Capital Gold Group Report: Is Credit Crisis Only 'Halfway Through'?
(2008-08-18 12:48:43) - The
year-old financial crisis is not only far from over but could actually
get much worse, bringing more big shocks to the U.S. economy and stock
market, a host of experts said Monday. Among the
predictions: the failure of some of the country's biggest financial
institutions, the collapse of 1,000 banks and a possible government
bailout of mortgage giants Fannie Mae and Freddie Mac .
Kotok thinks Merrill Lynch , Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities.
"I think the
financial problem is halfway through the cycle," David Kotok, chairman
and chief investment officer from Cumberland Advisors, told CNBC.
"There's another shoe to drop ahead of us and it could be more severe."
Kotok thinks Merrill Lynch , Wachovia and other financial companies are at risk of failure as the cost of raising capital soars at a time when the banks need to pay settlements over auction rate securities.
The cash companies'
need to shore up bad investments "is up to about $50 billion and will
probably top $100 billion before it's over," he added.
"Those firms --
Merrill, Wachovia and others -- are going to have to raise that cash,"
he said. "They are either going to have to get it from the Federal
Reserve, through some direct or indirect means, which means more
leverage, more Fed balance sheet, more regular oversight, or they're
going to have to get it in the capital markets."
Meanwhile,
billionaire investor Wilbur Ross told "Squawk Box" that a thousand
banks could fail before the financial crisis is over.
"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot."
"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot."
And the impact on the credit crunch could be severe, he added.
"Each dollar of
bank equity that gets lost takes out about 12 or 13 dollars of loans so
there's a tremendous magnifier effect of small changes in bank equity."
His comments were
echoed by Morgan Stanley co-President Walid Chammah, who told a German
newspaper that the financial crisis will probably not end until next
year or even 2010.
"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said.
And a Barron's
article over the weekend said the U.S. Treasury is growing increasingly
likely to recapitalize Fannie Mae and Freddie Mac in the months ahead
on the taxpayer's dime.
The weekly
financial newspaper said that such a move could wipe out existing
holders of the agencies' common stock, with preferred shareholders and
even holders of the two entities' $19 billion of subordinated debt also
suffering losses.
On CNBC, Kotok agreed that Fannie and Freddie are in jeopardy.
"Were it not for
government aid and backing they would have already had to declare
bankruptcy. Their portfolios have problems," he said.
"You see one brick
at a time in the financial problem area become addressed. Here's Lehman
trying to divest real estate holdings in a falling real estate market,"
he added.
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