Higher Unemployment Could Bring More Trouble For Banks

Unemployment hit 9.8% last month, and most analysts consider it all but guaranteed that it will exceed 10% by the end of the year. The following excerpt from Charles Gasparino’s column yesterday shows how a rising unemployment rate could cause another banking crisis:

[Banks are] still holding trillions of dollars in ailing mortgage loans and commercial-real-estate debt that they have yet to fully write down. They’re hoping they won’t have to — but continued joblessness is squeezing those portfolios.

The banks will tell you that they’ve written down a good chunk of their consumer loans. But the problem, according to banking analysts like Mike Mayo, becomes acute if unemployment passes 10% and nears 11%.

That’s the point, according to many economic models, that American consumers start defaulting on loans in such a way that trillions of dollars in consumer-related loans and debt that haven’t been written down start to implode.

And that doesn’t account for the trillions in commercial-real-estate loans and bonds that have yet to take any significant hit at all — but (most analysts predict) will be crashing in the months ahead even if unemployment stabilizes at 10%.

Bottom line: If unemployment goes higher than 10%, the banks’ numbers get even worse. As losses begin to mount, the big banks may well find themselves back begging the government for more bailout money.

As one major Wall Street CEO told me: “If the consumer comes back, the banks will be safe — but if the consumer begins to implode, so will the banks.”

But will unemployment head toward 11%? Well, former Fed Chairman Alan Greenspan (whose lax monetary policy helped lead us into the financial crisis) warned last week that America should brace for it to cross the 10% level.

Prominent banking analyst Meredith Whitney, who all but predicted the banking crisis, recently laid out why unemployment is likely to keep rising: For all the talk of recovery, banks are cutting back on loans to small businesses, which make up nearly half of the country’s workforce and a massive chunk of the GDP — close to 40%.

Of course, President Obama and the stock market might be right — unemployment isn’t climbing as fast, so jobs will start coming back as business profits return. Problem is, President Herbert Hoover said just about the same thing back in 1932.

As the following chart from Econoday shows, the recent trends of rising unemployment and falling average hourly earnings aren’t encouraging:

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