Banking system insolvent, top US economist warns
US financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is "effectively insolvent," said New York University Professor Nouriel Roubini, who predicted last year's economic crisis.
"I've found that credit losses could peak at a level of $3.6tn for US institutions, half of them by banks and broker dealers," Roubini said at a conference in Dubai yesterday.
"If that's true, it means the US banking system is effectively insolvent because it starts with a capital of $1.4tn. This is a systemic banking crisis."
Losses and writedowns at financial companies worldwide have risen to more than $1tn since the US subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg.
President Barack Obama will have to use as much as $1tn of public funds to shore up the capitalisation of the banking sector, following the $350bn injection by the Bush administration, said Roubini. Congress last year approved a $700bn rescue fund, of which half remains to be disbursed.
Bank of America, the largest US bank by assets, posted a quarterly loss of $1.79bn last week, its first since 1991, and received $138bn in emergency government funds. Citigroup posted an $8.29bn fourth-quarter loss, completing its worst year, and plans to split in two under boss Vikram Pandit's plan to rebuild a capital base eroded by the credit crisis.
"The problems of Citi, Bank of America and others suggest the system is bankrupt," Roubini said. "In Europe, it's the same thing."
Stocks in Europe, Canada and Brazil dropped yesterday on speculation that government efforts to shore up the financial industry will fail to stem the deepening global recession.
The UK's RBS said it expects to post a loss of as much as £28bn for 2008 and the government got ready to raise its stake in the lender.
Oil prices will trade between $30 and $40 a barrel all year, Roubini predicted.
"I see commodities falling overall another 15-20pc ," Roubini said. "This outlook for commodity prices is beneficial for oil importers, it's going to imply that economic recovery might occur faster, but for oil exporters this will be very negative."