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US Banking Crisis Goes from Bad to Worse

News_Letter / Credit Crisis 2008 Jul 28, 2008 - 03:50 PM GMT

By: NewsLetter

News_Letter 15th July 08
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 Market Oracle Newsletter
July 15th , 2008            Issue #19 Vol. 2

Commodities Currencies Economics Housing Market Interest Rates Education Personal Finance Stocks / Financials Best Analysis

US Banking Crisis Goes from Bad to Worse


Dear Subscriber,

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.

This weeks timely special report is 'How Safe is Your Bank'

In this free report made available to our readership by Elliott Wave International, you'll discover …

  • Five incredibly risky banking conditions.
  • How even the FDIC can't really guarantee your money.
  • The Top 100 Safest U.S. banks (two for each state)
  • How you can choose a safe bank.
  • Tips on international safe banking.

Read the Safe Bank Report Now

For more on the banking crisis subscribe to our Free Newsletter.

Your analyst ensuring savings exposure with each bank is limited to the guaranteed insurance limits.

Nadeem Walayat,
Editor of The Market Oracle

In This Issue
  1. Price Inflation and Asset Deflation, the Reversal of 25 Years of Booming Markets
  2. Fannie & Freddie Bailout: Truth or Consequences
  3. Gold Major Breakout on Freddie & Fannie Catastrophe
  4. Fannie Mae, Freddie Mac- The Mother of ALL Bailouts!
  5. Fed is Playing an Incredibly Dangerous Game, a Look Back Over the Past 2 years
  6. Financial Markets Reeling from Fannie & Freddie Collapse and Evitable Government Bailout
  7. Farewell Indymac, What's Next? Say Hello to the 1970s Inflation Rate (Part2)
  8. Operation "Rescue Fannie Mae " Underway- Paulson a Blatant Liar
  9. Indymac America 's Northern Rock Goes Bust as US Housing Market Implodes
  10. Credit Crisis Losses Pass $1.6 Trillion as Credit Contraction Ensures Recession
1. Price Inflation and Asset Deflation, the Reversal of 25 Years of Booming Markets

By: Adrian_Ash

AFTER TWENTY-FIVE YEARS of booming asset markets, it's getting hard to keep hold of your money, let alone grow it.

Inflation is destroying fixed-income bonds. Stocks have tipped into a bear market, down more than one-fifth worldwide. Real estate suffers both over-supply and an historic shortage (too many units vs. no mortgage finance). And this is clearly no time to launch a business relying on discretionary spending, consumer debt or prompt payment.

Read Article

2. Fannie & Freddie Bailout: Truth or Consequences

By: Mike_Stathis

Amidst speculation that Freddie and its big brother Fannie are facing insolvency, U.S. Treasury Secretary Paulson said the primary focus was supporting Fannie and Freddie "in their current form as they carry out their important mission." Well, the fact of the matter is that “carrying out their mission” is what got them into this mess to begin with.

Read Article

3. Gold Major Breakout on Freddie & Fannie Catastrophe

By: Clive_Maund

Last week both gold and silver staged important breakouts from base areas to commence major uptrends. This is a development that we had been expecting for quite some time. On the 1-year chart for gold we can see how it first broke out from the 3-arc Fan Correction that we earlier delineated with the biggest one day rise for many years - itself a very bullish development.

Read Article

4. Fannie Mae, Freddie Mac- The Mother of ALL Bailouts!

By: Nadeem_Walayat

The US Government has gone all out to perform a full scale rescue of Fannie Mae and Freddie Mac to prevent a collapse of the US financial system. The move follows Friday's near collapse of both companies stock prices which saw shares of the too big to fail institutions plunge by more than 50%.

In a joint move the White house and Federal Reserve issued a number of initiates aimed at supporting both companies which include -

Read Article

5. Fed is Playing an Incredibly Dangerous Game, a Look Back Over the Past 2 years

By: Mick_Phoenix

Welcome to the Weekly Report. Normally at An Occasional Letter From The Collection Agency we try to focus attention on the macro-economic near term effects using the Weekly Report, allowing the Occasional Letter to look further into the future by about 18-24 months. We have reached a stage now where it is becoming difficult to keep the various strands of my convoluted thoughts distinct and clear for the readers so, in keeping with one or two other writers it is time for a re-cap.

Read Article

6. Financial Markets Reeling from Fannie & Freddie Collapse and Evitable Government Bailout

By: Prieur_du_Plessis

Finance is the art of passing money from hand to hand until it finally disappears,” said Robert W. Sarnoff. This is certainly the way it looked last week as the fall-out of the credit crisis deepened.

Markets had investors feeling dazed and confused after another roller-coaster week amid further evidence of the deteriorating health of the US financial sector and a renewed rise in oil prices. Adding to the pain, Barron's Randall Forsyth said: “Now that the bear market has officially arrived, it may stick around and gnash its teeth for a while – until it's scared away those who remain.”

Read Article

7. Farewell Indymac, What's Next? Say Hello to the 1970s Inflation Rate (Part2)

By: Mike_Stathis

Those of you who are familiar with my previous publications know my real estate forecasts remain unchanged since first published in 2006. To reiterate, I'm expecting an average decline from peak prices of 30% (best case scenario) to 35% (worst case scenario), sending home values back to pre-1999 levels. Within the next three years, mortgage rates should approach 8% and take off thereafter. Soon, we will see a 1970s type inflationary period. This will bode well for owners of real estate rental units.

Read Article

8. Operation "Rescue Fannie Mae " Underway- Paulson a Blatant Liar

By: Mike_Shedlock

Middle Eastern countries know their oil supplies aren't going to last forever. So they're pumping more than $2 trillion into new, long-term economic projects - such as brand new cities that will function as both business and vacation hot spots.

Read Article

9. Indymac America 's Northern Rock Goes Bust as US Housing Market Implodes

By: Nadeem_Walayat

One of America 's biggest savings and loans mortgage banks, Indymac goes bust as regulators stepped in to seize the banks assets on Friday. The bank saw panicking savers withdraw more then $1.3 billion in deposits in one day alone as the bank teetered on the brink of collapse under the weight of mortgage defaults as result of the meltdown in the US housing market in similar style to Britains Northern Rock bank run during September 2007.

Read Article

10. Credit Crisis Losses Pass $1.6 Trillion as Credit Contraction Ensures Recession

By: John_Mauldin

It seems that with each passing month the estimates for losses in the international banking system keep rising. This time last summer the largest estimates (from credible sources), if memory serves me correct, were around $400 billion, give or take a few months. By the end of the year it was in the neighborhood of twice that. Then last quarter we saw estimates approaching $1 trillion. Last week, the number being broached was $1.6 trillion, by Bridgewater Associates, one of the top, and more credible, analytical firms in the world.

Read Article

For more indepth analysis on the financial markets make sure to visit the Market Oracle on a regular basis.

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