Posted by Matt Purdue
Last week, Kenneth Rogoff, former IMF chief economist and Harvard professor, hit the news when he told a conference in Singapore that the worst of the credit crisis is yet to come, and that a large U.S. bank or banks is likely to fail. He sounded like another Cassandra (a la Nouriel Roubini), but his comments still have legs a week later. The smart people at Chase Cooper in the UK picked up on Rogoff’s warnings, speculating that Lehman could be on the brink.
A JP Morgan Chase analyst has forecast third-quarter writedowns of up to $4 billion for Lehman, and that doesn’t count any exposure the bank may have to Fannie Mae and Freddie Mac. Whether it’s Lehman or not, that firm and many like it have yet to give any clear indication of how much exposure they have to the mortgage giants. Overall, U.S. banks hold about $28 billion in common or preferred stock in Mae and Mac.
Of course, if the government must bail out Mae and Mac, those shares are likely to become worthless. That’s more bad news for banks, and could be the final straw for some. Of course, this is the same Ken Rogoff who wrote in July that the staggering global economy is still growing too fast, thus continuing to inflate global commodity prices. Without a gradual correction in the prices of commodities, Rogoff argues, we’re all in for “a bigger crash in the not-too-distant future.” So take his dire predictions in that vein, but watch Fannie Mae, Freddie Mac and your financial services clients very closely.
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