The chief executives at 10 large banks were all smiles last week as they repaid a total of $68 billion of Troubled Asset Relief Program money — but some on Wall Street feel they rushed too quickly to get the government off their backs.
Economists and analysts are predicting a slow economic recovery and rising unemployment will create a massive credit meltdown over the next couple of years that could whack banks with defaults that are twice the size of the TARP repayment.
Defaults linked to the $930 billion owed on US credit cards, along with the faltering commercial real estate market and the $2 trillion speculative corporate-debt sector are all heading higher, they said.
“The banks have been through the market losses — now its time for them to go through the credit losses,” said Diane Vazza, head of global fixed income research at Standard & Poor’s.
Despite the banks’ increased capital ratios, the credit losses predicted by the S&P executives could lead them back for more federal assistance.
David Wyss, S&P’s chief economist said banks should brace for a plastic meltdown as credit-card losses track the unemployment figures almost exactly. “Credit-card losses, on average, are equal to the unemployment rate plus about 5 percent,” he said, noting his estimates that the nationwide jobless rate could rise as high as 12.5 percent by 2011.
“If one more thing goes wrong, say oil goes over $100 a barrel, or the banks have to deal with another big hit like the commercial real-estate market dropping substantially, unemployment could continue to rise through 2011,” Wyss said.
Tania Azarchs, who covers the financial sector for S&P, agrees that the banks are facing a bleak future: “Regardless of how they are feeling now, and how the economy recovers, there are a lot more losses to come that the banks will have to realize,” she said.
Speculative-grade corporate bonds are already defaulting at a rate of 8.25 percent this year, way ahead of last year’s 3.4 percent. Azarchs forecasts, meanwhile, that the default rate will hit 14 percent by the end of the first quarter next year.
The final big hit the banks will have to take is set to come from the commercial real-estate market. Prices for commercial buildings are down by between 30 percent and 50 percent, according to real-estate research specialist Reis Inc. — while the number of transactions in the pipeline in the first quarter of the year were 89 percent lower than the market peak at the end of 2007.
Banks rushed to repay their TARP debt, in large part to get themselves out from under pay restrictions.
“They wanted to get out of TARP to prove they are strong enough to stand alone,” Azarchs said, “They were in a crisis of confidence. But now they are facing many new crises.”