Oppenheimer & Co. analyst Meredith Whitney warned Wednesday that the federal government’s $700 billion Troubled Asset Relief Program will not be enough to keep banks from needing additional capital this year.
The report echoes ideas laid out in Ms. Whitney’s past reports, which purport that credit-rating downgrades on mortgage-related securities are leading to further stresses on companies’ capital. To date, more than $5 trillion in mortgage-related securities have been downgraded, but Ms. Whitney said more downgrades lie ahead.
“There is an undeniable correlation between downgrades and increased capital demands by the banks. What continues to confound us is why we are the only ones talking about it,” she wrote in the note. “As fundamentals continue to devolve, more voids will be created in banks’ core capital positions.”
Credit rating agencies continue to downgrade mortgage-backed securities as the housing market worsens, which forces banks to hold a higher level of capital to those securities. According to the report, the July 2007 collapse of two Bear Stearns hedge funds corresponded with the first of such downgrades. Some $16 billion in securities were downgraded that month, but Ms. Whitney warns the fourth quarter of 2008 will prove far worse, with an average of $740 billion in securities downgraded each month.
She estimates those figures will more or less drain the approximately $390 billion in TARP money that has been injected into banks so far.
Though some analysts are touting banks’ fire-sale share prices, Ms. Whitney is not the only one sounding an alarm. Sandler O’Neill and Partners analyst Jeff Harte on Tuesday said he expects J.P. Morgan Chase & Co. to lose 10 cents per share in the fourth quarter, down from a previous forecast of earnings of 16 cents per share. Mr. Harte, who has a “hold” rating on the bank, cited capital losses “in the investment bank stemming from dramatic intra-quarter price declines,” specifically losses related to leveraged loans and mortgages. Shares of J.P. Morgan were down 5.7% at $28.19 in afternoon trading.
J.P. Morgan Chief Executive Jamie Dimon warned last month that the bank had a “terrible” November and December, and said it could be hard hit by an estimated 20% additional drop in housing prices. The company reports fourth-quarter results on Jan. 21.
Ms. Whitney’s report also comes one day after Bank of America Corp. Chief Executive Kenneth Lewis said the company’s 2008 results will be below forecasts. Standard & Poor’s analyst Stuart Plesser warned Wednesday that Bank of America may be forced to cut its dividend or raise additional capital.