Banking Losses Telling!

Bank of America posts massive $1.79 billion loss in last three months of 2008, slashes dividends and accepts $138 billion emergency lifeline. This was its first loss in 17 years. Citigroup reports total losses of $18.7 billion in 2008 and 44% of the losses ($8.29 billion) attributed to the fourth quarter alone. This was its fifth straight multi-billion dollar quarterly loss.

In short, new phase of bank crisis is beginning to show with soaring unemployment, plunging stocks, cancelled dividends and sinking investment income ahead. This essentially suggests that the worst of the carnage in the US banking system is yet over despite the US$$350 billion in TARP funds Washington already spent to save the big banks. After all, Obama's advisers are getting their forecasts right and they have been freely admitted that they see an increasingly grave banking crisis beginning to unfold.

The stock market had a nervous breakdown — with stocks plunging as much as 1,000 points in a single trading session and the Dow crashing by nearly a third in less than 30 days.

I am always fascinated with black holes. The idea that you could have an area of space so massive, so dense that it could suck in and absorb anything that got too close — even light — seemed ludicrous. They're real…and they keep popping up throughout the financial sector.

Another possible bomb-shell could possibly come from the Federal Home Loan Banks (FHLBs) – the second biggest borrower after the federal government. Unless you follow the banking industry closely, you probably haven't heard of the Federal Home Loan Banks. FHLBs are vitally important as a source of funding for U.S. banks both large and small. FHLBs sell debt into the capital markets to raise money, using their AAA ratings to borrow cheaply. They use that money to make advances to banks that are members of the system and take collateral in exchange — often mortgages or mortgage-backed securities. The FHLBs own billions and billions of dollars worth of mortgage backed securities. Those securities have plunged in value. So just like their banking customers, FHLBs are facing potentially huge write-downs on their portfolios.

And that's what is stressing the system. Moody's recently warned that eight out of the 12 FHLBs could ultimately face capital problems. They collectively have roughly $1.25 trillion — with a "T" — in debt outstanding. Now, we're looking into the maw of yet another gigantic black hole!

If this is not handled properly, crisis could easily be spread across insurance industry as surplus cushions are eroding fast as well as pension funds. The consulting firm Mercer recently estimated that the pension funds of big U.S. companies are under-funded to the tune of $409 billion! At the end of 2007, they were running a $60 billion surplus. That huge swing could drive up corporate borrowing costs and drive down corporate earnings.