Banking Crisis II

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Banking Crisis II

Post by raptor » Tue Jan 20, 2009 5:41 pm

The following is my opinion only and does not constitute investment advice.

We are now seeing the start of the second banking crisis. This like the first will be world wide. The Royal Bank of Scotland has had 70% of its equity turned over to the UK government after it posted losses that are double the losses of any other bank...ever. The Royal Bank of Scotland (RBS) announced that its losses for 2008 would be a staggering 28 billion pounds (41.3 billion U.S. dollars). Moody and S&P say more RBS losses are coming down the road.

http://uk.reuters.com/article/bondsNews ... 4620090120" onclick="window.open(this.href);return false;

Other countries are seeing credit problems:

Ireland
http://www.telegraph.co.uk/finance/4241 ... crisis.htm" onclick="window.open(this.href);return false;

Spain:
http://www.reuters.com/article/newIssue ... 5820090112" onclick="window.open(this.href);return false;

The US Treasury is still trying to prop up CitiBank and Bank of America while Merrill Lynch owned by B of A just announces a $15 billion loss.

What this means is:

1) More banks will start to fail in 2009 some of them big. Think about the turmoil caused by Lehman's collapse. You need to have an adequate cash reserve in a place. If events go very badly, a banking holiday is not out of the realm of possibilities. I am not saying run and close your account, I am simply saying be aware and be prepared for a bank holiday. We are entering a time when it may be possible.

2) Credit will start to freeze again. That means that business expansion will slow or more than likely businesses will contract further since they will cut back to be conservative and preserve the precious capital they have now. Put simply more layoffs fewer job recalls. Consumer credit will be difficult to obtain, plan on paying cash for a lot of things.

3) With more layoffs, the housing market will continue to worsen or if we are lucky it will stay low and simply not recover but not get too much worse. Watch the mortgage rates and the available loans.

4) People will be calling for the restoration of inflation. I still do not think inflation will be a problem in 2009... or 2010. all of these bank failures will erase wealth. this wealth erasure will contribute to deflationary pressures. You will see article like this.

http://blogs.reuters.com/great-debate/2 ... -disaster/" onclick="window.open(this.href);return false;

5) Chrysler is toast. The merger of Chrysler and Fiat reminds me of the merger of AMC and Renault with the same end result being likely. In the end I don't think a Chrysler failure will matter to the economy, except to their employees.

6) All of the bad news will make the markets test their previous lows. I have no idea how low or how long (& neither does anyone else IMHO), but when the markets rally and they will from time to time, sell into these rallies and move yor money to cash and cash equivilents.

7) I do not think the US dollar will collapse, not because it is in good shape...it is not! The US dollar looks very ugly right now. However, the pound and euro look even uglier. If you are long on the pound or euro it might be good time to diversify. Note I am not saying it is impossible for a dollar collapse only that I do not think it will happen. A US dollar collapse would be very different in the US from any other currency collapse. I do not think the Argentina or Wiemar Germany collapse model would be a good study for such a collapse.

I still do not see TEOTWAWKI, but then what the hell do I know. We are in unknown waters. This will not be the Great Depression II, the results may look the same in 2009 but we will have gotten there by a different path and route out of this mess will also be different. the problems we face are different from 1930 so avoid a blanket generalization of it was true in the Great Depression or in the 30's so it should work now. Very few things in the 30's can be transplanted to 2009 and work the same way.

My suggestion is stay liquid cash, cash equivilents like 13 week T-bills look good right now. Cash in your hand will be the best investment today and likely through 2009. Gold is also a possibility but you should be prepared to see it lose value so do not overweight your portfolio. However, with the potential turmoil it would not surprise me to see it hold its value while other commodities are losing value.

You ask about oil all I can say is that the oil companies are going into a capital conservation mode or the acquisition mode. Either way that means job losses in that sector and failing oil prices... at least for a while.

http://www.reuters.com/article/innovati ... 2520090120" onclick="window.open(this.href);return false;


EDITED to add:
I wish I could find a silver lining to the coming year. The only one I can find is that I think the coming 2 years will reshape America and turn us back to the basic beliefs that made great. That which does not kill us makes us stronger. 2009 and 2010 will not kill us, therefore it will make us stronger.
Last edited by raptor on Tue Jan 20, 2009 7:11 pm, edited 2 times in total.

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Re: Banking Crisis II

Post by TheGunslinger » Tue Jan 20, 2009 6:06 pm

Actually, I reckon that in the same vein that the US dollar will win the 'least ugly' competition, the US economy will increase, not decrease it's lead ahead of the rest of the world.

The US economy, whilst looking pretty rough and ready, is going to go back to basics. It's robust, it's still strong and their are still products it produces that the rest of the world wants.

China and Inda, after making massive GDP gains is set to reverse them damn fast - foriegn investment is going to dry up, outsourcing is set to reverse in so many industries. I think that jobs will start flowing back to US shores. Perhaps not in manufacturing, but certainly in services. Instead of running red hot with virtually 0 capacity, prompting services to go overseas, the US economy now has a lot of slack to pick up.

I'm totally guessing, and it's all based more on what I think, rather than any real empirical evidence - but who else would be doing better? For every exposure that the US has to risk, any other large trading block has something similar or worse.
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Re: Banking Crisis II

Post by raptor » Tue Jan 20, 2009 6:16 pm

TheGunslinger wrote: For every exposure that the US has to risk, any other large trading block has something similar or worse.
That is the problem in a nutshell. The much touted world economy is great when things are booming but when one country gets a cold everyone else catches the cold. This BTW can also lead to isolationism and trade wars as countries try to export their problems. This did not work before the "world economy" and is less likely will not work now.

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Re: Banking Crisis II

Post by TheGunslinger » Tue Jan 20, 2009 6:47 pm

Protectionism/isolationism would be one of the worst things you could do at the moment.

Whilst it might look like a good idea, throwing up protectionist barriers would be catastrophic. If you stopped the foriegn investment flowing back into your nation, whichever one that is, then you'd better have something that stops people from wanting to invest outside.

Pretty quickly, you'll find that money will flee your economy. Even if its only a small leak, with much less coming back in things can degenerate really fast.
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Re: Banking Crisis II

Post by theclockwork » Tue Jan 20, 2009 6:48 pm

I would say the big warring bell will be when we barrel ( not just fall, but free fall) below 7500. Its a marker point in the psychology of the market. All bets well be off then.

Raptor, you have a very firm grip on whats going on I have to say. I pulled most of my money out of BOA in late September, got out of everything before it tanked. I almost bought back in when the market hit 7998 the in the first round of free falls, but I figured I wanted to wait till I saw stead gains and what they where going to use the big bail out for. When I saw they where not really treating the issues with the market but just giving out the money to banks, I knew to stay out.

See, I figured it like this, bankers are shrewd men. That's how they got rich. Nothing really wrong with it, but that's who they are. When you give a banker money and tell him to fix a issue with it, he will look at the problem and likely see a easy or at least direct way to fix the issue, as he is a smart man and understands whats happening. But he will not approach the issue by this manner, he'll try and find a way to make money and fix the problem too. In this case a major round of mergers, now in his mind, its ok to do this as the risk of the problem not being fixed is out weight by the potential to gain personally, or at least corporately. So they made there bets, and of course, they did not pan out. As soon as I saw that the mergers did not have the stimulus effects they wanted and I started to see strain on BOA and Even Wellsfargo, I knew I had to stay liquid for a while longer. I have to say. I am pretty dammed scared for my father a small businessman. I am not sure if the shop can weather this storm. At least its a silver shop and we do good when people have less money.

Sorry for rambleing, I just jotted this out at work.
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Re: Banking Crisis II

Post by phil_in_cs » Tue Jan 20, 2009 7:17 pm

Raptor isn't the only one giving the advice to move to cash; and that advice itself is very deflationary. As people build up cash money cushions, there is that much less money in the banks for them to lend.
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Re: Banking Crisis II

Post by BeerandGuns » Tue Jan 20, 2009 7:29 pm

I was just thrilled to go into work today and listen in as Regions bank announced a $6.25 Billion write off. Hey, it's "good will", it's a "good will" write down. That's all, no worries. Except that they lost $0.35 per share with the good will decrease removed from the picture. Company stock plunged 25% in one day.

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Re: Banking Crisis II

Post by hdandb » Tue Jan 20, 2009 7:42 pm

I have nothing to add except that I can no longer read post that have something to do with "nukes" or the author is Raptor. I am not upset so please do not take in a negative way, I just want to be oblivious and live in my happy world.
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Re: Banking Crisis II

Post by naegling62 » Tue Jan 20, 2009 8:40 pm

raptor wrote: but then what the hell do I know.
Well raptor, on this forum I have noticed that when it comes to guns there's DavePAL84 and when it comes to economics there's you my friend. Thanks for the post. You make more sense than most of the "talkingheads" on cable. :wink:
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Re: Banking Crisis II

Post by Ellie With An Axe » Wed Jan 21, 2009 12:25 am

theclockwork wrote:I would say the big warring bell will be when we barrel ( not just fall, but free fall) below 7500. Its a marker point in the psychology of the market. All bets well be off then.
With the DJ closing below 8000 today, on such an important day, I certainly had a hard time looking to the future. I know it's imperative to try, but it's difficult sometimes. I have hope that the DJ will settle above 8500 tomorrow, but that number is no longer proof of anything. Trouble is everywhere. My tactic as of late is just to be as proactive as I can, and keep focused on the immediate needs.

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Re: Banking Crisis II

Post by OhioMe » Wed Jan 21, 2009 12:46 am

We're seriously considering stopping adding to my wife's 401(k) for the near future. Her portfolio has dropped so low that 11 years worth of employer match is gone. Her company's stock trades at less than $.50. Not counting the tax savings, she is at the point or 'losing her own money' right now.

What is really irking me is that no financial consultants are willing meet with us or go out on a limb for suggestions. It is like even the people that are supposed to know what they are doing are paralyzed with fear.
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Re: Banking Crisis II

Post by TheGunslinger » Wed Jan 21, 2009 1:04 am

I'd say that unless the company (and the 401k plan) is going under or bankrupt or something, then still make contributions.

Sure, it's not performing at the moment - but you will also be buying at market bottom, or close to. Your dollar contributions will be going a lot further.

Unless of course, you need that cash for other more immediate things.
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Re: Banking Crisis II

Post by phil_in_cs » Wed Jan 21, 2009 7:02 am

OhioMe wrote:We're seriously considering stopping adding to my wife's 401(k) for the near future. Her portfolio has dropped so low that 11 years worth of employer match is gone. Her company's stock trades at less than $.50. Not counting the tax savings, she is at the point or 'losing her own money' right now.

What is really irking me is that no financial consultants are willing meet with us or go out on a limb for suggestions. It is like even the people that are supposed to know what they are doing are paralyzed with fear.
My 401(k) has options for money markets; I could move stocks to those if I choose. You likely have similar option.

Also, be sure you're diversified - her company stock shouldn't be the only one you're in. That's how the Enron folks got hosed.
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Re: Banking Crisis II

Post by herbalpagan » Wed Jan 21, 2009 7:17 am

We've lost a lot of our 401K also. A total of 5 years so far...I had given a brief thought to cutting it out and just putting it in savings, but the company is strong (defense) and all our funds are in defense funds. Husband says, we can just buy more stock while it's low and hopefully recoup the 5 year loss in the future. We have about 12-15 years left till retirement, so it might be ok. The thing bothering me is that hubby thinks we should put more into stocks while the prices are down. I think we should just put the extra in savings.
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Re: Banking Crisis II

Post by Ad'lan » Wed Jan 21, 2009 8:12 am

Raptor. I have one question. I have an exam in 45 minutes. Will my Money be safe untill I get back in the evening?

It's in cash and an ISA in a Bank Owned by RBS. (Apart from an emergency fund). IF the Bank goes tits up, do I loose the money?
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Re: Banking Crisis II

Post by OhioMe » Wed Jan 21, 2009 10:00 am

My wife works for Rite-Aid, here is their stock profile: http://finance.yahoo.com/q?s=rad" onclick="window.open(this.href);return false; If they don't get above $5 they'll be de-listed. They are going to do a reverse split. When they started it was going to be something like 5:1, then 8:1, now 10+:1. The insurance on their debt just jumped from around .5% to over 2%. IMO the company is going down.
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She would most likely just be folded over into whatever company buys Rite-Aid, but if she isn't I think I'd rather have the cash than pissing it into the current black hole of the market.
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Re: Banking Crisis II

Post by phil_in_cs » Wed Jan 21, 2009 10:12 am

Her 401(k) account is hers, no matter what happens to the company. Stock in RiteAid is worthless if it folds, of course, but the account is held out side and belongs to her.
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Re: Banking Crisis II

Post by OhioMe » Wed Jan 21, 2009 10:21 am

Yeah, I understand that Phil. I was just using her employers' current difficulties to illustrate why she is thinking of temporarily halting further funding of the 401k for the time being. My wife is a very apathetic investor so she will most likely do nothing.

The market fell to 10K, they said... keep investing. 9K... keep investing... 8k...keep investing... Soon...its down to 7,000...don't pull your money out yet, change is coming!....
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DavePAL84 wrote:If you guys bring an old t-shirt or two each it would also be beneficial (maybe something you don't mind being perforated with bullets and then thrown out?)
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Re: Banking Crisis II

Post by Moana Drifter » Wed Jan 21, 2009 10:32 am

phil_in_cs wrote:
OhioMe wrote:We're seriously considering stopping adding to my wife's 401(k) for the near future. Her portfolio has dropped so low that 11 years worth of employer match is gone. Her company's stock trades at less than $.50. Not counting the tax savings, she is at the point or 'losing her own money' right now.

What is really irking me is that no financial consultants are willing meet with us or go out on a limb for suggestions. It is like even the people that are supposed to know what they are doing are paralyzed with fear.
My 401(k) has options for money markets; I could move stocks to those if I choose. You likely have similar option.
Legally, you can do what you want with your contributions, but a lot of companies provide their match only in company stock and restrict how you can unload that stock and her company may have that policy.
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Re: Banking Crisis II

Post by phil_in_cs » Wed Jan 21, 2009 10:42 am

Moana Drifter wrote:Legally, you can do what you want with your contributions, but a lot of companies provide their match only in company stock and restrict how you can unload that stock and her company may have that policy.
I thought that was changed after Enron...
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Re: Banking Crisis II

Post by raptor » Wed Jan 21, 2009 11:11 am

Ad'lan wrote:Raptor. I have one question. I have an exam in 45 minutes. Will my Money be safe untill I get back in the evening?

It's in cash and an ISA in a Bank Owned by RBS. (Apart from an emergency fund). IF the Bank goes tits up, do I loose the money?
You money should be safe for the time being, but I would suggest opening an account with a bank other than RBS and splitting your funds between two banks just in case. I am not as familiar with UK banking laws as I am with US and Swiss laws. I believe your UK equivilent of the FDIC insures your account up to a statutory limit and I would under no circumstances exceed that limit. You would not lose funds under that limit but if things go really bad, it may be days before you can regain access those funds. I would consider using a bank other than RBS but do some research first to find one that is healthy. In the US many of the smaller banks are in great shape. I have moved accounts to such banks.


Finally let me state once again my post is not urging everyone to close your accounts and hide your cash at home. Nor am I saying sell all of your stock regardless of the cost. I am saying be prepared to withstand in a worst case scenario a POSSIBLE bank holiday. I stress possible here I am not saying it is going to happen just that we are entering point where it is possible.

I am saying liquidity and safety should be your goal in 2009 even to the point of foregoing a return on your capital. It is better to earn a .01% return on your money by keeping in cash than to incur another 20% or 30% hit.

Do not pull out of your 401(k) program, simply ask the plan administrator to help you move your current deposits into a money market fund. If you want to reduce your 401(k) do not reduce your contributions to the point where you lose match dollars. Simply put these deposits into the money market fund option. If you reduce your 4019k) contribution do not spend this money! Continue to save it it is too easy to spend the cash if you receive it.

Finally check out your bank on a regular basis and watch the news for information on your bank. you can use this site to assess your bank. However like October we are entering a fluid situation and it is possible that a "strong" bank one day will be toast next week.

http://www.bankrate.com/brm/safesound/ss_home.asp" onclick="window.open(this.href);return false;

Good luck and God Speed to everyone.
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Re: Banking Crisis II

Post by phil_in_cs » Wed Jan 21, 2009 11:16 am

raptor wrote:In the US many of the smaller banks are in great shape. I have moved accounts to such banks.
The bigger banks biggest problem right now is everyone is doing that.... The invisible hand is pushing money to the small/strong banks, which means the invisible foot is kicking the legs out from under the big/weak ones.
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Re: Banking Crisis II

Post by raptor » Wed Jan 21, 2009 11:46 am

phil_in_cs wrote:
raptor wrote:In the US many of the smaller banks are in great shape. I have moved accounts to such banks.
The bigger banks biggest problem right now is everyone is doing that.... The invisible hand is pushing money to the small/strong banks, which means the invisible foot is kicking the legs out from under the big/weak ones.
Yes and no.
For instance, the recent $6.5 billion write down of goodwill by Regions Bank is due to the market conditions. It is a non-cash charge to income. BTW Goodwill means that a company paid premium for assests during an acquisition. Goodwill is an intangible asset that screams I did not negotiate hard enough or that the asset I bought was very valuable to me therefore i am paying an amount in excess of its value.

In addition the mega banks have services that smaller banks cannot provide so businesses have no choice but to use these institutions for a lot of services. If you are in Dubai and I offered you letter of credit drawn on the Bank of New Orleans or one drawn on Bank of America or Credit Suisse which would you chose? BTW Bank of New Orleans has a five star rating and is very sound.

I have no doubt Regions will lose deposits over its write down. I for one left them in October 2008. But the reason I left them was their expansion policy in my opinion left them vulnerable in the current market climate.

Finally let me state that there is no obligation on anyone's part to leave their funds exposed any more than there is an obligation in a PAW situation to take in other less prepared people. You all have a positive duty to protect yourself even if that means your actions may harm a damaged banking institution. I can assure you, if the roles were reversed the banks would have no problem taking the bread out of your mouth. Protect yourself, rely on yourself, do no harm but ensure no harm comes to you and yours.

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Re: Banking Crisis II

Post by naegling62 » Wed Jan 21, 2009 11:58 am

O.K. guys, what happens if there is a bank holiday? Please advise for the following:

1) You own a buissness.

2) You are employed by someone else.
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