April 08, 2009

Have we reached the bottom yet? That's a question that people ask me from time to time. I haven't got an answer yet, but today I have some numbers that may give us an idea. And the preliminary verdict is: No! Why? Because the commercial banking industry in the U.S. is likely to be bankrupt -- by which I mean its liabilities could exceed its assets -- as we approach the bottom.Just how bad will it get? It could see 41% of its core capital wiped out by loan losses alone.

And when you take into account all the toxic waste and derivatives on the banks' books -- its capital looks mighty thin.To understand how I reached this conclusion -- consider that the banking industry has $6.7 trillion worth of loans and $1.2 trillion in equity capital. During the Great Depression, loan losses peaked in 1934 at 3.4% of loans. Banking analyst Mike Mayo believes that this figure could be far worse this time around -- hitting 5.5% in 2010.