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Bailout Nation: More Govt. Control of JPMorgan, Citi, BofA Coming

Posted Oct 20, 2008 11:32am EDT by Aaron Task in Investing, Recession, Banking
Related: JPM, C, BAC, XLF, WFC, AIG, FNM

Rather than resolving the crisis, the government's plan to inject capital into big banks is "merely the appetizer and soup course" in what will ultimate be a multi-course meal, says Christopher Whalen, managing director at Institutional Risk Analytics.

So what does Whalen see as the main course? Greater government control, if not outright ownership, of the nation's biggest banks, including:

  • Citigroup, which Whalen says is the "riskiest" of the group because of its exposure to consumer loans.
  • Bank of America, which faces more Countrywide-related litigation and keeps more of its loans in house, meaning it has "whole loan" risk.
  • JPMorgan, which is heavily exposed to potential defaults by businesses and is what Whalen calls an "over-the-counter derivatives exchange with a bank attached."

Whalen, lauded for forecasting the banking crisis when most others were sanguine, believes the U.S. banking system is going to face $250 billion to $300 billion in additional loan losses in the coming 6 to 9 months. In anticipation of such heavy losses, banks are now diverting capital into loan loss reserves rather than seeking to make new loans.

So when policymakers and politicians say the taxpayer monies injected into the banks is going to be used to make loans, "they are lying to us," Whalen says, using the kind of candor others are afraid of or can't afford.

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