The financial services industry is in dire shape and needs between $1.0 trillion and $1.2 trillion in tangible common equity pumped into it, according to a new report from analysts at Friedman, Billings, Ramsey & Co., Inc.

FBR says “the bulk” of this $1.0 trillion to $1.2 trillion of capital will have to come from the government and calls for a “holiday” on dividend payments to get banks to preserve capital.

Here are some key points from the report:

1) U.S. financial system has $37 trillion of debt outstanding. There are eight large financial institutions with $12.2 trillion of assets and only $406 billion of tangible common capital. That’s 3.4% of assets.

2) TARP capital “is not true capital,” the report says. “Only injections of true tangible common equity will solve the current crisis. Tangible common equity is the first loss position and will absorb the majority of balance sheet deficiencies.”

3) It will take three to five years for the financial system to recover completely.

4) Private market participants won’t reenter the financial system until the government stabilizes it.

– Damian Paletta