Worse news follows. Of the 4 trillion dollars USD, only 1.3 trillion have been recognized and written down to date, leaving a further 3 trillion yet to slam into the financial superstructure. Most foreboding of all however, is the fact that the effects of the subprime meltdown have already been absorbed, and are represented by the 1.3 trillion in write-downs to date. Fully 75% of the expected losses from the IMF report are due entirely to the effects of a global economic slowdown that shows no sign of ending.

In the United States, where economics is politics, the Obama administration has been fighting a valiant rear guard action to stave off panic and further US deterioration. The happy spin has been playing like a preacher in an influenza epidemic, however it has been enough while Obama is riding a historic wave of popularity in the face of an unprecedented hurricane.

That honeymoon should come to an end when, right after the IMF storm hits, the US Treasury releases the results of its bank stress tests. Once the IMF reports, it will be impossible to lipstick that pig.

Obama has himself to blame. Bank stress tests are done regularly, but are kept secret or have the results obscured. The reasons are simple enough; a bank at the bottom end of the test scale would have legitimate concerns that the results of the test would ruin it as its customers flee to safer ground. Announcing that the one test you intend to make public is the one where everybody will fail was a mistake that may define Obama's early presidency.

The tests are based on a system known as the "CAMELS rating system". A stressful economic scenario is devised that would mimic the probable worst-case scenario for the economy over the test period, and banks are rated against their ability to survive the "test". The categories are as follows;

C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk

The stress test which commentators feel is being applied by the Treasury, does not adequately represent the true downside risk to these banks, but rather a rosier (albeit terrible) scenario that jives with the White House talking points.

What the IMF shows is that the US is upside down in Bank assets in the worst way. Against 3.6 trillion in losses, the US Banking establishments total equity capitalization is only a scant 1.3 trillion. 2 trillion has got to come from somewhere to close the gap or insolvency results. Is the America of Tea Parties and battling economists ready to pour in that much additional capital from very, very distant taxpayers pockets?

There will have to be bank nationalizations, and it is expected that up to 300 small and midsized banks will fall to fill the gap. The large media darling banking houses will be protected by politics, and will have two options only. The first would be to ignore the losses and try and build out of them. Changes to Mark to Market accounting and the PPIP plan have set the groundwork for this eventuality. However, that would require a timely and precipitous recovery from global meltdown in the next three years. The IMF report makes this an idiots dream.

While banks are carrying such debts, it will be impossible for them to lend like they have never lent before. The IMF reports further that most of the retreat in liquidity has and will be from biscuit coloured items like credit cards, autos, and homes. Rather than rise heroically from them, US banks can expect to be sucked further down the hole.

If they can't simply hold the fort, then the only other option available is for Obama to ask for a further two trillion in injections, a politically unstable move in the current climate of evil banks and bonuses.

In the end, the collision between reality and action will be ground shaking in the US, where there still remains doubt about the magnitude of the storm, and hope hangs on by the skin of its teeth.

Resources;

http://www.investopedia.com/terms/c/camelrating.asp

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6047929.ece

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/15/BUNV1733H8.DTL&type=business

http://www.imf.org/external/index.htm

Aetius Romulous

Historian, Economist, Accountant, Writer, and blood sucking CEO.

Born at the wrong end of the Baby Boom Generation - too late to enjoy the ride, too early to have missed it, and stuck in the middle with the mess.

Aetius writes and blogs from his frozen perch atop the earth in Canada, spending the useful capital of a life not finished making sandwiches and fomenting revolution.

It's a living.

http://screambucket.com/

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Banks: Corporate Bundles of Dismal Joy - and Mislaid Rage

Impossibleism

Food is too Cheap

The Humble Tuna

Freud's Bastards

Economic Democracy Demands One World Balance

Why is Lloyd Blankfein

There Is No Recession in Heaven

Lorax Economics

A Crisis Carol

Stock Markets are Not Democratic

Free Markets Are Not Rational

Like A Rolling Stone