New, More Severe Stress on Banks

Chrysler bankruptcy; GM deathwatch: Chapter 11 at Chrysler will not only deliver more losses to many banks, but it also hastens the failure of General Motors and related companies, creating a whole new crop of toxic, hard-to-sell assets at the nation’s largest banks.

Unemployment is still rising: Even before the impact of mass layoffs at Chrysler and GM, this week’s numbers show no end to the rise in joblessness. The Fed’s “worse case” scenario in its stress test — of 8.9 percent unemployment for 2009 — could be reached far sooner than previously expected.

Historic decline in the U.S. economy is still unfolding: This week’s announcement that the U.S. economy contracted at the annual rate of 6.1 percent in the first quarter digs a deeper hole in the government’s “worse case” GDP assumption of 3.3 percent; it will take a miracle to achieve a GDP decline of less than 4 percent.

The real estate decline is continuing: On Monday, the S&P Case Schiller index showed that home prices are still falling, down 18.8 percent in a year. Beginning this month, payments on teaser-rate ARMs will be start adjusting higher in large quantities, boosting defaults and foreclosures. Meanwhile, the decline in commercial real estate continues to accelerate as key default rates surge. As a result, regional banks, overloaded with commercial real estate loans, are suffering far greater stress than most expected.