ANALYSIS:One famous financial figure expects 150 banks to collapse in the next 12 months, writes Proinsias O'Mahony.
DESPITE THE carnage in the financial sector, the big names in the world of finance continue to stress that a bottom is not yet in sight.
Arguing that the turmoil in the financial markets represents "the most serious financial crisis of our lifetime", George Soros said on Monday that the "incident" that has hit US mortgage providers Fannie Mae and Freddie Mac will not be the last of its kind.
Jim Rogers, Soros's former trading partner, was more blunt in his assessment of the effective government bailout of the two companies. "It ruins the Federal Reserve's balance sheet, and it makes the dollar more vulnerable, and it increases inflation. Other than that, good morning."
Dr Mark Faber is similarly pessimistic. Faber, who famously advised his clients to get out of the stock market prior to the Black Monday crash in 1987 and who predicted last August that US markets were about to enter a bear market, tends to be contrarian in his outlook but he's not touching out-of-favour banks.
"I think a lot of banks are already bankrupt," Faber wrote in a recent note to investors.
"I think the financial sector by and large has much larger problems than is perceived by the investment community."
Faber expects 150 banks to collapse in the next 12 months. That remains well below the failure levels between 1990 and 1992, when there were 834 bank failures. Worryingly for savers though, the number of uninsured deposits has doubled since then, representing 37 per cent of the $7 trillion on deposit.
Similar sentiments were yesterday uttered by Noriel Roubini, professor of economics at New York University, who stressed that "this is a systemic financial crisis" with "no end" in sight.
Roubini has earned a reputation as something of a bearish prophet, having slammed the "increasingly delusional" financial community last October when markets were hitting new highs.
One analyst who departed from October's sunny consensus was Oppenheimer's Meredith Whitney, who correctly predicted then that Citigroup would have to slash its dividend, and that the credit crisis was about to hammer financial stocks. Yesterday Whitney said mortgage related assets remained priced too high on the balance sheets of US banks, and financials would keep falling until asset prices "get real".
He said shareholders in Wachovia, America's fourth-largest bank, faced a "bleak" future, with the bank's earnings outlook having "dramatically diminished".
Viewpoints that were once regarded as apocalyptic have become mainstream as the financial turmoil continues. On Monday Goldman Sachs widened its loss estimates for Fannie Mae and Freddie Mac to $32 billion and $21 billion respectively, saying the most recent mortgage data "suggest deterioration even beyond our bear expectations".
Global writedowns now exceed $416 billion, according to Bloomberg data.
Incredibly, if hedge fund Bridgewater Associates is correct, that's just a fraction of what the end figure is likely to be.
A confidential study by the firm was leaked last week to a Swiss newspaper. Its estimate for total credit-related losses; $1.6 trillion the highest so far.
"We are facing an avalanche of bad assets," the study reportedly says. It estimates that US banks alone will need to raise $400 billion to plug holes in their balance sheets. However, the financial industry does not have enough healthy institutions to inject such capital.
Assuming the banks cannot raise the necessary capital, they will be forced to sell a "mountain of distressed assets" which is "enormous in comparison with any conceivable demand". This could lead to further weakening of bank share prices.
While the study has gone largely unnoticed by the mainstream media, it is said to be causing a stir in professional circles. Bridgewater is the second-largest hedge fund in the world, and its analyses are said to be valued by central banks and other institutions.
