Banks Face $400 Billion More in Losses, JPMorgan Says (Update1)

By Jody Shenn April 20 (Bloomberg) -- Banks are likely to realize about $400 billion more in losses on soured assets, requiring further injections of government capital, JPMorgan Chase & Co. said. Banks will need to set aside about $215 billion more in reserves against their holdings of $2.1 trillion of U.S. home loans that haven’t been packaged into securities, mortgage-bond analysts led by Matthew Jozoff in New York wrote in a report dated April 17. A surge in defaults on subprime mortgages that began in 2006 escalated a U.S. housing slump, leading to a global economic downturn. Banks worldwide have taken writedowns and losses of $920 billion so far, compared with $900 billion of capital raised, the analysts wrote. “Given the amount of losses still to come, we believe the system will need more government capital,” the analysts wrote. “Healthier institutions may not need more and may try to raise capital from the private sector.” As of the fourth quarter, banks had set aside $85 billion in reserves for residential loans on their books under accounting rules that require allowances only for losses expected to be “realized in the next year or so,” according to the report. Losses from securities portfolios will slow because “they have already gone through large writedowns,” the analysts wrote. Losses worldwide at banks and others from toxic U.S. assets may reach $2.2 trillion, the International Monetary Fund said in a report Jan. 28, more than the $1.4 trillion it predicted in October. World growth will be 0.5 percent this year, the weakest postwar pace, the IMF said in a separate report that day. Private Markets The U.S. has pumped capital into banks through the $700 billion Troubled Asset Relief Program; the Treasury Department estimated last month that $134.5 billion of the TARP hadn’t yet been spent or committed. Obama administration officials signaled yesterday there may be no need to request more financial-rescue funds from Congress as several banks plan to return taxpayer money and others are pushed to tap private markets first. The remarks indicate the administration isn’t girding for a battle with lawmakers who have warned that a popular outcry against aiding Wall Street means approval of an expansion of the TARP would be a challenge. White House chief of staff Rahm Emanuel said in an interview on ABC’s “This Week” program that while he hadn’t seen results of so-called stress tests on the 19 biggest banks, he believed “we won’t” have to get more money. Stress Tests Lawrence Summers, the National Economic Council director, said on NBC’S “Meet the Press” that “the first resort for more capital is going to the private markets,” by issuing new equity or swapping some liabilities into stock that dilutes other stakeholders. The stress tests are scheduled for release May 4, with the Federal Reserve and other regulators aiming to publish the methodology behind the assessments on April 24. The exams aim to ensure that the 19 companies, including Citigroup Inc., Bank of America Corp., GMAC LLC and MetLife Inc., have enough capital to weather a deeper economic downturn. Since April 9, banks including New York-based Citigroup, Charlotte, North Carolina-based Bank of America, San Francisco- based Wells Fargo & Co. and New York-based JPMorgan have reported better-than-expected profits during the first quarter. Pretax, pre-provision earnings of an estimated $200 billion at the largest banks over the next two years will lessen their capital needs, according to the JPMorgan report.