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US financial system still needs at least $1 trillion

(Agencies)
Updated: 2008-11-20 15:23

The US financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said.

Eight financial companies, Citigroup Inc, Morgan Stanley, Goldman Sachs Group Inc, Wells Fargo & Co, JPMorgan Chase & Co, American International Group Inc, Bank of America Corp and GE Financial, are in greatest need of capital, he said.

"Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis," he said in a note dated November 19.

Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4 percent, the analyst said in his note to clients.

Miller said these institutions need somewhere between $1 trillion and $1.2trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.

He said the US government must declare a bank-dividend holiday and convert the TARP funding into pure tangible common equity to get the credit markets functioning.

Also, the government should support a centralized CDS clearinghouse that backstops all transactions and banks should be forced to raise additional capital above the Treasury's capital injections, he said.

Miller said it could take three to five years for the financial system to fix itself completely, with adequate capital and appropriately priced interest rate and credit risk.