BankWatch: Big Banks Face Financial Doomsday in 2012

Friday, June 4, 2010
By Paul Martin

By PALLAVI GOGOI
DailyFinance.com

The cost of borrowing funds for the largest American banks is going to skyrocket in the coming years — and that’s just the beginning of their troubles.

A confluence of factors are coming to a head: First, the credit ratings of large Wall Street banks like Goldman Sachs (GS), Morgan Stanley (MS), J.P. Morgan Chase (JPM) and Citigroup (C) are all under siege due to aspects of the financial reform bill, which was passed by the Senate last week. Second, that bill will restrict their lucrative derivatives and trading businesses, which is sure to put a crimp on their earnings. Finally, the vast amounts of government-backed cheap capital that these banks raised in the financial markets in 2009, will all have to be refinanced in 2012 at interest rates that could be as much as five times higher than those they got last year.

“Goldman Sachs alone has something like $21 billion of debt due then,” says Tim Backshall, chief strategist with Credit Derivatives Research. “The average yield on those is less then 1%, or 77 basis points, and will likely go up to as much as 4% and 5%.”

In fact, Goldman’s massive debt pales by comparison to the amounts raised by others last year under the government-backed programs: Citigroup raised $64 billion, Bank of America (BAC) $44 billion, J.P. Morgan Chase $39 billion, and Morgan Stanley (MS) $25 billion. And most of this debt is due 2012.

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