The price of bank stocks is some indication that Wall St. believes that the industry is coming out of the woods. But, even if toxic assets can be sold off of bank books under the Treasury’s new public/private investment plan, there are still landmines sitting in the path of improving earnings.
Among the problems still facing banks are consumer credit defaults and LBO loans. But, as The Wall Street Journal points out, the greatest danger may be commercial real estate loans.
According to the paper, “Some experts say it now looks as if the current commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession.” Over the next two or three quarters, banks will start recognizing those losses which could push the recovery of financial firm earnings out another year or more. And, just as bad, it may force banks to raise more capital in a market where many institutions were burned by the round of money they put into the companies a year ago.
Douglas A. McIntyre
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