There has been plenty of forecasting and anecdotal evidence that US money center banks will have more write-downs in coming quarters. Most of this data is deductive. The IMF has said the mortgage write-downs will top out at $1 trillion. Experts believe that credit card and auto loan defaults will spread to bank earnings.
A more solid indication of bank trouble is the rate at which they are borrowing money from the Fed.
According to Reuters, "Banks borrowed a record amount of funds from the Federal Reserve in the latest week as the year old credit crisis took a persistent toll." That figure hit $17.45 billion per day in the period.
Although the trend is not a perfect indication of what will happen to bank earnings in the current quarter, it is the best available proxy. If financial companies were earning their way out of the crisis, the Fed window would be quiet.
The extent to which bank earnings will fall is impossible to predict. If Fed borrowing is at record levels, Q3 numbers might well be worse than Q2. What follows from that is the likelihood that banks will need to sell more equity to improve their reserves and drive up dilution of their common shares.
What follows from that is that bank stockholders will lose more money.
Douglas A. McIntyre
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