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Large U.S.
Bank Collapse Seen Ahead
By Jan Dahinten
19/08/08 "Reuters" -- - SINGAPORE (Reuters) - The worst of the
global financial crisis is yet to come and a large U.S. bank
will fail in the next few months as the world's biggest economy
hits further troubles, former IMF chief economist Kenneth Rogoff
said on Tuesday.
"The U.S. is not out of the woods. I think the financial crisis
is at the halfway point, perhaps. I would even go further to say
'the worst is to come'," he told a financial conference.
"We're not just going to see mid-sized banks go under in the
next few months, we're going to see a whopper, we're going to
see a big one, one of the big investment banks or big banks,"
said Rogoff, who is an economics professor at Harvard University
and was the International Monetary Fund's chief economist from
2001 to 2004.
"We have to see more consolidation in the financial sector
before this is over," he said, when asked for early signs of an
end to the crisis.
"Probably Fannie Mae and Freddie Mac -- despite what U.S.
Treasury Secretary Hank Paulson said -- these giant mortgage
guarantee agencies are not going to exist in their present form
in a few years."
Rogoff's comments come as investors dumped shares of the largest
U.S. home funding companies Fannie Mae and Freddie Mac on Monday
after a newspaper report said government officials may have no
choice but to effectively nationalize the U.S. housing finance
titans.
A government move to recapitalize the two companies by injecting
funds could wipe out existing common stock holders, the weekend
Barron's story said. Preferred shareholders and even holders of
the two government-sponsored entities' $19 billion of
subordinated debt would also suffer losses.
Rogoff said multi-billion dollar investments by sovereign wealth
funds from Asia and the Middle East in western financial firms
may not necessarily result in large profits because they had not
taken into account the broader market conditions that the
industry faces.
"There was this view early on in the crisis that sovereign
wealth funds could save everybody. Investment banks did
something stupid, they lost money in the sub-prime, they're
great buys, sovereign wealth funds come in and make a lot of
money by buying them.
"That view neglects the point that the financial system has
become very bloated in size and needed to shrink," Rogoff told
the conference in Singapore, whose wealth funds GIC and Temasek
have invested billions in Merrill Lynch and Citigroup
In response to the sharp U.S. housing retrenchment and turmoil
in credit markets, the U.S. Federal Reserve has reduced interest
rates by a cumulative 3.25 percentage points to 2 percent since
mid-September.
Rogoff said the U.S. Federal Reserve was wrong to cut interest
rates as "dramatically" as it did.
"Cutting interest rates is going to lead to a lot of inflation
in the next few years in the United States."
(Editing by Neil Chatterjee)
© Thomson Reuters 2008 All rights reserved
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