Biblical version of seven deadly sins: lust, gluttony, greed, sloth, wrath, envy and pride

Higher Structural Risk The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators. To a degree, each reflects a way that banks tried to compensate for lower natural rates of growth by taking more risk. The effect was to front-load earnings only to have back-ended costs, the brunt which is getting felt today. The consequences of this risk, while not new, seem only midstream and have more to go. Cyclical pressures We expect loan losses to increase from 2% to 3.5% by year-end 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial. Pre-tax, pre-provision profits should get hurt more than in the past given a greater portion of market sensitive fees, higher deposit insurance, and fall-out from a higher risk securities portfolio, as well as a historically high starting level of consumer debt. Most of our estimates are below consensus. Government actions are a Catch-22 The government can go easy on the banks but, if so, would leave many of the toxic assets on balance sheet (at least as it relates to loans vs. securities). Alternatively, overly tough actions will trigger the need for large capital raises by the banks. Relaxation of mark-to-market accounting rules impacts balance sheets by only one-quarter to one-third or less and, where it could impact, reflects a potential artificial accounting-induced capital injection that does not change the economics.