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Concerns are growing among economists and analysts that those projections may be too optimistic.
As a result, more thought is being given to how rising unemployment could further wound loan
portfolios, how many banks would be able to withstand a rate that exceeds the generally accepted
mark and whether the government would need to revisit its stress tests.
A great amount of uncertainty clouds the forecast, especially over how this year's stimulus package
will affect recovery and employment. In a July survey of buy-side analysts by Friedman, Billings,
Ramsey Group Inc., more than half the 191 participants forecast a peak rate of 11%. Though the
Blue Chip Economic Forecast still hovers around 10%, more economists are ratcheting up their
numbers to 11% or more.
"My view is that we may have higher unemployment than 10%," said Dimitri B. Papadimitriou,
president of the Jerome Levy Economics Institute at Bard College. "A higher unemployment rate
would certainly affect banks' earnings dramatically," he said, though the impact of the stimulus
package remains a key wild card.
The most pessimistic observers note that unemployment reached 9.5% in June and that it is likely to
inch higher again this month, to the highest level since 1983. The Midwest and West regions already
have topped 10% unemployment, as have 15 states, according to June data from the Bureau of
Paul Miller Jr., an analyst at FBR, wrote in a recent note to clients that he expects consumer and
commercial loan losses to rise largely in step with the unemployment rate. If unemployment were to
reach 12%, he forecasts that credit losses at several big banks could rise 25% to 67%, compared
with losses off a 10% rate, depending on the bank and asset mix.
Michael Mayo, an analyst at Calyon Securities Inc., pressed Bank of America executives during their second-quarter conference call on what the impact might be if unemployment hit 11.5%, which is the mark being touted by Calyon's chief economist.
A continued rise in unemployment "clearly signals a broader weakness in the economy and
continued weakness in consumer spending," responded Joe Price, B of A's chief financial officer. "I
don't have a pinpoint answer for you as much as it would be additional costs that we would have to
absorb, probably most pertinently on the consumer side. But that additional weakness would [also]
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James Dimon, the chairman and CEO of JPMorgan Chase & Co., expressed that view during the New York company's earnings call. "Once unemployment levels off, you may see that number [of chargeoffs and reserves] actually start to come down a little bit," he said. "We don't know that, but there are good reasons to believe that."
Higher unemployment could also hurt capital levels, notably for the 19 big banks that were stress- tested in May. The most adverse scenario under the test relied on a peak unemployment rate of 8.9% this year and 10.3% next year. With that number in mind, nine banks were given passing grades, and many of those have since exited the government's Troubled Asset Relief Program.
Miller said the Federal Reserve Board could go back to the biggest banking companies, regardless of
whether they passed or failed the exam, to encourage them to raise more capital. "The chief
regulator would apply [the changes to] the stress test going forward," he suggested.
Terry Moore, the managing director of North America banking for Accenture Ltd., said smaller banks
would also see capital further strained, which could prod more regulatory seizures or open-market
sales. Moore said he already believes the number of banks will shrink by 25% between now and
Michael Mussa, a senior fellow at the Peterson Institute for International Economics, says that
consumers and companies would further curtail borrowing. "There would be a lot less loan demand
than would otherwise be the case," said Mussa, who remains among economists who see
unemployment staying close to 10%.
Richard Anthony, the chairman and CEO at Synovus Financial Corp., said that is already happening
in many of the Columbus, Ga., company's markets where unemployment has already hit double
digits, though he hopes the stimulus packages provides some relief. "It would hurt us," he said of
national unemployment hitting 11% or higher. "Your losses would go up and the balance sheet would
Capital One Financial Corp. on Thursday raised its unemployment forecast for the end of this year to
10.3%, from the 9.6% estimate it provided in April, though executives expressed optimism that
layoffs appear to be growing at a slower rate.
Bank of America CEO Kenneth D. Lewis also held fast to a 10% projection during the company's
earnings call, saying that such a rate remains among "the assumptions we use to run this company."
With such an assumption, he still conceded that profitability would be a difficult task for the rest of the
year, with some hope of a "return to more normalized earnings" in 2010.
How much online social networking is enough? Are you tweeting in MySpace while you\u2019re Linked in
to Facebook until your Friendsters find your Naymz and check your Plaxo Pulse to tell your
Classmates your status in My Life? Well, depending on whom you talk to, online networking is either
the best new tool in job search or the greatest waste of time so like beauty, it\u2019s in the eye of the
beholder. Best rules of thumb: if you\u2019re comfortable in cyberspace, be careful not to overdo it; and if
you don\u2019t have a cyber-life, take it up in small measurable doses preferably with someone who can
walk you through the pros and cons of a site\u2019s effectiveness. And always remember that at the end
of the day, 3 quarters of job seekers will still land via traditional networking \u2013 though a virtual network
"Surviving Corporate America"; Tuesdays, 1 p.m.; people of various professions are brought together to debate how to break through the elements for finding work; paid pre-registration required; call for locations and further information.
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