In his FT opinion piece on March 26, Alan Greenspan writes of the need for a better cushion against risk.  Naked Capitalism accuses Greenspan of both disengeuousness and errors of fact in his piece.  Yet, Greenspan’s estimates for new capital needed at the money center banks are interesting and except at RGE Monitor, have received little attention:

“I believe that recent risk spreads suggest that markets require perhaps 13 or 14 per cent capital (up from 10 per cent) before US banks are likely to lend freely again.

Analysis of the US consolidated bank balance sheet suggests a potential loss of at least $1,000bn out of the more than $12,000bn of US commercial bank assets at original book value.

Through the end of 2008, approximately $500bn had been written off, leaving an additional $500bn yet to be recognised. But funding the latter $500bn will not be enough to foster normal lending if investors in the liabilities of banks require, as I suspect, an additional 3-4 percentage points of cushion in their equity capital-to-asset ratios. The overall need appears to be north of $850bn. Some is being replenished by increased bank cash flow. A turnround of global equity prices could deliver a far larger part of those needs. Still, a deep hole must be filled, probably with sovereign US Treasury credits.”

Given his assertion that 13-14% equity is required and even with the current program of raiding AIG (make that taxpayer) assets to fund the banks, Greenspan, conservatively estimates a need for $850B.  This level of capital will need congressional approval as we don’t believe the Geithner gansters can fund it by the shenanigan pipeline.  Greenspan’s estimate is also with writedowns as they are now.  Greenspan makes no mention of it, but obviously his estimate is before the coming commercial mortgage and credit card tsunami, or any further writedowns in existing assets necessitated by the Geithner plan.  Another item he ignores is the possibility of having to bring shaddow assets back onto the banks’ balance sheets. If this is required, even more capital will be required.

Paul Jackson at Housingwire.com reports:

On the heels of the Treasury’s latest plan to work with private investors to purchase private-party RMBS, Fitch Ratings said Monday afternoon that it had revised its projected cumulative loss estimates for 2005-2007 vintage U.S. prime RMBS transactions — in other words, more downgrades are coming.

Why defaults are surging among prime borrowers has less to do with the mortgage instrument, as was the case early in the mortgage crisis, than with more traditional risk factors tied to declining property values and rising unemployment. For example, Fitch said it found that loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics.

Negative equity, too, is a still-emerging problem: borrowers with negative equity in some recent vintage mortgage pools are approaching 50 percent, the rating agency said. Borrowers with no remaining equity are defaulting at a rate three times greater than their equity-holding counterparts.

Continuing deterioration in what used to be prime credit means the assets Giethner’s plan is aimed at removing from banks are growing faster than PIMCO  can say, “We intend to participate and do our part to serve clients as well as promote economic recovery”.