Thread: A note of caution for those with deposits in US Banks

i think most people have their cash in FDIC accounts...but you should make sure that you don't have more than 100,000 in one bank...but if it's a joint account, the insurance goes up to 200 K. it's always smart to diversify...even with the banks holding your money.

people should also be slightly concerned about their money market accounts....i think we're going to see some funds 'break the buck' this year or next.

Meanwhile, the collective sum of all US banks are now technically bust/bankrupt/insolvent/skint/brassic/broke/penniless/short of a bob or two (select your favorite...

See:

FRB: H.3 Release--Nonborrowed Reserves

They now actually have a NEGATIVE sum of money in reserve. Scary...

While on the UK side of the pond - anyone have accounts with these banks:

From:

Credit default swaps: how to spot the riskiest banks - Money Week

So what is the market telling us now? Riskiest of all the major banks is HBOS, with a senior 5-year debt premium of 78 basis points (0.78% above the 5-year gilt yield of 4.3%, i.e. 5.1%). 5.1% is therefore what they have to pay the market for funds. (If they’re paying you much less that’s not a good risk/reward). RBS, Santander (Abbey National) and Barclays aren’t much better but HSBC and Lloyds are considered by the market to be the safest. If you can get a good rate from either of these banks, then given the risks the market thinks you’re taking, that’s a good deal and you should be able to sleep well at night.


I haven’t mentioned the ex-building societies yes just because they are in a group of their own. Alliance & Leicester and Bradford & Bingley both have 5-year CDS spreads that are flashing major warning signs. When these banks give you a higher savings rate, it’s not because they’re being generous, it’s because they have to compete for funds with rather more secure institutions.
Alliance & Leicester is being made to pay 200 basis points (2%) over the odds for 5-year money (i.e. about 6.33%) so no wonder they are offering savers in excess of 6% - they have to in order to get any funds at all. The implication is that a high savings rate from Alliance & Leicester reflects a higher risk that you won’t get your money back. Such fears obviously only apply to people with very large sums because the system insures savers up to a certain amount (£35,000). Still, I don’t think you want to have your life savings in a bank that the bond market views with such suspicion. The same goes for Bradford & Bingley.
Here too, the spread over risk-free 5-year money is very nearly 2%. The credit market won’t lend to BB/ over 5 years unless BB/ pays nearly 6.3%.
The question you have to ask yourself is: should you accept anything less?
Then, there are the foreign banks who are offering us internet savings accounts. The basic rule of thumb here is: if they’re ING, they’re no worse a risk than a UK high Street bank. If they’re Irish, they’re likely to be over leveraged and a bit more of a worry (especially Anglo Irish Bank). But if they’re Icelandic, then be afraid; these banks are starting to be priced for bankruptcy risk and it’s not clear what protection UK savers might have with these foreign accounts.

^ thanks for the info, very useful

people have the false idea that banks and bonds are "secure", whatever the fuck that means.

Banks as we see now act irresponsibly, and they did numerous time in the past, they have a very high risk pattern, and they go down, but people forget about those because it is never a massive event,

Bonds is one of the most risky market with FX,

More worrying news, see:

The Bush Financial Bust of 2008: “It's All Downhill From Here, Folks”

On January 14, 2008 the FDIC web site began posting the rules for reimbursing depositors in the event of a bank failure. The Federal Deposit Insurance Corporation (FDIC) is required to “determine the total insured amount for each depositor....as of the day of the failure” and return their money as quickly as possible. The agency is “modernizing its current business processes and procedures for determining deposit insurance coverage in the event of a failure of one of the largest insured depository institutions.”

(http://www.fdic.gov/news/news/financial/2008/fil08002.html#body)
The implication is clear, the FDIC has begun the “death watch” on the many banks which are currently drowning in their own red ink. The problem for the FDIC is that it has never supervised a bank failure which exceeded 175,000 accounts. So the impending financial tsunami is likely to be a crash-course in crisis management. Today some of the larger banks have more than 50 million depositors, which will make the FDIC's job nearly impossible.
Good luck.
It's worth noting that, due to a rule change by Congress in 1991, the FDIC is now required to use “the least costly transaction when dealing with a troubled bank. The FDIC won't reimburse uninsured depositors if it means increasing the loss to the deposit insurance fund....As a result, uninsured depositors are protected only if a bank acquiring the failed bank will pay more for all of the deposits than it would for insured deposits only.” (MarketWatch)
Great. That's reassuring. And there's more, too. FDIC Chairman Shiela Bair warned that “as of Sept. 30, there were 65 institutions with assets of $18.5 billion on its list of "problem" institutions;” although she wouldn't give names.
So, what does it all mean?
It means there's going to be an unprecedented wave of bank closures in the US and that people who want to hold on to their life savings are going have to be extra vigilant as the situation continues to deteriorate. And it is deteriorating very quickly.
Right now, many of the country's largest investment banks are holding $500 billion in mortgage-backed securities and other structured investments that are steadily depreciating in value. As these assets wear-away the banks' capital, the likelihood of default becomes greater. This week, Fitch Ratings announced that it will (probably) cut ratings on the 5 main bond insurers (Ambac, MBIA, FGIC, CIFG,SCA) “regardless of their capital levels”. This seemingly innocuous statement has roiled markets and put Wall Street in a panic. If the bond insurers lose their AAA rating (on an estimated $2.4 trillion of bonds) then the banks could lose another $70 billion in downgraded assets. That would increase their losses from the credit crunch--which began in August 2007---to $200 billion with no end in sight. It would also impair their ability to issue loans to even credit worthy customers which will further dampen growth in the larger economy. Structured investments have been the banks' “cash cow” for nearly a decade, but, suddenly, the trend has shifted into reverse. Revenue streams have dried up and capital is being destroyed at an accelerating pace. The $2 trillion market for collateralized debt obligations (CDOs) is virtually frozen leaving horrendous debts that will have to be written-down leaving the banks' either deeply scarred or insolvent. It's a mess.
There were some interesting developments in a case involving Merrill Lynch last week which sheds a bit of light on the true “market value” of these complex debt-pools called CDOs. The Massachusetts Secretary of State has charged Merrill with “fraud and misrepresentation” for selling them a CDO that was "highly risky and esoteric" and "unsuitable for the City of Springfield.” (Most cities are required by law to only purchase Triple A rated bonds) The city of Springfield bought the CDO less than a year ago for $13.9 million. It is presently valued at $1.2 million---MORE THAN A 90% LOSS IN LESS THAN A YEAR.
Merrill has quietly settled out of court for the full amount and seems genuinely confused by the Massachusetts Secretary of State's apparent anger. A Merrill spokesman said blandly, “We are puzzled by this suit. We have been cooperating with the Secretary of State Galvin's office throughout this inquiry.”

Originally Posted by bkkandrew

This week, Fitch Ratings announced that it will (probably) cut ratings on the 5 main bond insurers (Ambac, MBIA, FGIC, CIFG,SCA)

Its a mess, even the ratings companies themselves are under scrutiny by the SEC for "waiting too long to cut ratings"

linky

More bad news from the UK side of the pond:

Britain's battered banks pray for deliverance - Business Analysis & Features, Business - Independent.co.uk

Just glad trusty Nationwide is not on the hit list!

German Bank about to go under:

AFX News Ltd. London : Financial News Products

IKB Deutsche Industriebank AG needs 2 bln eur in additional guarantees to cover risks from failed investments related to the US subprime market, a re-evaluation of its securities portfolio has shown, Frankfurter Allgemeine Sonntagszeitung (FAS) reported.

The total amount of IKB's financial risks now amounts to 11.5 bln eur, the newspaper said, citing capital market sources.

Neither IKB's shareholder KfW Bankengruppe nor IKB itself are able to cover for the new deficit, the report said.

A group of private-sector banks, which has already pledged almost 1 bln eur in guarantees to IKB is now being urged to provide an additional 2 bln eur in funds, but the group of banks has so far resisted the pressure, FAS said.

Meanwhile, Sueddeutsche Zeitung cited unnamed sources as saying that the German government, development bank KfW and several private-sector banks are working on a new package of financial guarantees for IKB.

The paper cited unnamed KfW supervisory board members as saying IKB faces further writedowns of 1.3-1.8 bln eur related to US mortgage backed securities.

Previous guarantees worth 5.3 bln eur that were given to IKB have already been all but exhausted, Sueddeutsche Zeitung said.

Story in German:

Faule US-Kredite: Weiteres Milliardenloch bei der IKB aufgetaucht - Wirtschaft - SPIEGEL ONLINE - Nachrichten

Anyone with an account with this bank should withdraw now IMO.

Is the sky falling again?

Damnit. I really should nip out and pick up some of that sky-falling insurance, but not sure the insurers are any more solvent than the banks.

Need to find a basement.

More carnage to come (believe me). Canny sabang will then start buying again.

Originally Posted by Texpat

Is the sky falling again?

Perhaps not for those retired and comfy in Isaan but for many the state of the economy is a serious matter to which livelihoods are attached. I wish I could be so blase about it but my trading dollar account tells me to believe the worst right now.

^ It's darkest before dawn spin. This volatility and cyclicality is a necessary adjunct of our financial system, due actually to the primal emotions of greed and fear. It was overdue, but thats normally the case.

It's easy for me to be sanguine I realise, but from your point of view a time is coming that will present a low risk buying opportunity that you likely only see every twenty years or so. Just wait a bit longer. Generally, the clarion call is when everyone is shouting 'Doom'.

Originally Posted by Texpat

Is the sky falling again?

I guess for those with no money in the bank, you need not worry about the likely failure of said bank.

I do not fall into this catagory, I can only assume why you airily dismiss such matters...

Originally Posted by sabang

^ It's darkest before dawn spin. This volatility and cyclicality is a necessary adjunct of our financial system, due actually to the primal emotions of greed and fear. It was overdue, but thats normally the case.

It's easy for me to be sanguine I realise, but from your point of view a time is coming that will present a low risk buying opportunity that you likely only see every twenty years or so. Just wait a bit longer. Generally, the clarion call is when everyone is shouting 'Doom'.

Well put. Trouble is that dark point seems some way off yet...

Most central banks have a built-in rescue system, it's called the window discount rate, basically a "special discount" rate for banks to "borrow" reserves from central banks,

That UK bank with the bank run a few months ago did exactly that,

Yes it's a disaster, and the news are quiet about it for good reasons, the last thing you need is a bank run as this would collapse the whole system, like it did in the 1920s

Originally Posted by Butterfly

Most central banks have a built-in rescue system, it's called the window discount rate, basically a "special discount" rate for banks to "borrow" reserves from central banks,

Thats what has been happening in the US, to the point that the FED has lent a sum greater than the sum held on deposit. See post 3. Yet still the problem intensifies.

The issue with the newly crocked German bank detailed above, is that the German authorities are now reduced to pleading to other private banks to help out. The ECB has already injected over 100BN Euros through its window, to little effect...

^ the ECB made it available, it doesn't mean it was injected in the system yet,

using the discount rate is a very political move for a bank, it basically means trouble and greater scrunity from the Feds, it basically advertise to authorities and "investors" and credit agency that you fucked up somewhere, hence used by banks on the very last resort, it's your nuclear option when everything else has failed, or when a disaster to come is so big, that the Fed might give you a break,

^No - all 94.8BN Euros taken up by 49 banks in total. See:

ECB Quenches Europe's Liquidity Thirst - Forbes.com

^ oops, that's not good

I guess "cheap" money is still better than getting nothing, or selling out like American Banks did,

2 billions per bank is still reasonabe

^wish I could change the name of my business to 'Bank' and claim my 2BN...

Originally Posted by raycarey

i think most people have their cash in FDIC accounts...but you should make sure that you don't have more than 100,000 in one bank...but if it's a joint account, the insurance goes up to 200 K. it's always smart to diversify...even with the banks holding your money.

This holds true not matter the economic climate. Can be a bit painful if like RC you have 20 or 30 accounts to worry but well worth the pain when things go bad.

Originally Posted by Norton

Can be a bit painful if like RC you have 20 or 30 accounts to worry but well worth the pain when things go bad.

now that would be a problem well worth having.

More trouble - the insurers insuring the debt are now unable to provide insurance...

Bloomberg.com: Exclusive

Feb. 11 (Bloomberg) -- Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the U.S., more than doubling some borrowing costs.

Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating- rate debt doubled in the last six weeks, said Chief Financial Officer David Cooke. The rate on $98 million insured by Ambac climbed to 6 percent on Jan. 30 from 3.06 percent on Jan. 2.

``We'll have to reduce our capital expenditure program, which means less equipment, less modernization of facilities,'' Cooke said in an interview. The hospital paid Ambac to ``count on that AAA insurance for 30 years. Now it's going away on us.''

Investors are shunning insured bonds after three of the biggest guarantors, owned by Ambac, Security Capital and FGIC Corp., were stripped of at least one AAA credit rating amid losses on debt tied to subprime mortgages. Interest costs on floating-rate bonds sold by more than 100 governments, hospitals and colleges rose as much as 7 percentage points since the beginning of January even as the Federal Reserve lowered its benchmark rate for U.S. borrowing by 1.25 percentage points.

Essentially this means any company that has PAID for insurance for the bonds they issue (such as Arsenal FC, for the Emirates Stadium), now faces massive increases in their interest payments, as the insurance policies are worthless!

As a Spurs fan, I find the latter effect quite funny actually...

Originally Posted by Norton

This holds true not matter the economic climate. Can be a bit painful if like RC you have 20 or 30 accounts to worry but well worth the pain when things go bad.

Yes Norton, but ol Ray baby is so smart and knows so much about so many things that if he lost a few it would only take him a couple days at NYSE to recoup,
I had 3 accounts closed and moved the cash to Gold mining so I think it will pay off, fact has made a goodly amount in the last 4 years already.