 7 percent by theend of this year, he estimated. While above the 6 percent neededto maintain its ``well-capitalized'' status from federalregulators, the capital ratio is below Citigroup's own targetof 7.5 percent. Bank of America's Tier 1 ratio fell to 8.22 percent in thethird quarter, from 8.52 percent in the second quarter and 8.48percent a year earlier. JPMorgan's ratio was 8.4 percent in thethird quarter, down from 8.6 percent a year earlier. -- The resulting tightfistedness at the banks may help pushthe U.S. economy toward recession, RCM's Compton said. In the third quarter, less than a tenth of U.S. bank loan officers witnessed ``substantially'' higher demand for commercial loans,down from more than 50 percent in the second quarter of 2005,CreditSights reported, citing data from the Federal Reserve. -- The default rate on U.S. junk-grade corporate loans mayreach 2 percent to 3 percent this year, compared with about 0.9percent in 2007, according to Bank of America's Rosenberg.