Unemployment, the New Black

A 7.5% unemployment rate is the new black – at least to bankers.

(Leave it to bankers to be hip to a number.)

The recession has coursed through Wall Street and now is hitting Main Street, as Lawrence Fink, the chairman and chief executive of BlackRock, indicated last week. But it is not hemlines that bankers are watching these days. To gauge the intensity of the downturn, the unemployment rate is the hottest measure.

Most banks have reserved for losses as a result of an unemployment rate of up to about 7.5%. (Actually, bank executives will talk about a 7% hurdle for 2009, but I don’t buy. I think most banks, in today’s super-conservative operating environment, have modeled up to 7.5%.) Should the unemployment rate breaches 7.5%, it would appear as though a new round of reserving will need to take place. As if the KBX could use more downward pressure.

Yes, some economists indicate that the unemployment rate could crack 8%. That should get bankers reaching for a scotch – neat, please. Right now it is a waiting game to determine how intense will be the current recession, with one eye on Main Street’s employment trend. Some top bankers are finger-crossed for a 1991-like recession, when unemployment peaked at 7.8% in June 1992, but mainly hovered in the low 7% range. I hope they are fashionably right.