TARP Isn’t Enough
By Elizabeth MacDonald
Banks will have to raise new capital in 2009, as a sharp increase in credit-rating downgrades on mortgage-related securities will lead to further stresses on bank capital, according to top banking analyst Meredith Whitney at Oppenheimer Equity Research.
“From July 2007 to date, over $5 tn worth of securities have been downgraded, but our concern here is that the pace of downgrades has only accelerated through 2008,” the Oppenheimer analyst wrote in a research note.
As a result, “capital ratios will be meaningfully lower in the fourth quarter (of 2008) versus post TARP pro forma levels,” she added.
In describing what Whitney calls the banks’ “Ring of Fire,” the analyst explains: “When a security is downgraded, a higher level of capital is required by banks to be held against that security.”