US Banking Crisis Goes from Bad to Worse
Stock-Markets / Credit Crisis 2008 Jul 14, 2008 - 10:17 PM GMTBy: Nadeem_Walayat
The last four days have seen the already distressed US banking sector lurch towards the precipice of a full blown financial system meltdown. Banks that have already seen stock price falls of as much as 90% were again hit today with many falling a further 5% to 10% on fears that a series of cascading bank failures were about to be triggered following the collapse of Indymac bank on Friday, as a run on the bank had panicking depositors withdrew funds at the rate of a billion a day.
The Federal regulators stepped in to seize the assets and guarantee 100% of the first $100k of depositors money. Meanwhile at the same time another far bigger crisis was unfolding as Freddie Mac and Fannie Mae that insure or manage more than half of US mortgages were also on the brink of collapse.
US Treasury Secretary Hank Paulson stepped in to try and reassure the market that the banks were able to meet to day to day financing operations. This 'ms-information' was followed on Sunday by a U-turn by the Federal Reserve and Treasury Department by making unlimited funds available to both critical institutions so as to prevent their collapse, even going so far as the government seeking to buy the banks stock so as to put a floor under the share prices.
The problem the US banking system now faces is that the failure of Indymac, and bailout of Fannie Mae and Freddie Mac to prevent a far worse collapse are not an isolated instance but systemic of the whole banking system. The New York Times estimates that as many as 150 banks could go bust and thus requiring the Fed to step in to seize assets during the next 12 month with many of the remaining banks cutting back on their branch networks. However this estimate may still be just the tip of the banking crisis iceberg as the Savings and Loans crisis of the early 1990's witnessed the number of bank failures explode that eventually saw more than 1000 financial institutions go bust, which given that today the US is experiencing the worst housing market crisis since the Great Depression may be in for an even worse fate.
The FDIC currently has some $53 billion of funds available to pay depositors of defaulting banks of which upto $8 billion has now been eaten up by Indymac, which means should anywhere near the number of anticipated banks fail then the US Tax payer will be forced to step in to the tune of several hundreds of billions of dollars if not for over a trillion dollars.
There also exists this risks of an across the board loss of confidence in the banking system culminating a series panic runs on US banks accompanied by a collapsing US Dollar as the US national debt levels explode as the liabilities of these failing banks are taken over by the government and depositors / investors seek shelter in more secure currencies and assets such as the precious metals.The question now being raised is who will be next on the list to go bust. ?
The crisis in the US banking sector echoes around the world as many banks have seen capital bases eroded by well over 50% due to exposure to toxic US mortgage backed securities that continue to default in ever increasing numbers which has resulted in the credit freeze as increasingly cash starved banks fear lending money to one another due to the increased risk of default.
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By Nadeem Walayat
http://www.marketoracle.co.uk
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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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