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U.S. Banks Get Pummeled: Is Your Money Safe?
“For the most part, it’s all doom and gloom.” (FOX news) “Panic,” “Hysteria,” “Malaise,” “Meltdown.” “Sinking Feeling” (Time magazine) “All Hell Breaks Loose.” (AP) “Put Your Money In Your Mattress.” (MSNBC)
These are a few of the hair-raising headlines that circulated from July 14 to July 18. As for the stories themselves, here’s a brief rundown of the week’s events:
- Lehman Brothers may be one step away from following in the bankrupt footsteps of Bear Stearns; further downgrades, layoffs, setbacks, and losses accumulate at Citigroup and Merrill Lynch
- Shares of Washington Mutual (the largest U.S. Savings & Loan) plunged to a 17-year low
- And, last but not least, the third largest bank failure in U.S. history took place with the shut down and bank run of #2 mortgage lender IndyMac.
All this and more produced a flash flood of morning television broadcasts, late night TV debates, on-line interviews, and on-air radio call-ins between concerned citizen A and EXPERT economist B wanting to know, in essence, how to spot “The Warning Signs Of A Troubled Bank” (Washington Post).
Here’s one: The Federal Deposit Insurance Corp (FDIC) has $52 billion on hand to insure depositors before it has to ask Congress for more money. So far, faltering financial firms have amassed $399-billion (and counting) in write-downs. And, the U.S. Congress is knee-deep in the $5.2 Trillion of mortgage debt owed by We-Must-Not-Fail Fannie Mae and Freddie Mac.
What about seeing “warning signs” that the entire U.S. banking sector was in deep trouble BEFORE it came to this? Contrary to popular belief -- i.e. “It was impossible to know at that time [the year 2003] that a period of ‘free money,’ abetted by ultra low interest rates would stoke a new bull market in debt and fuel a giant housing bubble.” (Barron’s) -- such insights did indeed appear in print.
In his 2002 best-selling book “Conquer The Crash,” Bob Prechter revealed five major conditions that “pose a danger” to many banks. Among them: “Low liquidity levels, dangerous exposure to leveraged derivatives, the inflated value of the property that borrowers have put up as collateral on loans, and the substantial size of the mortgages that their clients hold compared both to those property values and to the clients potential inability to pay under adverse circumstances.”
(How To Find A Safe Bank? It’s the exact title of Chapter 19 in Bob Prechter’s Conquer The Crash. Get your very own copy today. Click Here)
As Conquer the Crash also explained, "When social mood turns down, consumers change their primary orientation from expansion to conservatism… In a fearful market, liquidity will dry up… The result in turn, means that in times of bank stress, it will take progressively smaller percentage of depositors to cause unmanageable bank runs."
And -- “What screams ‘bubble’ – giant historic bubble – in real estate today is the system-wide extension of massive amounts of credit to finance property purchases. Confidence is the only thing holding up this giant house of [credit] cards. When real estate prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
When the tide had indeed turned, the September 2005 Elliott Wave Financial Forecast stepped in with this urgent message: “Banks seem to be blind to the danger of overpriced collateral as they continue to stuff their balance sheets with mortgage-backed assets… Lenders are still behind the curve, but once they see the writing on the wall, the rug will get pulled out from under the economy in a hurry.”
Finally, in the January 2007 Elliott Wave Financial Forecast, the point of no return had been reached. “2007,” we wrote. This would be “The Year of the Financial Flameout.”
Know beforehand when “All Hell Breaks Loose” via a risk-free subscription to the complete Financial Forecast Service. Click here for details on how to get started.