Turning now to the Real Estate/Mortgage situation, it is clear to me that there are more shoes left to fall than Imelda Marco's wardrobe in an earthquake. Bank after bank is stepping into the confessional to tell how many billions they have lost, but most still have a significant amount of mark-to-myth assets on their balance sheets. So far, the damage has been limited to residential real estate, but that may change soon.
Delinquency rates on commercial mortgages have started to follow residential rates upward. In fact, in the third quarter, the delinquency rate on commercial mortgages passed the highest level of the 2001 recession. While it is very unlikely that they will get back up to the levels seen during the S&L bust of the early 1990's, mortgage problems on the commercial side are just about the last thing the banking system needs right now.
Banks have also been managing to hide much of there activities through Special Investment Vehicles (or SIV's), highly leveraged (usually at 14:1) off balance sheet entities that have been borrowing short and lending long. The big European bank HSBC (HBC) recently announced that it would have to bring its SIV's back onto its balance sheet. While this does not immediately cause any losses, it simply adds billions to both the asset and the liability side of the balance sheet, and it does mess up the capital ratios.
This will mean that it has less capital relative to the size of its balance sheet, and this will constrict its ability to make new loans. There has been an attempt, supported by the Treasury, by the three largest U.S. banks -- Citi (C), J.P. Morgan (JPM) and Bank of America (BAC) -- to create a bailout fund for their SIV's so that they will not have to put them on their balance sheets. However, the super SIV proposal has not gathered much momentum and will probably not come about. The capital ratios of the big banks are already under stress, and they will be under pressure to either raise more capital -- i.e. the Citi deal with Abu Dhabi at very expensive rates -- or shrink their balance sheets.
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