Lazard's Parr sees bank losses mounting

NEW YORK (Reuters) - For banks worldwide that need to raise capital, as credit losses pile up, government is pretty much the only game left in town, veteran Lazard merger advisor Gary Parr told Reuters on Monday.

"There are still losses to be recognized in a number of financial institutions. We think they are sizable. So we don't think (the losses) ended in the third quarter," Parr, a deputy chairman at Lazard (LAZ.N), told the Global Finance Summit.

As of two weeks ago, losses realized by financials from the credit crisis totaled about $680 billion, he said, for which companies raised about $650 billion of capital. Sometime this summer, banks were no longer able to offset losses with their own capital, he said.

"Somewhere along the way, the financial industry, broadly defined, ran out of (capital) cushion," said Parr, who advised China Investment Corp's and Mitsubishi UFJ Financial Group's (8306.T) investments in Morgan Stanley (MS.N), as well as Kuwait's capital investment into Citigroup (C.N).

Now companies must raise capital any time they suffer new losses. The problem is, Parr said, the sources for these injections has essentially been reduced to one: government.

"So government is the primary source of capital and it will be for some time."

There are exceptions. Barclays (BARC.L) raised capital from two Persian Gulf states and Wells Fargo (WFC.N) on Monday sold $13 billion of stock in a public offering.

Yet for the most part, the banking industry will need to raise new money for any new losses and government is the most likely source.

PRIVATE SOURCES SHY AWAY

Parr, who also advised on the sale of Lehman Brother's North American investment bank to Barclays and of Bear Stearns to JPMorgan Chase & Co (JPM.N), observed about $300 billion of that capital raised so far has been from government.

Sovereign funds, by comparison, invested less than $100 billion in banks worldwide, he said. The U.S. government has pledged $700 billion of support for banks and brokers, though its actually deployed less than $200 billion so far.

Banks have exhausted other sources: convertible securities markets have shut down, and companies with hard hit shares would be hard put to sell lots of common stock. Sovereign and private equity funds also are likely to abstain because they have learned -- the hard way -- that there is no telling when losses will peak.

"Investors have, appropriately, become very concerned with how you define the losses. How can you get a handle on balance sheet quality? Enough people have been burned," he said.

The problem is, Parr warned, that nobody knows when the losses will end. That has put the brakes on capital injections and on consolidation.

"One of the biggest issues is defining what the quality of your balance sheet is. Now people are realizing they don't know," he said. "It's going to take stability in loss recognition before a lot of money is going to come back in. And I'm not sure when that will be."

Parr said even insiders do not have a clear view. A lot of the market's future rebound depends on a recovery in U.S. housing prices, consumer credit and other areas.

"From the outside, it's very hard to tell what the quality of a balance sheet is," he said. "And from the inside, even, when the environment is changing rapidly."

Parr noted that most bank deals going forward will be predicated on some form of government involvement: from soaking up bad assets through an FDIC takeover or Federal Reserve facility, to having the Treasury Department inject capital.

"No amount of due diligence tells you when housing prices will stop going down," he said.

(Editing by Bernard Orr)

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