Nouriel Roubini’s firm just released a report with this grim title: “Total $3.6T Projected Loans and Securities Losses, $1.8T Of Which At U.S. Banks/Brokers: The Specter of Technical Insolvency“.

It doesn’t exactly roll off the tongue, but it’s the wording of it is fascinating: The Spectre of Technical Insolvency. Not long ago, reports warning of large-scale insolvencies were dismissed. Today people calmly digest them, then react according to how they’re positioned in the markets. Bears urgently gesture to their friends (who could care less), “look! it’s bad, reaaal bad!”. Bulls find some way to refute the analysis with numbers and assumptions more to their liking.

Meanwhile, technical traders shrug and resume charting, thinking “Oh, you foolish fundies. Don’t you understand that this is not an efficient market?“.

Enough nonsense, here are some interesting excerpts:

FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize. (emphasis mine)

That’s especially worrying, because Roubini’s earlier statements, which were among the bleakest around, turned out to be far too optimistic. It’s worth noting that he has recently erred on the side of caution when issuing negative reports. If the same happens this time, all bets are off.

In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

I think Roubini’s analysis is fantastic. But ideas he seems to favor, like “good-bank/bad-bank”, and “give them more capital, and keep it coming”, are ridiculous. Yes, he would probably execute the plans on much better and fairer terms than Bush’s boys did. I may be missing something.

It’s hard to endorse any ideas that reward incompetence and encourage inefficient markets. I think the band-aid approach is much more appropriate: get the pain over with quickly, let the corrupt and worthless institutions fail. Maybe the impact would be too much to handle, I don’t know… But the concept of having open, honest, and healthy banks just warms my heart. It’ll never happen, though.

Source:
RGE Monitor – need a subscription to view the whole article.