Red Flag: Read If You Have Excess Cash in Regional/Small Banks

Discussion in 'Trading' started by ByLoSellHi, Jun 20, 2008.

  1. From a newsletter that I wanted to share with all my fellow ETers.

    Check this out.

    Friday, June 20, 2008 - Vol. 10, No. 148
    Is the FDIC Trying to Tell Us Something?
    Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert.

    Dear A-Letter Reader,

    Something smells a little fishy to me...The Federal Deposit Insurance Corporation (aka the "FDIC") just launched a series of full-page advertisements in U.S. newspapers. On the surface, these ads are celebrating the FDIC's 75th anniversary.

    According to the ad, the latest campaign, published in Monday's Wall Street Journal, celebrates the institutions' long-term safety net of public funds up to US$100,000.

    The full page, and no doubt expensive, ad serves to remind depositors that the FDIC is there to protect cash deposits and CDs.

    In all my years of reading the Journal and other financial newspapers, I've NEVER seen the FDIC advertise their work.

    So doesn't it seem a little suspicious that the FDIC took out a full-page ad in the midst of the country's worst financial crisis since 1990?

    I've got to wonder if the FDIC is firing a warning salvo ahead of a rash of small bank failures in 2008 and possibly, in 2009.

    Are more banks likely to fail? Maybe the FDIC wants to remind depositors that the government ONLY guarantees your cash deposits and CDs up to US$100,000.

    The Birth of the FDIC

    The government created FDIC during the Great Depression. At the time, businesses were collapsing and bank failures riddled the economy. From 1920 to 1934, a total of 9,812 banks were suspended, closed, failed or merged, according to Colonial Statistics.

    From March 6 to March 13, 1933, President Roosevelt declared a banking holiday. During that week, all financial institutions were closed and depositors could not access their funds. During the Great Depression, the Roosevelt administration also confiscated gold ownership.

    The number of U.S. bank failures since the onset of the credit crisis last July is still under 100. But from 1988 to 1990, over 1,000 American banks failed, mostly because of the Savings & Loans crisis.



    No Mom and Pop Banks Are Safe
    Considering the depth and longevity of this crisis, it's probably fair to assume many more banks will succumb to failure or suspension, especially smaller banks. In fact, a few months ago, Fed Chairman, Ben Bernanke, warned that he expects a rash of smaller banks to fail because of weak capital ratios and bruised balance sheets.

    Bernanke, of course, won't bailout a small bank in Arkansas or other Mom and Pop banks in Middle America.

    But the Fed did bailout Bear Stearns in a forced merger with J.P. Morgan Chase in March. They will also rescue other large U.S. banks if they pose systemic risk to the financial system. These include J.P. Morgan Chase, Citigroup, and Bank of America.

    The Fed is desperately trying to help FDIC member banks rebuild their capital ratios and cut interest rates to 2% recently.

    Low Rates Only Help So Much...
    Low interest rates help boost lending margins for banks. When rates are low, spreads widen between short-term and long-term lending rates. However, the problem is most banks have pulled back from lending since the onset of the sub-prime debacle last summer.

    Mortgage lending has collapsed. Consumer credit is especially difficult to secure, especially while these banks' balance sheets are eroding. We've already seen enough massive write-downs and plunging capital ratios to be jaded by the numbers.

    Indeed, 2008 marks the 75th anniversary of the FDIC.

    Yet, I doubt this is a celebratory environment for an institution that serves to protect depositors. I've got a feeling the FDIC will be quite active over the next 12 months as smaller banks, including possibly some regional banks, head into bankruptcy.

    The government's safety net might offer peace of mind to some individuals, but for most depositors it's a stop-gap none of us want to secure. As a precaution, park your cash and short-term emergency liquidity needs at J.P. Morgan Chase, Citigroup, Bank of America or 90-day Treasury bills. I'd avoid small institutions and the regional banks.

    ERIC ROSEMAN, Investment Director