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Billionaire Investor Ross Sees Bank Failures Ahead

By Andrew Fisher, CNBC.com
Monday, 10 Mar 2008 | 8:21 AM ET

Billionaire investor Wilbur Ross says the current market downturn differs from previous slumps in that no

American banks have yet failed this time, but he suggests that's about to change.

"I think that's going to be the next wave, and coupled with problems in the commercial real estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC's "Squawk Box" in an exclusive interview.

He was asked about the risks to big banks.

"I think that the big banks won't fail in the sense that they will go to zero and depositors would lose money," Ross replied. "I think the Fed and other regulators will make things happen. I think it's the medium-sized banks, and particularly some of those that got overextended with the subprime and other kind of mortgage debt. I think those are the ones that had the serious mismatch, making 20- and 30-year loans based on 90-day deposits."

Ross's comments echo those made by Federal Reserve Chairman Ben Bernanke, who told a Senate committee on Feb. 28 that some smaller regional banks that heavily invested in real estate could go under.

Equities Roundtable
More insight on the economy, with Hank Greenberg, CV Starr & Co. chairman/CEO;Wilbur Ross, Jr., WL Ross & Co. chairman/CEO; Doug Dachille First Principles Capital Management and CNBC's Carl Quintanilla

Ross and other high-profile investors have made recent moves in the credit markets, explaining that they have done so to snap up bargains. Last week it was reported that Ross had invested $1 billion into municipal bonds.

In the meantime, Ross said he didn't think the U.S. economy would recover any time soon.

"I think at best we're in for stagflation," Ross said, referring to the combination of higher inflation and weak economic growth. "I think the consumer has been tapped out for quite a while and is frightened by the poverty effect of seeing the house go down."

Straightening out the problems in the bond industry, particularly the situation of the insurers who backstop bond offerings, would go a long way toward fixing the current paralysis in the credit markets, Ross intimated. That process is underway, he suggested, with the current reassessment by ratings agencies of the bond insurers.

"Making real triple-As will solve a lot of the problem," he said. "The problem is we've had a lot fake triple-As before."

That effort is far from over, indicated New York State Insurance Commissioner Eric Dinallo, who has been at the center of efforts to stabilize the sector. Troubled bond insurers MBIA and Ambac successfully raised fresh capital last week, he noted. Now attention now turns to FGIC, he said, also during an appearance on "Squawk Box."(Read more here).

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