25 Ways to Tell a Banking System Is Unsound

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 (C), 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 firm. 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, it 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 (WM) agreed to a death spiral cash infusion of $7 billion accepting an offer at $7.85 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. Shared 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. In my opinion.

Comments

[debtacid:]

26. Your bank ATM issues hand written I.O.Us

2008 Jul 23 09:32 PM

[GaryD:]

27. Your bank gives you counterfeit bills

www.local6.com/news/16...

2008 Jul 23 09:59 PM

[liack:]

from everyone with a short term memory - thank you

2008 Jul 23 10:43 PM

[PastTense:]

Any predictions when banking stocks will crash (after this current rally)?

2008 Jul 23 10:56 PM

[MudEngineer:]

Gee now I don't feel so bad being down over $1100 in one day being short the financials. Hope that I don't have to endure too much more pain from this fantasy land rally before banks go back down again.

2008 Jul 23 11:12 PM

[Norevenand:]

Shedlock is a hack. He compiles information and presents it to the acolytes who are only too eager to suck it up because it's the kind of slop that appeals to their hack-selves.

There's no original thought here nor an in-depth analysis of the current financial malaise. What good is rehashing old crap when you have nothing new and original to offer?

Move along. Nothing to see here.

2008 Jul 23 11:44 PM

[icandoitdon:]

norevenand....

feel free to post an original thought if you have one. as it is your post offers only the type of sorry-assed complaint you're bitching about.

2008 Jul 24 01:15 AM

[WhenIsThisS...:]

You have to clear your ATM I.O.U.s with your employer.

2008 Jul 24 02:31 AM

[normthefedup:]

Mike, I, unfortunately, agree with much of what you've said.

There's a but.....you, like all the other doomsayers continue to throw numbers around that are, indeed, impressive, but only tend to cloud the issues and reinforce your own arguments.

Case one: "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."

Are you implying that ALL of the $2.6 trillion in uninsured deposits are at risk? Well you are and of course they're not. So don't even use that number. If 1% of those deposits are at risk, that's $26 billion. There's enough money to cover twice that much in FDIC according to your numbers.

That's only one example. I could go on.

I'm, frankly, not going to take the time to argue every point you make. It's fruitless and I DO agree with SOME of them. But I'm really tired of you and your ilk using huge numbers to predict an apocalyptic scenario that is very unlikely to take place. Yes, Fannie and Freddy have $5 trillion in mortgages or whatever on their books. So what???? Again, the vast, vast, vast majority of that indebtedness is with people like you, me, and your readers. We pay our bills. For those that don't, won't, or can't, well, then the rest of us have to carry the burden. THAT will NEVER change.

But the bottom line is: stop sensationalizing a situation that doesn't need to be sensationalized. Give us real numbers that count, use facts that aren't distorted, and stop screaming doom and gloom. We're resilient.

Let me equate what your kind is doing with a hopefully mythical example in your own life: "Y'know Mike, your wife leaves the house every day for at least eight hours.....that's an average of 250 times a year....that's a lot of guys for her to be sleeping with.....are there really that many motels in your neighborhood...?" Reality check: she's very, very, very likely to be at work.

Grow up and cut the crap.

2008 Jul 24 08:41 AM

[Robt1947:]

I think norevenand works in the banking system, or has
bet heavily on it. Keep the info coming mish.

2008 Jul 24 08:49 AM

[mattymystique:]

Lol Norm, fantastic comment.

2008 Jul 24 09:15 AM

[normthefedup:]

Thanks Matty, I thought so, too! I guess it all boils down to the effect that comments like these have on the "great unwashed masses" who are currently involved with pennies in the market. Someone above commented about being down $1100. Try $100,000 a day.....all because of commentary that designed to frighten and impress...journalism's version of "shock and awe." I'm tired of it but I'm one very small voice in a very large and noisy wilderness. Thanks for the kudos and have a great day.

2008 Jul 24 09:22 AM

[HBWOW:]

You call it exactly as it is. Unfortunately the "manipulaters" (and a lot of foreigners) are taking the rest of the deminishing middle class investment wealth with the bank stocks run down/recoveries. Add this to the growing list for no investment. No hope.

2008 Jul 24 10:34 AM

[Takayama:]

Do not interfere with the free market forces.
When stocks are bullish, there was no intervention from the government departments. So why should there be intervention in a bear market ?? Let the market forces work its course.

Getting to see more government intervention as in SEC short rule timing, protection for Freddy and Fannie, and the buying of securities by the FED.

Instead of allowing market forces to work in free and capitalist America, I am seeing more market interventions, almost amounting to market manipulations which obviously benefited quite a few people with the insider information. The dice is loaded, and the playing field is not leveled.

2008 Jul 24 12:56 PM

[Takayama:]

Could someone publish a list of market interventions, and maybe make out something useful and meaningful?

Future generations are going to pay for it dearly.

2008 Jul 24 01:11 PM

[outtafavr:]

Norm, your soothing comments about what deposits are "at risk" and which are not must be based on the value of bank collateral and the strength of the economy to create and support jobs, so fine Americans like yourself can keep that mortgage payment current. I personally believe the collateral and the economy will no longer live up to your expectations in an environment where banks no longer sling the easy money, like there's no tomorrow. Reckless lending is what created those spectacular asset prices and the robust economy. Welcome to tomorrow.

2008 Jul 24 04:05 PM

[TinyTim:]

"Bank of America just announced it will not guarantee $38.1 billion in Countrywide debt. Questions over "Fraudulent Conveyance" are now surfacing."

Love it. Can FC even be used in a situation like this. Who is the injured party?

2008 Jul 24 04:22 PM

[ArtfulDodger:]

Don’t worry so much boys. The International Bankers have a plan if they crash the dollar into the eternal abyss—merge it with another currency to haul it out of the depths, such as the Mexican Peso or the Ethiopian Birr. That will cure every ill south of the border and/or on the Dark Continent, and will transfer trillions of greedy America’s wealth to a needy cause.

2008 Jul 24 04:38 PM

[i20dog:]

Hey Norm--thanks for your bit of rationality.

2008 Jul 26 10:11 PM

[Alimar:]

We need a president like Dr. Ron Paul. If anyone has not read his book "The Revolution: A Manifesto" you need to. The Federal Reserve is killing this country by printing paper money that has no value. Our tax system is breaking us and the IRS needs to be done away with. Our government is an elistist run system and we will be looking at worse things going on economicly with the way things are going. Obama is a socialist and McCain is not much better, voting for either one of these two is a wasted vote! Wake up America!!!!! If we do not rise up and do something NOW we may not get a chance to do something about this mess on down the road. People, we can not wait for the government to fix it, they can't and they won't. We have to step up and demand a real change and that will probably mean getting rid of the two party system as it has become. This country was built on freedom and liberty and we have less and less of both.

2008 Aug 01 09:22 AM