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Evidence of the US Banking System Teetering on the Brink of
/ Credit Crisis 2008 Jul 24, 2008 -
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.
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.
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
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
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
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 form. Some may not survive in any
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
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'
http://globaleconom icanalysis. blogspot. com
Click Here To Scroll Thru My Recent Post
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
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