Weakest and Strongest USA Banks & Thrifts 08/11/08

Introduction – The FDIC has a list of the banks that are in danger but will not let anyone know which institutions are on that list. Hmmmm. This leaves the consumer in the lurch. You may say it does not matter as long as you keep within the FDIC limits for insurance. Please remember that the FDIC is a private corporation and can go into bankruptcy due to losses exceeding their reserves. The FDIC is now lobbying Congress for more reserve money and that should tell you something. That something is more failures are on the way and those failures will be in excess of the FDIC reserves.

If you feel the USA is going to maintain a sound fiscal policy and there is no need to worry, all will be ok, then there is no need to continue reading this article. If you are a little concerned about the millions of homeless people, the staggering price of gas, high unemployment rates, loss of jobs to overseas markets, millions of undocumented foreigners working and not paying taxes and sending the money out of the country, high taxes, massive frivolous litigation, the numerous failed banks that have been closed this year alone, the mortgage crisis including Fannie Mae and Freddie Mac needing a bailout for many billions, plummeting house prices, credit card delinquencies at an all time 90 day high, bankruptcies at an all time high, 50 million people without health insurance etc then you should read the rest of the article.

Nothing here is more than an opinion based on information obtained from information on the Internet.

Below is a list of the 10 weakest USA Banks and Thrifts according to Mike Larson and Martin Weiss of www.moneyandmarkets.com.

From: www.moneymarkets.com

Discussion – One can easily see from the above list of weak banks that the FDIC reserve of $53 billion of which 15% has already been used up by the IndyMac failure is far from adequate. Something like an extra 1000 Billion (commonly called a trillion) may not even be enough. Look at the list again. Some say Wachovia alone has $300 billion in losses. Some experts predict 300 bank failures in next few years. So what happens? Who knows?

The FDIC, which is asking Congress for additional reserves, may get the money window slammed shut in their face. They may get enough money to keep their finger in the dyke for a few months until a new administration comes in. They may get enough for a year or so. They may get what they need but if they get any substantial extra reserves the extra expenses will be passed onto the consumers in the form of more and higher bank fees and lower interest rates. Basically you get to pay for their poor lending practices, lack of sound banking principles and mistakes. If you keep your money in the system playing the “I Hope It All Works Out Game” you are gambling on your government, the banks, the real estate and mortgage industry, Fannie Mae, Freddie Mac and the FDIC to do the right thing and make it all finish well. But it is them who got you in this mess in the first place isn’t it!

In 2002 the dollar was on par with the Euro, now a Euro buys 1.5 (approx.) dollars. A drop that is not slight. That is a decline in your buying power. Before you rush out and buy Euros remember the Euro is considered to be overstated and may drop substantially in near future and the dollar may come back. The bank failures and FDIC failures may have little or nothing to do with the price of the dollar on the world market. Banks are failing now like crazy and the dollar hit a five-month high against the Euro this week. Go figure that one out. Remember there is a credit card crisis coming on the tail of the mortgage crisis. (90-day credit card delinquency rates are at an all time high now). This will further propel the bank failures but it will not hit as hard as the mortgages since the dollar amounts are much lower . On the other hand these credit card loans are unsecured so the damage to the lender is worse since the losses are almost always completely unrecoverable. With a home foreclosure maybe the lender can get back a fraction of the loan amount, perhaps 30% to 65% after expenses.

What to Do – The first thing one can do is nothing. Look for what is a good secure bank, see above for suggestions as quoted, and hope for the best. Do bear in mind that the FDIC is a merger player. When they deal with the failed banks they try to merge them in with healthy ones to water down the losses as best as possible with creative accounting. The FDIC can be a very assertive negotiator in a merger situation. Without the FDIC insurance a bank can just close right up. If they get the FDIC mad, the FDIC can send in the auditors and revaluate the banks loans portfolio and uh oh now they are on the endangered species list. It is not wisdom to get the FDIC mad at you. Better to take the merger and negotiate for sympathetic deals from the FDIC. So the point of this is that when the carnage is over the good banks will not be so good after they have been merged one or more times with other failed institutions and their poorly performing loan portfolios.

The good banks will be good for how long is the question? They do not have complete control over their own destiny thanks to the FDIC. Another thing one can do is go into holding other currencies. This would require banking outside the USA. This is certainly a better choice than staying in the USA. Going offshore and even staying in USD denominated bank accounts is not such a bad idea. The offshore banks are generally much healthier than the USA ones. Houses are paid for in cash in most all of the countries of Central and South America. There is no sub-prime or credit card crisis. Mortgages are hard to get and when possible the down payments are often 30% to 50%. 100% financing is unheard of. Raw land loans are rare. These Central and South American banks never did 125% equity loans like in the USA. Frequently bank reserves can be up to 12%, not 1.2% as in the USA. The banks do not practice wild lending like in the USA. They are much safer. They are far from reaching critical mass. Business is good in Central and South America. No nation there is trying to fund a massively expensive war.

What About the USA Economy in General – In a word it is a mess. There is nothing that leads one to think it is capable of rebounding for years and years. This is not the sort of recession or depression that the nation will recover from in a year or two. Think four or five years for something resembling a recovery, best case. A new President can’t do much. He can cut spending but what about the debt that has mounted up over the years. There is a shortage of jobs, many of which have moved overseas. A lot of people are working for various governments, which is not adding to the productive economy. Government workers are by and large tax consumers, not taxpayers. In other words everyone cannot be a government worker. There are 12 million undocumented foreigners many of which are working in the USA and not paying taxes yet deriving benefits of various sorts such as emergency health care, schools, and other public assistance all at a cost.

So who is going to be buying these foreclosed houses. No one really. The real kiss of death to the housing market has yet to come. This is when the banks are choking on repossessed houses and are forced to rent them out to have some cash flow. Banks need cash flow. They have interest payments, wages, and overhead. When there are a lot of rental houses prices and rents go down. Now one can rent the same or a similar house up the street and lower their monthly payment by $800 or more. Hmmmm. Looks good to a family struggling to keep the lights on and gas in the tank. If there are a lot of rentals on the market credit guidelines will pretty much go out the window.

Today millions and millions of people have impaired credit and the people with perfect credit are unlikely to be renters. So those struggling to keep their financed houses, walk away from their mortgages, take the hit on their credit and become renters. Bankruptcy can be added in. If one has nothing, bankruptcy still works. If one has nothing, bankruptcy becomes a waste of money. Now the amount of foreclosures goes up even more as more and more people decide to quite the mortgage rat race and become renters. People say why struggle to make the payments when I can rent and have cash left over for medical expenses, gas, heating etc. Remember you have 50 million people running around without any health insurance. Those with health insurance usually have high deductibles, high co-pays and poor coverage in general which means their contributions will be substantial and the rates they pay are sky high. Now the mortgage crisis will get worse from the voluntary walk- aways converting to renters.

The lenders and the real estate market will do everything they can to keep the rental rates up but when it gets as bad as it has gotten rest assured the rentals will flood the market and the foreclosures will increase again. Remember things are so bad the average consumers credit is not good anyway. The credit card people are closing accounts, reducing credit lines etc. When things get bad enough like it is now, all it takes is income to get secured credit. The car dealers will have to take bad credit or they will have to start closing the factories. They may charge high interest rates but they will fiancé cars or else they will close down. Then comes the home rentals and the market will demand that renters with bad credit be allowed to rent. Only those with the highest credit ratings are going to be able to get unsecured credit like credit cards.

So the bottom line is expect to see much more of the same, which means bank failures, will abound. When people walk away from their house mortgage they will also walk away from their credit card debt. Many are up to their eyeballs in credit card payments. They are paying 19% or more in interest. Their lines of credit are used up or mostly used up and they are just making the payments to try and save their credit. This will only serve to increase the bank failures. Another game that will be played by the lenders is to do anything to prevent foreclosures. Let people fall further behind in their payments like make 7 payments a year instead of 12, or make partial payments and so forth. This will only delay the people from walking away from the house but if the payment with the required insurance is more than the amount needed to rent a similar house they will eventually walk away. When they drop behind in payments first their credit gets impaired so the incentive to make the payments to preserve their credit is removed. Next, the negative equity in the house soars. Then add on late fees to the payments already not being made. Eventually they are so buried upside down in the house the house would have to double in value for them to get well and that is not going to happen for many years.

There is safety in numbers. If a lot of people walk away it gets easier. The bankruptcy courts fill up and the wait becomes years long. This means you sit there in suspended animation with no payments for years until your case moves forward in the bankruptcy courts. Sounds better than struggling to keep the lights on and gas in the car each week. The collection agencies will start to go bankrupt themselves. They cannot get blood from a stone. It costs money to keep people on the phones bothering people and sending letters out. Filing court cases is expensive. A small claims action alone costs probably $150 in most jurisdictions. A regular court case can cost twice as much to file. They can’t keep chasing people who have no jobs, no equity in the house and no equity in their car. They bank using a friend or relatives bank account or just resort to check cashing and they become judgment proof, forget bankruptcy. If they have a job and the lenders or collectors try to attach their wages they can show up in court with a budget and show the court that they have no excess money to pay the debt and have the payments suspended for some months at a time or longer or reduce the attachment to 2% from 25%. Again a loser for the collection agency.

What’s the point of all this – it is going to get worse. Without new jobs increasing it is going to be worse. See any new jobs lately? See any new manufacturers opening up? See any expansions from existing manufacturers in the USA, not overseas? More doom and gloom is on the way. It will be years to get this economic mess turned around. Dropping interest rates won’t work. They need to do things to allow businesses to thrive and this is the opposite of what they have been doing for twenty years. They have placed so many taxes, and other demands on businesses that most of them just quit and shut down their USA operation as no longer being a feasible environment to operate in. You think the politicians will reverse on this? I don’t. I also do not think they want to go down with the ship either. I am just not sure if they understand that the ship is sinking. Remember they are politicians not business people. There is a saying business people use, experienced business people that is. It goes something like this. Let me go into partnership with a fellow who has been in business and has been bankrupt. He knows when to get out of a bad deal and does not need to ride it into bankruptcy before he knows it is a bad deal. These politicians have never bankrupted a country before and they might not know they have bankrupted their country until it is over. Food for thought.

Want a Better Life – Leave, at least for a few years until things restore if they ever do restore is quite debatable. The ones that get out first get out with the most. Let us help you settle in Guatemala or Panama. Live free and live better. Have better cleaner food, better health care that is affordable, have a nice home cheap, have domestic workers like maids, and enjoy life. We have our own agriculture, fish, meats and we manufacture things since our labor cost is low and our economies are good. While housing costs in the USA are down now the cost of living is quite high. The cost of living is quite low where are. Our people are working and our malls are hard to get a parking spot in at night or on the weekend. In Guatemala a beach home (3 bedroom) on the beach is $100,000, 3 bedroom condo in the city $140,000, 9000 sq. ft mansion villa is $750,000 in a gated community. Guatemala city is the land of perpetual spring with year round temperatures ranging from 55 to 75 degrees. Panama offers more of a Miami Beach type environment at higher prices. Nice city condos start at around $250,000 and a nice beachfront home is going to start at $450,000. Domestic help is reasonable, the food is excellent and the weather is full tropical so leave your snowshoes and skis home.

If you don’t leave at least move some of your assets offshore. There is no financial advisor in the world that ever speaks badly against diversification. Feel free to call on us for assistance.