US Banks in Death Spiral- Check Your Bank NOW!
Companies / Credit Crisis 2008 Jul 28, 2008 - 02:28 PM GMT
Martin D. Weiss writes: The truth may be unthinkable, but the reality is undeniable: Much of our nation's financial structure is collapsing, and our government's only response is phony money, bogus bailouts and a litany of false promises.
Ben Bernanke, Henry Paulson, the FDIC and the U.S. Congress say they can do it all.
They say they can save bankrupt brokers like Bear Stearns ... take over recently failed banks like IndyMac Bank and First National of Nevada ... prop up insolvent mortgage giants like Fannie Mae and Freddie Mac ... refinance millions of defaulting mortgages ... dish out hundreds of billions in tax rebates ... and still have enough cash in the kitty to cover the next round of financial collapses.
They say their unbridled money printing won't devalue the U.S. dollar.
They say their unlimited pledge to guarantee junk mortgage bonds won't sabotage the credit of the U.S. Treasury.
They say their blank checks to private companies won't rip off U.S. taxpayers.
They'd have you believe they can outlaw the cycle of boom and bust ... repeal the law of supply and demand ... even freeze the march of time.
In the real world, of course, no government in history has ever been able to do anything of the kind, and they know it.
In the real world, their "solution" is part of the problem, and they know that too.
They know that wealth is generated from work — not from the paper money they're printing. They understand the hazards of indulging the most daring debtors and rescuing the most reckless risk-takers.
They know darn well the fatal flaws of the course they've chosen. But they proceed to pursue it anyhow.
Why? Because, behind the façade of their feel-good happy talk and beneath the thin veneer of their Pollyanna optimism, nearly every single one of our leaders — including Bernanke and Paulson, Democrats and Republicans — is really a gloom-and-doom pessimist in disguise.
They are pessimists inasmuch as they have little faith in America's ability to confront hard times. They greatly underestimate our ability to cope and adapt. They think we can't handle the truth.
I disagree. In the Great Depression, our parents and grandparents faced the unthinkable truth and created a stronger country as a result. They confronted the truth again during World War II and helped create a better world in its aftermath.
I believe we can do that too. We have the resources. We have the knowledge. And we have the added benefit of hindsight. But before we move forward, we must admit five irrefutable facts:
Irrefutable fact #1: Ours is a debt-addicted society ,and weeding out the bad debts is the first step toward true recovery.
Irrefutable fact #2: By far the biggest pile-up of debts is in mortgages — $14.7 trillion, according to the Federal Reserve's latest Flow of Funds report (see PDF page 64, Table L.4, line 9).
Irrefutable fact #3: Among those mortgages, a quarter to a third could go bad: Their terms are high risk for both borrower and lender. Their collateral is shaky. Most should never have been created in the first place.
Irrefutable fact #4: When bad debts go into default, there is no free lunch. Somebody has to pay the price. The only question is: Who?
Irrefutable fact #5: The overwhelming bulk of the bad mortgages were created to help Americans move into homes that were priced far above their means. But the only way to correct this problem is to let natural market forces drive home prices back down to much lower levels.
Do most of our leaders have the wisdom and moral fiber to confess to these truths? Not yet. But in the not-too-distant future, they will have no other choice.
Reason: America's housing marketplace is bigger than any government; its power, greater than any law. It is the single largest asset class in the world. It packs the most powerful forces of supply and demand ever assembled in history.
And right now, it's tearing down some of our nation's largest banks. Two examples ...
Washington Mutual In a Death Spiral?
Washington Mutual, America's largest savings and loan, is unfortunately, also one of the nation's largest subprime lenders.
A direct consequence: It appears to be in a death spiral, losing $3.3 billion in the second quarter ... admitting to losses of as much as $19 billion this year ... and probably on its way to losses of an estimated $26 billion.
That estimated loss is over four times its total market value as of Friday's close ... twelve times its yearly earnings in the best of times.
Can it get a new capital infusion to stave off failure?
Perhaps. But on April 8, Washington Mutual already got an injection of $7 billion from private equity firm TPG Capital. And now, less than five months later, an amount equivalent to TPG's entire investment has been more than wiped out with the plunge in Washington Mutual's shares — to a meager $3.82 on Friday.
What's worse, the TPG deal restricts Washington Mutual's ability to raise new, desperately needed capital going forward. And further impairing its ability to raise capital, Moody's announced that it is reviewing the thrift for a downgrade to junk status.
Here's the big problem: As of the latest reckoning, Washington Mutual has $214.6 billion in residential mortgages on its books. And among those, more than three-quarters are in non-traditional categories — option ARMs, subprime loans, home equity loans and multi-family mortgages. Less than one-quarter is of the traditional, single-family prime variety.
Just in option ARMs alone, Washington Mutual has $52.9 billion, one of the biggest such portfolios in the industry. Moreover, 62.5% of its option ARMs are in two of the hardest hit states — Florida and California.
Nonperforming assets are growing by an average of 36% each quarter. If they continue to grow at that rate, they could reach a whopping 6.7% of total assets by year-end.
Investors are pulling out. Rumors are swirling that creditors may be doing the same. Bankruptcy looms.
Wachovia Also Suffering Huge Losses
Wachovia, the nation's fourth largest bank with nearly $800 billion in assets, is also in danger. Its staggering $8.9 billion loss reported last week may be just the tip of the iceberg.
Its big blunder: The acquisition of subprime lender Golden West Financial for $24 billion at the very peak of the real estate market in 2006.
The net result for the bank: It's now stuck with option ARMs valued at $122 billion concentrated in California, the state with one of the worst mortgage default rates.
Net result for shareholders: Over $55 billion of their wealth has been wiped out since the acquisition — more than double the total purchase price of Golden West.
The big problem going forward: Wachovia has $231 billion in residential real estate loans on the books. But only 22% of these are classified as "traditional mortgages." Most of the rest are higher risk.
My Recommendations
Recommendation #1. If you haven't done so already, check the safety of your bank.
Yes, your deposits are insured by the FDIC up to $100,000. But there are still risks and inconveniences of getting stuck in a failed bank or thrift.
For example, if your principal is $100,000, your accrued interest could be at risk. And if your account is a business checking account with large uncashed checks outstanding, even though your book balance may be under the $100,000 limit, your actual bank balance may be over the limit. So those funds may also be at risk.
Even with your insured deposits, after a messy failure, there could be a significant delay in regaining access to your money. You will get your $100,000. But don't expect it to happen overnight. To get a free safety rating on your institution, follow these steps:
Step 1. Go to TheStreet.com's Banks & Thrifts Screener .
Step 2. Look for the green box to enter your information. Under "Bank Name," type in only the first word of your institution's name.
Step 3. To the right of your bank or thrift's name, make note of its rating: A is excellent, B is good, C is fair, D is weak and E is very weak.
Step 4. Use these general guidelines:
- If your bank or thrift is rated B+ or better, we believe it's secure.
- If its rating is between B- and C-, check it a few times per year to make sure it hasn't fallen below C-.
- If it's D+ or lower, seriously consider switching to a safer institution, of which there are many to choose from.
Recommendation #2. Also consider moving most of your savings and checking to a Treasury-only money market fund. Treasury-only money funds are not insured by the FDIC. But I think that's a moot point because the investments they buy enjoy the direct guarantee of the United States Treasury, with no $100,000 limitation.
Examples:
- American Century Capital Preservation Fund
- Dreyfus 100% U.S. Treasury Money Market Fund
- Fidelity U.S. Treasury Money Market Fund , and
- Our affiliate's Weiss Treasury Only Money Market Fund .
Recommendation #3. If you haven't done so already, dump any bank shares that you may own, whether at a profit or a loss. The recent Fed- and SEC-inspired rally was a gift — a last chance to get out at somewhat better prices.
Recommendation #4. Your investments, your business or your income may still be vulnerable to collapsing mortgages and other debts. For protective hedges, check Our Comprehensive List of Inverse ETFs and consult with your advisor or money manager to select the ones that best match your needs.
Good luck and God bless!
Martin
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