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Are Banks Worried About You?
Furrowed brows, maybe, but for who?
There is an unspoken "mutual respect clause" among lawyers and judges. Courtroom opponents must live with each other both on the job and after work, on the golf links and in the country club. They've got each other's backs because they belong to the same club. That's also true of Wall Street bankers, the friends Cramer anguished about during his recent tirade on CNBC. These guys are under big pressure, trying to remain members of the club even as they obscure the extent of their losses from each other. This paragraph alone has given more thought to them than they've given to investors like you.
Today's New York Times article about "pack mentality among hedge funds," similarly describes a "good old boy" network among top Wall Street hedge fund managers. “These guys all know each other, and they all have the same strategies… They came from the same schools, and they get together for drinks after work.”
You watched the subprime contagion spread from the bottom to the very top of financial strata and around the world. Central banks injected rescue liquidity. Investment banks on the hook for deals estimated at $300 billion, cannot sell them to investors. Seven million people in the U.S. may lose their homes as mortgage rates reset. This process is still unfolding.
As an individual investor, I worry about keeping my savings in local banks that are heavily invested in real estate owned by debt-laden consumers addicted to easy credit. As real estate and the loan-packaging/reselling CDO scheme continues to unravel, smaller banks will eventually come under pressure. What happens to my deposits?
Bob Prechter's 2002 best-selling book, Conquer the Crash describes the situation:
Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.
Because U.S. banks are no longer required to hold any of their deposits in reserve (see Chapter 10), many banks keep on hand just the bare minimum amount of cash needed for everyday transactions. Others keep a bit more. According to the latest Fed figures, the net loan-to-deposit ratio at U.S. commercial banks is 90 percent. This figure omits loans considered “securities” such as corporate, municipal and mortgage-backed bonds, which from my point of view are just as dangerous as everyday bank loans. The true loan-to-deposit ratio, then, is 125 percent and rising. Banks are not just lent to the hilt; they’re past it.
Hedge fund investors didn't expect their assets to be frozen, and most investors don't expect trouble in local banks. If the credit contraction spreads to a bank that holds your "deposits," who will worry about you?
You need to take care of yourself. You can start by getting Conquer the Crash for free with a subscription to FFS (below). Then you can access our online CTC strategy updates that include the latest list of the two strongest banks in every state.