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NEW YORK (Reuters) - U.S. corporate debt default rates are expected to hit "unprecedented" levels in 2009, even though the economy may be past the halfway mark of the U.S. recession, according to a forecast unveiled on Monday at the Reuters Restructuring Summit.
"There is a lot of pain left -- we are only just half way through the 600 or so defaults in this cycle," said Phil Kleweno, a partner at Bain's corporate renewal group.
More Help for Financial Institutions
The Treasury Department has been working behind the scenes with private firms to set up investment funds to buy the toxic assets. The funds would be a combination of public and private money. The private firms would then have the opportunity to buy the assets at a very low price in hopes that they turn a profit down the road.
The Treasury Department will initially contribute $2.5 billion in matching contributions to the fund. The private firms entering the fund would then be allowed to borrow another $5 billion in the form of leverage, The Post reports.
The program could grow to as large as $40 billion, according to The Post.
That, however, may not be nearly enough to solve the problem. According to the TARP Congressional Oversight Panel, there is $657 billion worth of toxic assets circulating in the financial markets currently.
The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages.
From this we can develop a "cocktail napkin" view of the losses to be taken in home mortgages for single-family homes (remember, this does not include condos, apartment buildings and similar "commercial" paper.)
$200,000 X 40% = $80,000 loss per foreclosure.
87.5 million homes with mortgages X 12.42% = 10,867,500 foreclosures.
or $869 billion in losses remaining in single-family mortgages alone.
What if the average outstanding is higher and negative equity greater than 20% (which is likely)? Losses will almost certainly be well north of a trillion dollars.
The entire banking system and likely The Fed, given the quantity of Fannie and Freddie paper it has been and is "eating", is insolvent. These facts are why the government is lying - they're well-aware of the near-zero cure rates and know that these facts mean that the banking industry has nowhere near sufficient capital to withstand these losses without folding like a paper cup getting stomped on by an elephant.
(Remember that these numbers do not include any commercial real estate losses and we have found that banks are frequently over-stating their claimed values for these loans by 50% or more - as was seen with Colonial.)
It gets better. The FDIC has a negative balance both in its fund balance and the reserve ratio projected for the end of the quarter, which is, big surprise, tomorrow. Oh, and there is this pesky problem that the FDIC has - contrary to its mandate - been issuing bond guarantees for banks, so if and when that banking insolvency is recognized the FDIC will implode into a gravity well also, since it is on the hook for the entire deficiency of those bonds that were issued with its "guarantee" should they default.
Care to argue with the math folks?