IMF Joins List Of Those Saying Banks Need More Capital

Each time the IMF looks at the global banking industry, its pessimism grows. Its concerns have risen so sharply in the last four months that it now believes that major banks will have to raise tens of billions of more dollars to support their balance sheets. The agency is clever enough to point out that the money will not come from private equity operations or sovereign funds. No one will risk putting more money into the financial firms except for central banks and national treasuries.

In its April report, the IMF writes that the Fund estimates that potential writedowns, including about $1 trillion already taken, could be nearly $4.1 trillion on some $58 trillion of assets originated in the United States, Europe, and Japan. The sums still needed to be accounted for as losses are enough to knock the world off of its axis.

The IMF expects banks to take two-thirds of the writedowns with the balance coming at pension funds and other institutional pools of capital. For assets that were originated in the United States, the report estimates that writedowns will total about $2.7 trillion, up from the roughly $2.2 trillion projected in an interim report in January. The $500 million in additional deterioration has almost certainly not been accounted for in the TARP projections, one reason why Secretary Geithner is saying he may not take the money back from firms like Goldman Sachs (GS) ever though it has offered repayment.

On a bell-shaped curve of bank balance sheet expectations, the IMF would have to be considered at the radical fringe. Most financial firms are trying to convince their investors that the world is not so dark. Based on the trading in bank stocks, that point of view is not getting many takers.

Even if the international agency is only half right the crater that was created in bank financial statements last year is almost bound to grow, making the odds of an improvement is credit availability small and the need for government intervention almost certain. It also begs the question of where that government money will come from and the answer is surely the issuing of more debt. Japan has just announced that it will go to the capital markets for $109 billion. The forecasts of what the US Treasury will have to raise are becoming too rosy leaving the question of whether global debt demand will be severely tested.

Higher interest rates are on the way. The Treasury cannot ask for an endless stream of cash. Sometime soon, the rising risks are going to drive a need for better yields.

Douglas A. McIntyre