Is US Banking System Teetering On Brink of Collapse?

[John317]

Evidence of the US Banking System Teetering on the Brink of Collapse

Interest-Rates / Credit Crisis 2008

Jul 24, 2008 - 06:34 AM

By: Mike_Shedlock

1. Paulson appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. Indymac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?

3. In a Northern Rock moment, depositors at Indymac pull out their cash. Police had to be called in to ensure order.

4. Washington Mutual (WM), another troubled bank, refused to honor Indymac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of Indymac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?

5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.

6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?

9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.

10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.

11. The SEC takes emergency action during options expirations week regarding short sales.

12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).

13. Citigroup ©, Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.

14. Bernanke openly solicits private equity firms to invest in banks. Is this even close to a remotely normal action for Fed chairman to take?

15. Bear Stearns was taken over by JPMorgan (JPM) days after insuring investors it had plenty of capital. Fears are high that Lehman will suffer the same fate. Worse yet, the Fed had to guarantee the shotgun marriage between Bear Stearns and JP Morgan by providing as much as $30 billion in capital. JPMorgan is responsible for only the first 1/2 billion. Taxpayers are on the hook for all the rest. Was this a legal action for the Fed to take? Does the Fed care?

16. Citigroup needed a cash injection from Abu Dhabi and a second one elsewhere. Then after announcing it would not need more capital is raising still more. The latest news is Citigroup will sell $500 billion in assets. To who? At what price?

17. Merrill Lynch raised $6.6 billion in capital from Kuwait Mizuho, announced it did not need to raise more capital, then raised more capital a few week later.

18. Morgan Stanley sold a 9.9% equity stake to China International Corp. CEO John Mack compensated by not taking his bonus. How generous. Morgan Stanley fell from $72 to $37. Did CEO John Mack deserve a paycheck at all?

19. Bank of America (BAC) agreed to take over Countywide Financial (CFC) and twice announced Countrywide will add profits to B of A. Inquiring minds were asking "How the hell can Countrywide add to Bank of America earnings?" Here's how. Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing.

20. Washington Mutual agreed to a death spiral cash infusion of $7 billion accepting an offer at $8.75 when the stock was over $13 at the time. Washington Mutual has since fallen in waterfall fashion from $40 and is now trading near $5.00 after a huge rally.

21. Shares of Ambac (ABK) fell from $90 to $2.50. Shares of MBIA (MBI) fell from $70 to $5. Sadly, the top three rating agencies kept their rating on the pair at AAA nearly all the way down. No one can believe anything the government sponsored rating agencies say.

22. In a panic set of moves, the Fed slashed interest rates from 5.25% to 2%. This was the fastest, steepest drop on record. Ironically, the Fed chairman spoke of inflation concerns the entire drop down. Bernanke clearly cannot tell the truth. He does not have to. Actions speak louder than words.

23. FDIC Chairman Sheila Bair said the FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits.

24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

By Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

[Amelia]

OK, what about Credit Unions?

[John317]

OK, what about Credit Unions?

Here's something that might interest you:

Conservator takes over Cal State 9 credit union

The weight of defaults on real estate loans has forced the Bay Area-based Cal State 9 Credit Union into federal conservatorship.

The takeover signals yet another misfortune in the unfolding mortgage crisis in which homeowners are defaulting on their loans and losing their properties. The bulk of Cal State 9's loans are for real estate transactions.

The state's action "is related to the credit union's defaults on mortgages," California Department of Financial Institutions spokeswoman Alana Golden said today.

Source: http://globaleconomicanalysis.blogspot.com/2007/11/housing-weekly-potpourri.html

[Woody]

I have a friend who works in the banking industry in Germany and he says look out for trouble in the world banking status soon. Don't know to believe it or not but that is my 'inside' info.

[Neil D]

I have a friend who works in the banking industry in Germany and he says look out for trouble in the world banking status soon. Don't know to believe it or not but that is my 'inside' info.

Red, the problem with that is that the insiders in the banking industry have been saying that for years....What makes NOW any more relevant?

[fccool]

Neil,

The cliches are cliches for a reason... and the reason because they are so true that they are annoying when repeated. The rotting banking industry has become this sort of cliche. My sister is a travel agent in Seattle and she is saying that all of a sudden she has billionaires for clients rushing to familiarize themselves with far East. Why do you think is that? The people who are insiders are dumping dollars and trying to rush East? If everything was sound, I think this would not be happening. When birds begin flying south... winter is coming... and winter IS coming.

What happened with IndiMac, Freddie and Fannie, those are only a tip of the isberg. The Fed can't keep bailing out those anymore without substantial jump in inflation numbers... We are living in the final years of the dollar. Soon dollar will be no more, and I'm guessing will be replaced with something else.... Just like old Rouble was replaced after Soviet Union Was collapsed. Hyperinflation was measured in 10000++%.

That's what happens when you make unbacked interest bearing money. Now it's re-run time.

[Amelia]

FDIC takes over 2 more banks, closing 28 branches

By BRENDAN RILEY

Associated Press Writer

Jul 26, 2008

CARSON CITY, Nev. (AP) -- The 28 branches of 1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California, were closed Friday by federal regulators.

The banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said.

The FDIC said the takeover of the failed banks was the least costly resolution and all depositors - including those with funds in excess of FDIC insurance limits - will switch to Mutual of Omaha with "the full amount of their deposits."

The FDIC also said accountholders can access their funds during the weekend by writing checks or using ATM or debit cards.

As of June 30, the closed banks had total assets of $3.6 billion. That's down from $4.1 billion six months earlier. Most of the assets are in 1st National while First Heritage accounts for $254 million.

Calls to 1st National were referred by a receptionist to Joe Martony, an executive vice president in Scottsdale, Ariz. Martony didn't return repeated calls to his office.

In Nevada, 1st National has 10 branches and employs about 350 people. Five of its branches are in Las Vegas, three are in the Reno-Sparks area, one is in Carson City and one is in Laughlin. Notices of the closure were being posted late Friday.

Fifteen 1st National branches are in Arizona, while Newport Beach-based First Heritage has three branches in Southern California.

Bill Uffelman of the Nevada Bankers Association said Friday the FDIC action "is a reflection of the times for the banks. It's a poor economy."

Uffelman cautioned against the sort of consumer concern that prompted many customers of IndyMac Bank branches to wait for hours in line to withdraw funds across Southern California last week after that bank was seized by federal regulators. All FDIC-insured bank deposits are guaranteed by the FDIC up to $100,000, he noted.

Gov. Jim Gibbons said the bank takeover will be closely monitored in Nevada "to ensure there's minimal disruption to business and that employees' jobs are protected as much as possible."

Arizona Gov. Janet Napolitano spokeswoman Shilo Mitchell said in a statement that the FDIC's takeover of 1st National is not indicative of the overall banking climate in Arizona.

"It's very important that Arizonans know that their deposits are secure," said Felecia Rotellini, superintendent of Arizona Department of Financial Institutions. "They are well-managed and the 1st National Bank of Arizona issues should not cause any panic in Arizona."

[Bravus]

Yep, it's a mess and it's far from over. I suspect the banking system won't be allowed to collapse by the government, but the costs of that to the government will be immense. The scary thing is that they might be immense enough to collapse the government... and they will certainly have a massive effect on the economy worldwide.

[doctorj]

The woes of US Banking System are being felt here in Australia. Yesterday the National Australia Bank warned of about 1 billion in losses associated with its exposure to lending in the US. The stock market took it out on the NAB and in one day the Bank lost billions off its valuation in the stock market. There is lots more to this story that is going to work its way out over the next few months.

See the NAB Story: NAB Slumps on Debt Shock.

[John317]

Yep, it's a mess and it's far from over...

Apparently, as far as the US is concerned, it is more a matter of how soon rather than if it will happen. A lot of people have heard this "wolf" cry too often, though, so they are not taking it seriously.

[Gerr]

Yep, it's a mess and it's far from over. I suspect the banking system won't be allowed to collapse by the government, but the costs of that to the government will be immense. The scary thing is that they might be immense enough to collapse the government... and they will certainly have a massive effect on the economy worldwide.

Nah, they'll just print more money. That's what they're doing now to cover the deficits.

Gerry

[fccool]

That will only make it worse . The fact is ... government is helpless in stopping anything. They would essentially have to cover all of the sub prime loans... which means that people will have to pay for it in taxes and inflation... which we already see hapenning.