ADD $100 OIL to billions in bank write-offs and it should come as no surprise that the word “recession” is being heard with increased frequency. As is the view that circumstances have combined to neuter the Fed, making it powerless to use its monetary policy weapon to prevent a downturn.
It’s not the write-offs so much as the inability of the chiefs of the major banks to come close to estimating the magnitude of the problem. In “Evita” Juan Peron complains that “The knives are out, would-be presidents are all about.” That about describes what is going on in the board rooms of major financial institutions. Stan O’Neill might have survived at Merrill Lynch, and Charles O. (Chuck) Prince III at Citigroup, if their first public estimates of the extent of their firms’ exposure to losses from subprime and related lending had been correct. Or almost correct. It turns out that original reports were massive understatements, leading the boards of these institutions to doubt that the CEOs were in control of events, and the markets to believe that enough shoes to fill Imelda Marcos’ closets have yet to drop. Morgan Stanley is less exposed–estimates are in the $6 billion range, which is small by the standards of Merrill’s $8 billion and Citigroup’s $11 billion (going on $13 billion according to CreditSights Inc.), but enough so that CEO John Mack might just be wondering if he will be able to negotiate a golden goodbye as generous as those pocketed by O’Neill and Prince.
Julian Jessup, chief international economist at Capital Economics expects to see more heads roll. “It looks like it will require a change of management for banks to come clean and admit the full scale of their losses,” he said.