Last night, we posted a VoxEU article on the unraveling of Iceland that (among other things) said that the problem was that the financial sector had gotten so large that the government could not possibly rescue it. The author made a comment in passing that indicated he thought this was not a problem shared by other European countries; several alert readers said that both Switzerland and Germany have disproportionately large financial sectors.
And the numbers needed for rescues just keep getting bigger and bigger. The latest estimate comes via Reuters. And this is just for a US rescue. This does not count the cost of bank salvage operations in other countries, nor does it allow for the cost to the US of lending assistance (unlimited dollar swap lines, rescuing AIG, which has among other things, provided guarantees to European banks that allowed them to circumvent minimum capital requirements):
The U.S. government’s $700 billion bailout fund is unlikely to be enough, with the financial system needing more than $1 trillion to get through the crisis, two of Wall Street’s top dealmakers said on Wednesday.
The global crisis appears to have passed its most intense phase, seen around the time of the collapse of Lehman Brothers Holdings Inc in September, but financial institutions still face losses in the fourth quarter and early next year as the economy and credit quality deteriorate, said Gary Parr, deputy chairman of investment bank Lazard Ltd.
Parr was speaking on a panel along with H. Rodgin Cohen, chairman of law firm Sullivan & Cromwell, at The Deal’s M&A Outlook 2009 conference in New York.
“You saw the problems of the financial services industry start to play over into the broader economy,” Cohen said. “Now, we are going to see the reverse trend, with the broader problems in the broader economy moving back into the financial services industry.”
Parr said the financial system had run out of a cushion to deal with further losses.
“The government’s $700 (billion) is not enough. It’s going to be over a trillion,” he said. “It has to come from somewhere. And indeed in the last three months around the world, the primary source of capital for the financial services industry was the government.”
Cohen added that private equity could be another potential source of capital — although relatively smaller — for the sector, but an unwillingness to change the approach to letting that happen had held buyout shops back…
Cohen said that among the developments of the last few months, the failure of Lehman was “of all the events, probably the single most significant.”
“This was the first time all creditors were going to be at risk in any financial services company,” Cohen said….
Over the coming months, the priority of financial institutions should be to start working through some issues, such as finding ways of funding, recapitalization and strengthening balance sheets, Parr said.
“I frankly don’t think strategic positioning is the priority for major financial institutions,” Parr said. “The priority of the next 12-18 months is to live to fight another day.”