I found this fascinating quote today:
September 05, 2009 KANSAS CITY, Mo., Sep 5, 2009 (UPI via COMTEX) — Two U.S. researchers say dogs appear to be helpful to soldiers and former soldiers suffering from post-traumatic stress disorder. (source: Psycport.com) – RSS and News widget on Feedzilla.com Share and Enjoy: thesweetmagnolia.com, thesweetmagnolia.com-anxiety, Sep 2009
You should read the whole article.
I found this fascinating quote today:
September 07, 2009 Sep. 7–The longest recession since World War II has wreaked havoc on consumers’ personal finances and thrown millions out of work. (source: Psycport.com) – News widgets and RSS feeds on Feedzilla.comShare and Enjoy:thesweetmagnolia.com, thesweetmagnolia.com-anxiety, Sep 2009
You should read the whole article.
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It's hard to find anyone who's still bearish on the economy or the market these days. Listen to the average pundit on CNBC and this is what you'll hear:
The credit crisis? It's over! Quit worrying.
The real estate mess? Fixed! No problem.
The economy? Rebounding. The worst is behind us.
The markets? They're headed to infinity and beyond! Better get on board.
I've talked about the credit crisis a few times in previous Money and Markets columns. And no less an authority than the International Monetary Fund (IMF) believes we've only acknowledged $1.29 trillion of the $4 trillion in total global credit losses to date. That means we're not even a THIRD of the way through the process.
In the real estate arena, we're seeing tentative signs of life in some hard-hit markets. But it's the distressed, "fire sale" stuff that's moving. Inventory levels remain high, and foreclosures show no sign of abating. In fact, foreclosure filings hit a new record high of 341,000 in March — a gain driven by rising unemployment, falling home prices, and the expiration of several, temporary state and industry moratoriums.
And that's just on the RESIDENTIAL front!
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| Commercial real estate is suffering, too. In fact, General Growth Properties, the second-largest mall operator in the U.S., just filed the biggest real estate bankruptcy in U.S. history. |
The COMMERCIAL real estate business is in full-scale meltdown mode. Prices are plunging, vacancies are soaring, and rents are dropping. Office tenants recently vacated a whopping 24.9 million square feet of space, the most since the 9/11 attacks. And General Growth Properties, the second-biggest mall operator in the U.S., just filed for Chapter 11 bankruptcy protection. The company is buried under $27 billion in debt, and its bankruptcy is the largest EVER seen in the commercial real estate industry.
It's (still) the Economy, Stupid!
But it's the economy that could be the weakest link here. Several companies have come out and said that business isn't getting any worse. Some of the earnings reports I've read talk about how conditions are now simply horrendous, rather than Armageddon-like.
But does that mean things are getting better? Is the economy really ramping up? Is the worst really behind us? I find that hard to believe. Just consider what we learned this week ...
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No matter how you slice and dice the numbers (exclude autos, exclude gas, etc.), you still come to the same conclusion: The consumer is on the ropes and not in the mood to blow his dwindling paycheck at the mall. That's unlikely to change anytime soon, not with the level of continuing jobless claims now running at more than 6 MILLION — the highest in U.S. history.
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| The amount of factory space being used fell to 69.3 percent — its lowest level ... EVER! |
On a year-over-year basis, wholesale prices are now falling at a 3.5 percent rate. That's the deepest rate of deflation recorded in this country since January 1950! In addition, consumer-level deflation came in at 0.4 percent, the most since 1955.
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Garden Variety Recession ...
Or Something Else?
Many Wall Street investors are operating under the assumption that this is a garden variety recession. They're saying that the modicum of "less worse" news we've seen is a harbinger of "recovery." They expect consumer spending to resume its normal pace, factories to ramp production back up, and everything to be hunky dory by year end.
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| This recent rally will be very sharp, relatively short-lived, and ultimately, doomed to fail. |
But if this is a much deeper economic decline ... one driven by the biggest bout of debt destruction and deleveraging this country has seen since the Great Depression ... that's a different story. In that case, the Fed's reflation efforts will fail. At best, the economy will muddle along. At worst, it will slip even further down the rabbit hole. And stocks will ultimately head lower.
I don't have a perfect crystal ball. But I believe the risk of a Japan-style economic stagnation is much higher than the traditional Wall Street pundit thinks it is. And I believe this recent rally smells more like the bear market variety — very sharp, relatively short-lived, and ultimately, doomed to fail. So I most certainly wouldn't be chasing it.
Until next time,
Mike
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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| YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET | ||
by Martin D. Weiss, Ph.D.
For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates. In a moment, I'll explain what this means for your savings and your stocks. But first, here's the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1 And here's why the losses are so ominous: Until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments.
But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market. Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2 Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we've seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter. And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading. Why This Crisis Could Be Nearly as Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it's far more centralized. But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s: • In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation's high-roller megabanks dominate the market. • In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it's precisely in this dangerous sector that the megabanks dominate the most.
According to the OCC's Q4 2008 report, America's top five commercial banks control 96 percent of the industry's total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 ... while the rest of the nation's 7,000-plus banking institutions control a meager 22 cents!3 This is a massively dangerous concentration of risk. The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they'll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it's the primary reason they lost a record $3.4 billion in the last three months of 2008. The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead. Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers. Here's our chart on these risks, updated to reflect the new data just released on Friday:
Specifically, at year-end 2008,
What's excessive? The banking regulators won't tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view. And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs.
The folks at Goldman think they're smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes! Major Impact on the Stock Market In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century. The same is happening today. Whether the nation's big banks are bailed out by the federal government or not, the fact remains that they're jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations. And regardless of how much lawmakers try to arm-twist banks to lend more, it's rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don't even want bank loans to begin with. Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500. The big lesson to be learned: Don't pooh-pooh comparisons between today's bear market and the deep bear market of 1929-32. From its peak in 1929, the Dow Jones Industrials Average fell 89 percent. Compared to the Dow's peak in 2007, that would be tantamount to a plunge of more than 12,600 points — to a low of approximately 1500, or an additional 81 percent decline from the Friday's 7776. Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target. Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week's peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over. But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way:
Your approach today should be similar. Specifically, Step 1. Keep as much as 90 percent of your money SAFE, as follows:
Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell. Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.) Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead:
Good luck and God bless! Martin 1 For the banks' $3.42 billion loss in interest rate derivatives, see OCC's Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, "Cash & Derivative Revenue," line 1. As you can see, that was 7.2 times larger than the previous record — the fourth quarter of 2004, when the nation's banks lost $472 million in interest rate derivatives. 2 See OCC table at the bottom of pdf page 11, "Derivative Contracts by Type." In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all — 98 percent — are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent). 3 OCC. In Table 1, pdf page 22, "Notional Amount of Derivatives Contracts." 4 OCC, table at bottom of pdf page 13. About Money and Markets For more information and archived issues, visit http://www.moneyandmarkets.com Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig. Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
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I've just returned from Washington, DC, where I held a press conference at the National Press Club and a round-robin series of meetings with members of Congress ... with more to come this week.
Let me first tell you what I told them. Then, I'll explain what I think you should do about it ...
Why Banking Bailouts, Buyouts, and Nationalizations
Can Only Prolong America's Second Great Depression
And Weaken Any Subsequent Recovery
(Edited Transcript of Press Conference Presentation)
The Fed Chairman, the Treasury Secretary and Congress have now done more to bail out financial institutions and pump up financial markets than any of their counterparts in history.
But it's not nearly enough — and, at the same time, it's already far too much.
Two years ago, when major banks announced multibillion-dollar losses in subprime mortgages, the world's central banks injected unprecedented amounts of cash into the financial markets.
But that was not enough.
Six months later, when Lehman Brothers and AIG fell, the U.S. Congress rushed to pass the TARP, the greatest bank bailout legislation of all time.
But as it turned out, that wasn't sufficient either.
Subsequently, in addition to the original goal of TARP, the U.S. government has loaned, invested, or committed $400 billion to nationalize the world's two largest mortgage companies ... $42 billion for the Big Three auto manufacturers ... $29 billion for Bear Stearns, $185 billion for AIG, and $350 billion for Citigroup ... $300 billion for the Federal Housing Administration Rescue Bill ... $87 billion to pay back JPMorgan Chase for bad Lehman Brothers' trades ... $200 billion in loans to banks under the Federal Reserve's Term Auction Facility (TAF) ... $50 billion to support short-term corporate IOUs held by money market mutual funds ... $500 billion to rescue various credit markets ... $620 billion in currency swaps for industrial nations ... $120 billion in swaps for emerging markets ... trillions to cover the FDIC's new, expanded bank deposit insurance, plus trillions more for other sweeping guarantees.
And it STILL wasn't enough.
If it had been enough, the Fed would not have felt compelled this week to announce its plan to buy $300 billion in long-term Treasury bonds, an additional $750 billion in agency mortgage backed securities, plus $100 billion more in Fannie Mae and Freddie Mac paper.
Total tally of government funds committed to date: Closing in on $13 trillion, or $1.15 trillion more than the tally just hours ago, when the body of this white paper was printed.
And yet, even that astronomical sum is still not enough!
Why not? Because of a series of very powerful reasons:
First, most of the money is being poured into a virtually bottomless pit. Even while Uncle Sam spends or lends hundreds of billions, the wealth destruction taking place at the household level in America is occurring in the trillions — $12.9 trillion vaporized in real estate, stocks, and other assets since the onset of the crisis, according to the Fed's latest Flow of Funds.
Second, most of the money from the government is still a promise, and even much of the disbursed funds have yet to reach their destination. Meanwhile, all of the wealth lost has already hit home — literally, in the household.
Third, the government has been, and is, greatly underestimating the magnitude of this debt crisis. Specifically,
Clearly, the money available to the U.S. government is too small for a crisis of these dimensions.
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Fourth, but at the same time, the massive sums being committed by the U.S. government are also too much:
This trend packs a powerful message — that there's no free lunch; that it's unreasonable to believe the U.S. government can bail out every failing giant with no consequences; and that, contrary to popular belief, even Uncle Sam must face his day of reckoning with creditors.
We view this as a positive force. We are optimistic that, thanks to the power of investors, creditors, and the people of the United States, we will ultimately guide, nudge, and push ourselves to make prudent and courageous choices:
1. We will back off from the tactical debates about how to bail out institutions or markets, and rethink our overarching goals. Until now, the oft-stated goal has been to prevent a national banking crisis and avoid an economic depression. However, we will soon realize that the true costs of that enterprise — the 13-digit dollar figures and damage to our nation's credit — are far too high.
2. We will replace the irrational, unachievable goal of jury-rigging the economic cycle with the reasoned, achievable goal of rebuilding the economy's foundation in preparation for an eventual recovery.
Right now, the public knows intuitively that a key factor which got us into trouble was too much debt. Yet the solution being offered is to encourage banks to lend more and people to borrow more.
Economists almost universally agree that one of the grave weaknesses of our economy is the lack of savings needed for healthy capital formation, investment in better technology, infrastructure, and education. Yet the solution being offered is to spend more and, by extension, to save less.
These disconnects will not persist. Policymakers will soon realize they have to change course.
3. When we change our goals, it naturally follows that we will also change our priorities — from the battles we can't win to the war we can't afford to lose. Right now, for example, despite obviously choppy seas, the prevailing theory seems to be that "the ship is unsinkable" or that "the government can keep it afloat no matter how bad the storm may be."
With that theory, they might ask: "Why have lifeboats for every passenger? Why do much more for hospitals which are laying off ER staff, for countless charities that are going broke, or for the one in fifty American children who are now homeless? Why prepare for the financial Katrinas that could strike nearly every city?"
The correct answer will be: Because we have no other choice; because that's a war we can and will win. It will not be very expensive. We have the infrastructure. And we'll have plenty of volunteers.
4. Right now, our long-term strategies and short-term tactics are in conflict. We try to squelch each crisis and kick it down the road. Then, we do it again with each new crisis. Meanwhile, fiscal reforms are talked up in debates, but pushed out in time. Regulatory changes are mapped out in detail, but undermined in practice. Soon, however, with more reasonable, achievable goals, theory and practice will fall into synch.
5. Instead of trying to plug our fingers in the dike, we're going to guide and manage the natural flow of a deflation cycle to reap its silver-lining benefits — a reduction in burdensome debts, a stronger dollar, a lower cost of living, a healthier work ethic, a better ability to compete globally.
6. We're going to buffer the population from the most harmful social side-effects of a worst-case scenario. Then, we're going to step up, bite the bullet, pay the penalty for our past mistakes, and make hard sacrifices today that build a firm foundation for an eventual economic recovery. We will not demand instant gratification. We will sacrifice our lifestyle today to assume responsibility for our future and the future of our children.
7. We will cease the doubletalk and return to some basic axioms, namely that:
8. We will pro-actively shut down the weakest institutions no matter how large they may be; provide opportunities for borderline institutions to rehabilitate themselves under a slim diet of low-risk lending; and give the surviving, well-capitalized institutions better opportunities to gain market share.
Kansas City Federal Reserve President Thomas Hoenig recommends that "public authorities would be directed to declare any financial institution insolvent whenever its capital level falls too low to supports its ongoing operations and the claims against it, or whenever the market loses confidence in the firm and refuses to provide funding and capital. This directive should be clearly stated and consistently adhered to for all financial institutions that are part of the intermediation process or payments system." We agree.
9. We will build confidence in the banks, but in a very different way. Right now, banking authorities are their own worst enemy. They paint the entire banking industry with a single broad brush — "safe." But when consumers see big banks on the brink of bankruptcy, their response is to paint the entire industry with another broad brush — "unsafe." To prevent that outcome, we will challenge the authorities to release their confidential "CAMELS ratings" on each bank in the country. And we will ask them to reverse the expansion of FDIC coverage limits, restoring the $100,000 cap for individuals and businesses.
Although these steps may hurt individual banks in the short run, it will not harm banks in the long run. Quite the contrary, when consumers can discriminate rationally between safe and unsafe institutions, and when they have a motive to shift their funds freely to stronger hands, they will strengthen the nation's banking system.
I am making these recommendations because I am optimistic we can get through this crisis. Our social and physical infrastructure, our knowledge base, our democratic form of government are strong enough to do so. As a nation, we've been through worse before, and we survived then. With all our wealth and knowledge, we can certainly do it again today.
But my optimism comes with no guarantees. Ultimately, we're going to have to make a choice: The right choice is to make shared sacrifices, let deflation do its work, and start regenerating the economic forces that have made the United States such a great country. The wrong choice is to take the easy way out, try to save most big corporations, print money without bounds, debase our dollar, and ultimately allow inflation to destroy our society.
This white paper is my small and humble way of encouraging you, with data and reason, to make the right choice starting right now.
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What You Must Do Now
There followed a vigorous debate and some of the most unique questions I've had the honor to answer in many years. (I'll share them with you when I have the transcript.)
In the meantime, here's what I recommend you do:
Step 1. As soon as you have a chance, take a look at our white paper on the banking crisis.
Step 2. In Part II (where I list a few big banks) and in the appendix, where I have all the rest of the banks and thrifts we believe are at risk of failure, make sure yours is not on it.
Step 3. If it is, I recommend shifting to a stronger institution, regardless of the size of the bank or the size of your account.
Step 4. For our list of the strongest banks in the U.S., plus instructions on where to find even safer havens for your money, see our free report available to all Money and Markets members.
Step 5. Most important, stand by for my appeal for help! I can't do this alone. I will need your support, and I'll explain exactly how soon.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
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The nation's largest banks are so close to collapse and the world economy is coming unglued so rapidly, a major Wall Street meltdown is now imminent.
Specifically, it's now increasingly likely that virtually all of our forecasts of recent months could come to pass in a very short period of time, including ...
Shocking? Perhaps. Avoidable? No.
Nor am I alone in anticipating this rapid unraveling of the economy and financial markets. This past Friday, at a Columbia University dinner reported by Reuters ...
Both recognize that we're in a new era of chaos. What's the landmark event that separates us from the past era of relative stability?
According to Soros, it's precisely the same event we forecast in 2007 and the same event we have repeatedly highlighted here in Money and Markets: The bankruptcy of Lehman Brothers. (See "Dangerously Close to a Money Panic," December 3, 2007 and "Closer to a Financial Meltdown," March 17, 2008.)
That was the final straw that punctured the already imploding bubble. And it was the first major domino that set off the chain reaction of events now careening out of control: The collapse of consumer credit markets ... surging unemployment ... and now, a new set of even larger financial failures looming.
The Raging Debate Right Now Is How To Prevent
A Banking Collapse: To Nationalize Or Not To
Nationalize. But It's A Moot Point.
Based on the analysis we presented here in August 2008 ("The Next Big Failures") ...
Based on the frank recognition of the catastrophe by Soros and Volcker on Friday ...
And based on the trillions in government bailout funds already spent, lent or guaranteed ("The Obama Stimulus: Truth and Consequences") ...
The fact is that the banking collapse has already occurred!
So the relevant question is not "How can we prevent it?" Instead, it's "How can you protect yourself from the inevitable fallout?"
Washington and Wall Street, however, are either too cowered or too confused to give you the answers you need.
They won't tell you which banks are the most likely to fail or which ones are the most likely to survive.
They won't offer you alternative safe havens for your money.
They won't even guide you to publicly available information provided by the U.S. Treasury Department itself.
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In August of last year, Mike Larson and I took steps to fill that gap. As a public service, we invited readers to attend our 1-hour video, the "X List," later making the recording widely available on the Web and attracting over 100,000 viewers.
In the video, we shocked the financial community by forecasting the failure of Citrigroup, Wachovia, Washington Mutual and others; and unfortunately, today, less than seven months later, most of those forecasts have come true.
More importantly, we gave you specific instructions in the video on exactly where to find true financial safety, how and why. If you didn't attend, or you didn't act on our recommendations, you're fortunate in that you still have the opportunity to do so now.
But With The Latest Dramatic Events,
You're Clearly Running Out Of Time! So
Here's What I Suggest You Do Immediately ...
First, whether you've seen it before or not, invest a short hour of your time to watch our "X List" video. Given the urgency of this crisis, we have put it back online; and despite the dramatic changes that have taken place since, the advice remains 100% valid today.
Second, refer to the edited transcript of the first half of the program, which I'm providing below with my latest comments.
Third, download our free survival booklet, which we've just updated — my gift to you, conveying both my gratitude for your sincere interest and my concern for your financial safety.
In it, you'll find step-by-step instructions on how to buy Treasury bills, what to do with your 401k, how to get rid of risky stocks, how to find a strong bank, how risky is your insurance company, plus more.
Fourth, in the guide, be sure to check our handy lists covering the weakest and strongest banks and thrifts, the weakest and strongest insurers, plus select U.S. brokers.
Fifth, join us online THIS WEEK for our next landmark video event. Here are the facts:
Time: Thursday, February 26, 12 noon Eastern Time
Subject: 11 Laws for Bear Market Success
For more information: Click here
For free registration: Click here (Unless you sign up ahead of time, it will be impossible to attend.)
Now, here's the annotated transcript of the first half of the "X List" ...
The "X List": The Next Big Failures
Original Edited Transcript of
First Half of August 2008 Program
[With My Current Comments in Red Type]
Martin Weiss: Big banks and brokers have announced massive losses, with much more to come.
But government regulators generally make it difficult for average citizens to figure out which banks or brokers are the weakest and which are the strongest ...
Today, we're going to tell you what Washington won't, unveil our own "X List" of institutions and name the banks we feel are the most or least vulnerable to financial difficulties. Then, we're going to answer your questions, live.
It's the first time these lists are being released. And it's the first time we are taking live questions from viewers online. But the seriousness of the situation warrants these special steps. Every dollar you earn, save or invest could now be at stake.
Just look at what's happening all around you. The recession is still in its early phase. But already, we have one of largest bank failures in history, IndyMac Bank, and the largest brokerage firm failure in history, Bear Stearns. What will happen as the recession deepens? What will happen now that the mortgage crisis is spreading beyond subprime mortgages to the far larger market for prime mortgages?
My friends, this crisis is not over, not by a long shot.
All this raises urgent questions for you — as a saver, as an investor, and if you run a business: How safe is your bank? How safe is your broker? What would happen to your money and your investments if your bank or broker failed?
No one has all the answers, but we do have the data to provide most of the important answers.
And joining me today is Mike Larson, one of the few analysts who warned us ahead of time about the disaster that was — and still is — at the heart of this crisis: The real estate and mortgage crisis. It was thanks to Mike's research that our Safe Money Report laid out, many months ahead of time, the precise events that are unfolding today, step by step, play by play.
Mike, let's get straight to the heart of the matter. You, me and the Weiss Research team have been hard at work assembling our "X List," starting with the U.S. banks that, based on our research, are the most likely to run into financial difficulties.
Mike Larson: Correct. Here it is ...
[My current comment: Citibank has been downgraded to D+ by TheStreet.com. Plus, I have added Bank of America and JPMorgan Chase to the list. Meanwhile, most of the above institutions have now failed, been bought out or bailed out. All have suffered massive declines in their share price or the shares of their parent companies. And all should be avoided by both investors and savers.]
These banks are listed with the largest at the top.
Column B is TheStreet.com's Financial Strength Rating, which covers capital, asset quality, liquidity, earnings and more. This is a key input in helping us form our opinion, but not the only input.
Beyond their rating, we are also looking at the credit risk the largest banks are taking with their derivatives, according to the Office of the Comptroller of the Currency — big bets on top of big bets. That's in Column C. Plus, I've drilled down into their mortgage exposure (not shown in the table).
But before we jump into this, I have two important caveats:
First, don't assume that everything you hear or read is true — whether good or bad. Specifically, do not lower your guard just because officials tell you "everything's fine and dandy." And, by the same token, do not rush to act based on rumor.
[This is especially true today in early 2009. The U.S. Treasury Secretary would have you believe that the government can prevent a collapse with the newest, still-to-be-revealed bank bailout plan. Others say that the crisis will be resolved by nationalizing the largest banks. But at best, all that Washington can do is postpone the inevitable, which, in the final analysis, will deliver massive losses to millions of citizens who take no protective action.]
Second, no one can predict with certainty the failure or survival of a particular company. Everything we say here today is about the relative probability of a failure or survival, based on diligent research.
Martin: Most people think that "big" means "safe." So the first shock to most people reviewing this list is going to be the simple fact that some of the nation's very largest banks and thrifts could be vulnerable to financial difficulties: Citibank, Wachovia, Washington Mutual, HSBC.
Mike: Citigroup is on the list because of three factors: Its main banking unit has a C- financial strength rating. It has large exposure to the credit risk of derivatives. Plus, it has a big exposure to mortgages — $198 billion.
Wachovia is in a similar situation: It made the fatal mistake of buying the nation's largest and most aggressive mortgage lender — Great Western Financial — at the worst possible time. And it's also got some serious exposure to derivatives.
Washington Mutual, the nation's largest thrift, has a D+ rating and is loaded with mortgage exposure.
HSBC has a D+ rating. Plus, it has an exceptionally large 721% of its capital exposed to the credit risk of derivatives. In other words, for every single dollar in capital, HSBC is taking a credit risk of $7.21 with trading partners in derivatives, according to the U.S. Comptroller of the Currency.
This bank also made a big blunder, similar to Wachovia's, with its purchase of Household Finance, which is loaded with household and consumer loans that are going bad.
Martin: Mike, we're getting questions pouring in from all sides — via instant messenger on my computer and from our Customer Care representatives who are feeding us live questions from customers. Here's a question which summarizes what many readers think about the idea of big banks failing:
Q. Everyone I speak to says that big banks like a Citigroup could never fail. The government would never, NEVER let it happen. What is your response to that?
Martin: Our mission here is not to speculate about what the government may or may not do. Our mission is to present the facts and evaluate each bank on its own merits.
Mike: We had a similar question that came in earlier from a Safe Money subscriber who has money in Wachovia. He asks:
Q. As long as the government is going to keep my bank alive, why should I care? What difference is it going to make to me?
Martin: When a bank goes under, the government steps in, finds a merger partner or takes it over. This can be a quick process. But sometimes it may not be. We see three possible situations:
Situation #1. You're an insured depositor. You've got savings or checking accounts with the bank and they are under the FDIC insurance limit. Run through that situation first.
Mike: You will get your money back. If the FDIC runs out of money, it has the authority to borrow up to $30 billion more from the U.S. Treasury, plus another $40 billion beyond that from the Federal Financing Bank. And even if it maxes out that credit line, Congress would probably approve more.
Martin: But before things get that far, we would have to revisit this question and make a rational decision at that time, whether or not you should rely on FDIC insurance.
Mike: Right. For now, suffice it to say that at this time, the reliability of FDIC insurance is not an issue.
[Today, less than seven months later, FDIC insurance is still functional. However, as the federal deficit balloons toward $2 trillion, as larger financial institutions collapse, and as government resources are stretched beyond any reasonable limit, the viability of depositor insurance is bound to come into serious question.]
Martin: Situation #2. You're a shareholder. You own stock in a failing bank. In this case, it doesn't matter much what the government does. If the FDIC takes over the bank, like it did with IndyMac Bank recently, shareholders are wiped out. If the Federal Reserve steps in to keep the bank open, shareholders are probably still wiped out.
Mike: Either way, if you own shares in a weak bank, our recommendation is to get the heck out. One word of caution: When a bank's stock is falling, it's not a good sign. But remember — just because a bank is losing money and its stock is going down doesn't mean the bank is failing and your deposits are in jeopardy. What you do with your stocks and what you do with your deposits are two separate decisions.
[This is still true. But crashing share prices have emerged as an important factor in a financial institution's demise. Last week's plunge in the shares of Citigroup, Bank of America and General Electric, for example, are telltale warning signs that must not be ignored.]
Situation #3. You're an uninsured depositor. You have deposits with a bank that are over and beyond the FDIC insurance limits, or you've bought bank bonds or bank debentures. In most bank failures, you will suffer losses. And even with the so-called "too big to fail" banks, you could suffer losses as well.
Martin: Correct. We don't really know how government rescues will pan out. They may decide to cover certain groups of creditors but not others.
Mike: Exactly. So our recommendation is very simple: Do not count on the government to cover uninsured deposits or bonds.
Martin: Let me sum up, then: Avoid bank stocks. Keep your deposits under the FDIC insurance limit. And beyond the FDIC insurance, don't count on the government to protect you no matter how big the bank may be.
We'll take more questions in a moment. Let's move on now to the other banks on this list.
Mike: SunTrust Bank — a super-regional, concentrated in the Southeast, also with a marginal rating. It has large exposure to construction loans and commercial mortgages in a region that's likely to get hit very hard by the real estate crisis.
Plus, here are two Ohio banks that we feel are also in danger: National City Bank and Huntington Bank. Weak ratings. Large mortgage exposure.
And here are three more: First Tennessee Bank, Sovereign Bank in Pennsylvania, and E*Trade Bank in Virginia. All bad ratings. All with huge mortgage exposure.
Martin: Once we get down into this middle tier — large regional banks that are not necessarily critical for the national financial system — then the question arises: Would the Fed also try to keep these banks afloat? We don't have a firm answer to that question, do we?
Mike: No, we don't. The fact is, no one knows. But it seems less likely that the government would pull out all the stops to save these middle-tier banks.
Martin: Here's another question we got earlier via email. Leon asks:
Q. I have two 6-month CDs with Horizon Bank in Austin, Texas, rated B-, with five months to go, and I'm over the FDIC limit. Should I withdraw early and pay the penalties? Or should I stick it out?
Martin: Leon, before I answer your question, for everyone's benefit, let me review for you the ratings scale:
A = Excellent
B = Good
C = Fair
D = Weak
E = Very weak
+ = the upper third of each grade range
- = the lower third of each grade range
And based on these ratings, here are the guidelines we think you should follow. If your bank is rated ...
And if you're shopping for a new bank or thrift, favor those with a rating of B+ or better.
Now, let me answer your question more directly: Your bank was a B-, right? OK. So that means there should be no rush to abandon your bank. But you're over the FDIC limit. So to be on the safe side, I'd reduce your bank balance to below the FDIC limit. That gives you the double protection I think you need.
Mike: We've had a lot of questions that go like this:
Q. I have a CD for only $50,000, which is fully insured by the FDIC. So why should I care about the bank's safety rating? As long as my money is insured, what difference does it make? Even if the bank has a lousy rating, so what?
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Martin: Let me describe a real situation and then you can form your own opinion ...
Several months ago, a bank in California submitted its financial report to the banking regulators. Based on that report, it merited a safety rating of E- — the lowest possible rating and a clear warning of failure. So customers of that bank could have also asked the same question you have: "Why should I care?"
I'll tell why: Because the name of that bank was IndyMac, and it failed. You should care because you don't want the inconvenience of waiting on line for your money, even for a single day. You should care because, no matter how orderly the process may be, you don't want to have to hassle with bank officials telling you to "please be patient."
Plus, here's another important reason you should care: The FDIC's responsibility is strictly to get you your money back. The FDIC has no obligation to honor the special deals or the special features on your checking account. It has no obligation to honor credit lines or anything else you may have liked about your bank.
Mike: These pictures are depressing. Can we talk about the positive side now? The fact is that there are still many strong banks all over the country, and they're not hard to find. Consider this list, for example ...
Martin: Actually, the fact that they're not so big may be helping them stay out of trouble — away from derivatives, away from the "too big to fail" syndrome that might make them complacent about risk.
Mike: They have solid capital. They take fewer risks. And they're better positioned to ride out this crisis. These are all the large banks and thrifts in the country (with $10 billion or more in assets) that have a rating of B+ or better.
Plus, there are a lot of smaller ones that are not on this particular list. The list we're sending out right after this event has many more.
Martin: What about Dime Savings in Brooklyn, New York? Back in the 1970s and 1980s, when hundreds of banks and S&Ls were failing everywhere, I remember Dime Savings stood out as one of the safest. Is that still true today?
Mike: Yes, it is. It has an A- rating, which is excellent. But it has about $4 billion in assets, and the cut-off for this list was $10 billion.
The strongest among these top 10 is the smallest: Washington Federal Savings & Loan in Seattle, Washington. Since they're listed from largest to smallest, it's at the bottom of the list. But it's got the highest rating — an A+. Like in school grades, there is no higher rating than that.
Martin: So even if it gets stuck with some bad mortgages, even if it loses money, it has the capital — its own deep pockets — to cover those losses.
Mike: Correct. Here's a larger bank with an excellent rating: Deutsch Bank Trust Company Americas, based in New York City. Strong capital. Low risk profile. And here's another one in San Antonio, Texas (Frost National Bank). Also an A-, with $13 billion in assets. Or if you live in Hawaii, you're in luck because you have First Hawaiian — also a strong bank with an A- rating, also $13 billion in assets.
Martin: Plus, I notice there are quite a few B+ banks. Like I said earlier, if you're starting a new banking relationship or you're thinking of moving from an unsafe situation, seek to do business with banks that have a rating of B+ or better. And as you can see just from this list of banks with $10 billion or more in assets, there are quite a few to choose from.
Mike: Martin, there's an instant message on your computer that we have a question coming from the Weiss Research Customer Care Department.
Eva Kaplan: Hi, my name is Eva and I work for Weiss Research in the Customer Care Department. We have a lot of questions coming in about banks and about brokers. Here's one which is generic:
Q. What's the best place to put $10 million and keep it safe?
Martin: With that amount of money, we recommend mostly short-term U.S. Treasury securities. You can open an account online with the Treasury using your Social Security number — no bank or broker between you and your money. Another approach is to have your bank or broker buy them for you at the regular Treasury auction. They'll charge you a fixed fee. But if you're investing $10 million, it shouldn't make much of a difference.
Plus, for maximum convenience and liquidity, you can invest in a money market mutual fund that buys exclusively Treasuries or equivalents with your money. Here's the key: No matter where or how you buy them, the U.S. Treasury securities themselves are guaranteed by the U.S. government with no limit. It doesn't matter if you invest $10,000 or $10 million, you enjoy the same unlimited guarantee from the U.S. Treasury Department.
The downside risk we see is the decline in the U.S. dollar. But to offset that downside risk, taking all your money out of the dollar and abandoning the safety of U.S. Treasury securities is not the solution. Instead, we feel the solution to the dollar weakness is to allocate some of your money to investments that go up when the dollar goes down.
Eva: Martin, can I follow up on that question? Some of our customers are saying:
Q. In your writings, you and your team talk a lot about "the collapse of the dollar." If the dollar is truly collapsing and Treasury securities are denominated in dollars, aren't you, in effect, recommending an investment that's collapsing?
Martin: I think we sometimes overuse the word "collapse," and I'm guilty of that as well. For example, if the dollar is falling sharply in the foreign exchange market, we say "the U.S. dollar is collapsing," just like we'd say "the Dow Jones Industrials is collapsing."
But that doesn't mean the dollar or the Dow are going to vanish and suddenly be worthless. The U.S. dollar will continue to be a viable currency for many years to come. Besides, we're not asking you to trust the U.S. government for the next 30 years with a Treasury bond — only for the next three months or less, with Treasury bills and other short-term Treasuries.
For the balance of the transcript, click here.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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