Friday, August 8, 2008

Refining $3 Trillion

My $3 trillion bank loss number is admittedly simplistic. But it has to be noted that it is turning out to be closer to the evolving truth than the experts’ estimates over the past year. There are things that could make banking losses greater than $3 trillion, and things than could make banking losses less than $3 trillion.

Things that Lower Losses
1. Individuals showing old-time character by honoring the agreement they made with the bank, despite that they are upside down in their home. Or perhaps they make a calculation that involves their credit rating.
2. The price recoveries in white and rural areas. These loans will be profitable for the banks as prices never dipped or have bottomed.

Things that Raise Losses
1. Administrative costs associated with processing foreclosures. These can potentially eliminate all of the bank’s value, yielding a 100% loss of the banks collateral, instead of the 30% in my simplistic model.
2. Fallout from related industries, specifically mentioning commercial real estate and credit cards.

This post concludes FOX News week.

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