Predictions for 2010

For anyone interested in risk analytics of the banking system, The Institutional Risk Analyst is a useful resource. Chris Whalen (a regular on my favorite Bloomberg podcasts with Tom Keene) is worth following in particular.

Today, the group released its high level predictions for 2010. They suggest:

1. We are officially in a “post real estate boom phase” and shedding exposure is a tactical necessity (Whitney Tilson at T2 Partners argues similar points and is one of smartest investors I know on the subject).
2. The US banking industry will continue to shrink but hit its peak loss rates during the upcoming year.
3. State budgets will continue to worsen and we will see further unwinding of government programs.
4. We’ve only scratched the surface in understanding the new quasi-fiscal roles our Federal Reserve has taken through crisis capital lending arrangements and quantitative easing. This debate will grow significantly in 2010.

I can’t find much to argue in any of their points and have already suggested some of my thoughts on Item #4.

Predictions for 2010: The Best is Yet to Come

December 21, 2009

As is our custom at the end of a year, we below provide our thoughts on the coming year and reflect on the year that was. We wish all of the readers of The IRA a very happy holiday and a safe and prosperous New Year.

And remember that the special rate for subscriptions to the past articles from The Institutional Risk Analyst expires 12/31/09 when we transition to a paid model for past commentaries. Makes a perfect stocking stuffer for that aspiring young student of American political economy.

The first issue we see in 2010 is “completing the transition into a new reality that the country has moved into a post real estate boom phase,” as IRA CEO Dennis Santiago wrote in his “Picking Nits” blog on December 8th (“Industry and Bankers: Chasing Quality”). He continued to describe the situation in the banking industry revealed in the Q3 2009 Bank Stress Index and supporting metrics:

“Shedding exposure is a tactical necessity. This means banks need to tend to their own health particularly with respect to the lingering cancer of losses from distressed real estate still in their bloodstreams. Projected real estate loan losses still to come are massive. The bulk of Option-ARM reset dates are in the still to come in 2010 and 2011 bucket. The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.”

The second issue related to the first point will be the peak of loss experience for some US banks as the credit cycle plays out during 2010. Some of the most trouble-looking institutions will actually start to improve, while other banks that during the past year or more have seemed to be paragons of virtue will finally, grudgingly be force to take their lumps. In a very real sense, some banks will be changing places in 2010 even as the worst of the credit crunch plays out in the real economy.

In any event, we expect to see the US banking industry continue to shrink in terms of assets and the number of FDIC-insured institutions as losses are taken and banks are resolved and sold. Dennis describes the position of the US banking industry as of Q3 2009 in Pickin Nits.

PIECE TRUNCATED – Get the rest at InstitutionalRiskAnalytics.com