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The Meeting Behind The U.S. Banking Crisis

I’d heard about it a couple of times before: the infamous April 2004 meeting between the Securities and Exchange Commission and the big investment banks which, supposedly, is a major contributing factor to the ongoing U.S. banking crisis. Thankfully, Stephen Labaton of the New York Times heard about the meeting as well, and wrote in early October:

Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.

On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington…

The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

With that, the five big independent investment firms were unleashed.

… and the rest is history. Labaton explained:

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.

Thumbnail (click to open)
Leverage Ratios For
Major U.S. Investment Banks
2003-2007

The outcome? The end of the U.S. investment banking era. From UPI on September 22:

The U.S. Federal Reserve ended an era on Wall Street Sunday, agreeing to allow two investment banks to change structure to become bank holding companies.

Morgan Stanley (NYSE:MS) and Goldman Sachs, the remaining two large U.S. investment banks, requested the change, which gives them greater access to federal lending but additional regulatory oversight.

Previously regulated by the Securities and Exchange Commission, the two investment giants will now have restrictions akin to those placed on commercial banks, The New York Times (NYSE:NYT) reported Monday.

The other three large Wall Street investment banks met separate fates over the past six months. Bear Stearns (NYSE:BSC) collapsed in March and was bought by J.P. Morgan and Chase Co (AMEX:CCF) with help of a $30 billion federal loan. Last Monday, Lehman Brothers Holdings Inc. (NYSE:LEH), filed for Chapter 11 bankruptcy protection and Bank of American purchased the third — Merrill Lynch (NYSE:MER) — for $50 billion.

Meanwhile, while all of this was taking place, the Securities and Exchange Commission, under Chairman Christopher Cox, were nowhere to be seen. Labaton wrote:

In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves…

The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.

But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago…

Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.

“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.

Try crystal clear. Reporting on the program’s termination, Reuters’ Rachelle Younglai wrote on September 26:

“Sadly, this is the absolutely classic case of locking the barn door after the horse has been stolen,” said John Coffee, a professor at Columbia Law School. “They have belatedly recognized (at least the inspector general) that the consolidated supervised entity program was not working as intended and that a case for strict leverage ratios needs to be recognized.”

Too bad the “big five” U.S. investment banks are no longer around to heed such advice.

Sources:

“Agency’s ’04 Rule Let Banks Pile Up New Debt “
Stephen Labaton
New York Times, October 3, 2008

“U.S. investment banking era ends”
United Press International, September 22, 2008

“UPDATE 2-US SEC’s watchdog faults investment bank oversight”
Rachelle Younglai
Reuters, September 26, 2008

AIG, RBS Toasting Your Stupidity?

American International Group (AIG) is back in the headlines again. Back on October 24, I wrote about how AIG executives spent $440,000 in company funds for a luxury retreat in California and $86,000 on a weekend partridge hunt in England even though the American insurance giant needed to be bailed out by the U.S. government.

And how was this situation dealt with? Well, I’ve haven’t heard about any disciplinary action, but MarketWatch reporters Alistair Barr, Sam Mamudi, and Rex Nutting wrote this afternoon that AIG’s bailout terms were just modified and improved. They wrote:

The U.S. government dramatically changed its bailout of American International Group on Monday, giving the struggling insurance giant more time and financial flexibility to sell assets and repay the mountain of debt it owes taxpayers.

The total value of the new plan — roughly $150 billion — represents the largest government support package extended to a private company in U.S. history…

The changes give AIG a better chance of surviving, several analysts said.

…and more time to finalize plans for that year-long African safari AIG executives have always dreamed about.

Not to be outdone by their counterparts on this side of the pond, it’s being reported that Halifax/Royal Bank of Scotland executives used company funds to throw a $468,000 (£300,000) party this weekend— after British taxpayers bailed out their hides as well. Sam Greenhill of the Daily Mail (UK) wrote today:

The Royal Bank of Scotland has blown £300,000 on a secret champagne junket for executives - less than a month after being given a £20billion handout by the taxpayer.

Bankers and their partners enjoyed the lavish party to mark their ’success’ after a year in which the collapse of the banking industry led to global financial meltdown.

The supposedly stricken bank laid on the celebration amid extraordinary secrecy to try to prevent details reaching the public, even cancelling the original venue, a top hotel in Hampshire, and transferring the party 350 miles north to Edinburgh.

But despite holding the black-tie ball in private, executives gave the game away as they danced in the street and continued the fun back at their five-star hotel…

“15 minutes of shame”
Photo courtesy of Daily Mail (UK)

Sources:

“Washington dramatically alters AIG bailout”
Alistair Barr, Sam Mamudi, andRex Nutting
MarketWatch, November 10, 2008

“Bank executives enjoy SECRET £300,000 champagne party… just weeks after £20bn bail-out by taxpayers”
Sam Greenhill
Daily Mail (UK), November 10, 2008

FDIC Friday Night Special: Franklin Bank

From John Letzing over at MarketWatch tonight:

Houston-based Franklin Bank S.S.B. was closed by regulators Friday, the 18th bank failure this year amid the ongoing credit crisis.

The Federal Deposit Insurance Corporation said in a statement that Franklin Bank had total assets of $5.1 billion as of Sept. 30 and $3.7 billion in total deposits…

The FDIC estimated that Franklin Bank’s failure will cost its Deposit Insurance Fund between $1.4 billion and $1.6 billion.

Source:

“Franklin Bank closed, 18th failure this year”
John Letzing
MarketWatch, November 7, 2008

FDIC Friday Night Special- Alpha Bank

Another one bites the dust. MarketWatch’s John Letzing wrote late this afternoon:

Regulators said late Friday they’ve closed Alpharetta, Ga.-based Alpha Bank & Trust — the 16th U.S. bank this year to succumb to the ongoing credit crisis.

The Federal Deposit Insurance Corp. said in a statement that as of the end of September, Alpha Bank had total assets of $354.1 million, and total deposits of $346.2 million. The FDIC said there are roughly $3.1 million in uninsured Alpha Bank deposits in 59 accounts that potentially exceed its deposit insurance limits.

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Source:

“Alpha Bank closed, 16th failure this year”
John Letzing
MarketWatch, October 24, 2008

Bankers Get No Respect These Days

A long time ago, in a galaxy far, far away, the occupation of banker was seen by many as a prestigious one. Bloomberg’s Joe Mysak wrote on October 7:

Not too long ago, careers in finance beckoned the ambitious and avaricious. In New York, in particular, the only lives worth living seemed to be led by those who worked on Wall Street and whose compensation was determined in widely reported, year-end, life-altering bonuses.

As a financial storm blows through the U.S. economy and global financial system, and after Congress passed a $700 billion bailout bill, the perception of the occupation has changed— for the worse. And, now, Mysak writes, the position of banker is seen as:

Discredited and vilified.

Those are the words that can begin to describe the people most Americans would term “bankers.” Rarely has a broadly defined category of occupation sunk so far, so fast…

How long will it take to rehabilitate the profession? Is it three years? Five years? A decade? Fifty years?

How about when hell freezes over. I’m sure that’s what some were thinking after they read U.S. News & World Report associate editor Luke Mullins’ article from October 6. Mullins wrote in “Lehman E-Mail: Execs Mock Idea of Bonus Cut”:

Just before Richard Fuld, the CEO of the now bankrupt Lehman Brothers, testified on Capitol Hill Monday, House Committee on Oversight and Government Reform staffers distributed a handful of E-mails that they had obtained during their investigation of the company.

Perhaps the most damaging one is the following. In it, two executives—Fuld and George H. Walker, who sits on Lehman’s executive committee and is a cousin to President George W. Bush—dismiss a recommendation that top management forgo its bonuses for the year.

You can view the rest of the piece, along with an actual copy of the e-mail, here.

Speaking of Fuld, John Swaine of the Telegraph (UK) wrote on October 7:

Mr Fuld, who has been testifying on the financial crisis before the US House Oversight Committee, was attacked on a Sunday shortly after it was announced that the banking giant was bankrupt.

Following rumours that the incident had occurred, Vicki Ward, a US journalist, said “two very senior sources - one incredibly senior source” had confirmed it to her. “He went to the gym after … Lehman was announced as going under,” she told CNBC. “He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold.

“And frankly after having watched [Mr Fuld's testimony to the committee], I’d have done the same too.”

Bankers, it might be time to take a good, hard look at martial arts for defending yourselves…

“Welcome to my Dojo”

Sources:

“Bankers Might Need 50 Years to Regain Credibility”
Joe Mysak
Bloomberg, October 7, 2008

“Lehman E-Mail: Execs Mock Idea of Bonus Cut”
Luke Mullins
U.S. News & World Report, October 6, 2008

“Richard Fuld punched in face in Lehman Brothers gym”
John Swaine
Telegraph (UK), October 7, 2008

FDIC Friday Night Double Feature

Two more banks have bit the dust. MarketWatch’s John Letzing wrote tonight:

Northville, Mich.-based Main Street Bank and Eldred, Ill.-based Meridian Bank became the latest victims of the ongoing financial crisis on Friday, when they folded and their deposits were transferred by the Federal Deposit Insurance Corp.

The closures are the 14th and 15th bank failures so far this year.

Letzing noted how much would need to be drawn-down from the FDIC insurance fund:

The FDIC said Main Street Bank’s failure will cost its insurance fund between $33 million and $39 million, while Meridian’s failure will cost the fund between $13 million and $14.5 million.

More to come…

Source:

“Two banks fold, bringing total to 15 failures this year”
John Letzing
MarketWatch, October 10, 2008

U.S. Deficit, Debt Grows As Financial Crisis Heats Up

The financial crisis is burning one big fat hole in Uncle Sam’s wallet. From Bloomberg’s Matthew Benjamin today:

The global financial crisis is turning into a bigger drain on the U.S. federal budget than experts estimated two weeks ago, ballooning the deficit toward $2 trillion.

Bailouts of American International Group, Fannie Mae and Freddie Mac likely will be more expensive than expected. States are turning to Washington for fiscal help. The Federal Reserve said this week it will begin buying commercial paper, the short- term loans companies used to conduct day-to-day business, further increasing costs. And analysts now say the $700 billion bank- rescue plan passed by Congress last week may have to be significantly larger…

The 2009 budget deficit could be close to $2 trillion, or 12.5 percent of gross domestic product, more than twice the record of 6 percent set in 1983, according to David Greenlaw, Morgan Stanley’s chief economist. Two weeks ago, budget analysts said the measures might push deficit to as much as $1.5 trillion.

The Bloomberg reporter also brought up the issue of our national debt. Benjamin wrote:

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product. The rescue legislation increased the government’s debt limit to more than $11.3 trillion from $10.6 trillion.

Well, at least you can’t fault Congress for not planning ahead. Further exacerbating the problem with our nation’s finances, the Associated Press is reporting tonight:

Treasury Secretary Henry Paulson said Friday that the Bush administration will move ahead with a plan to buy stock in financial institutions.

Mr. Paulson said the program to purchase stock in financial institutions will be open to a broad array of institutions.

Ahead of the curve, Benjamin noted even before tonight’s announcement:

Meanwhile, Treasury Secretary Henry Paulson indicated two days ago that he is considering buying stakes in a wide range of banks in coming weeks to help recapitalize them.

Such a move is allowed under the $700 billion bailout package Congress passed last week. Edmund Phelps, winner of the 2006 Nobel Prize for economics and a professor at Columbia University, said such action is necessary — and will likely turn out to increase the measure’s cost…

The additional borrowing could push the national debt well past 70 percent of GDP, the highest since the immediate aftermath of World War II, when the U.S. was still paying off war debt.

In an attempt to illustrate just how out of control the debt is becoming, the Wall Street Journal’s Phil Izzo wrote in the “Real Time Economics Blog” yesterday:

The national debt clock, the unofficial tracker of the federal deficit maintained by the Durst Organization in New York, has reached its limits. Last month, as the national debt exceeded $10 trillion for the first time, the clock ran out of digits to record the number.

The dollar sign in the clock had to be deleted and replaced with a one to record the massive number. The clock’s owners say a new model — with space for two extra digits — will be in place early next year.

Now the debt clock will be able to reach the quadrillions. Hopefully, that’s not a level that will be breached any time soon.

Wow. I didn’t even know there was such a word as “quadrillions.”

I’ve given you a decision to make
Things to lose, things to take
Just as she’s about ready to cut it up
She says
Wait a minute honey I’m gonna add it up

-Violent Femmes, “Add It Up” (1982)

Sources:

“Cost of U.S. Crisis Action Grows, Along With Debt (Update1)”
Matthew Benjamin
Bloomberg, October 10, 2008

”U.S. Plans Bank Stakes”
Associated Press, October 10, 2008

“Sign of the Times: National Debt Clock Runs Out of Digits”
Phil Izzo
Wall Street Journal (Real Time Economics Blog), October 9, 2008

$40 Billion Loss Projected For FDIC Deposit Insurance Fund

From the Associated Press yesterday:

The head of the FDIC is asking for an increase in premiums that will double the average paid by U.S. banks and thrifts next year to replenish the deposit insurance fund.

Federal Deposit Insurance Corp. Chairman Sheila Bair is making the proposal at a meeting of the agency’s board. It calls for higher-risk institutions to pay bigger insurance fees than others.

The proposed increase is based on a projected $40 billion loss to the insurance fund from bank failures through 2013. It would reduce the industry’s average pretax income by 5.6% next year, according to FDIC estimates.

Question: if higher-risk institutions have to pay larger fees than others, wouldn’t that make them an even higher-risk? Just curious.

Source:

“FDIC chair asks banks to pay more”
Associated Press, October 7, 2008

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FDIC Friday Night Special: Ameribank

It’s not just Friday night. It’s an FDIC Friday Night— which means another U.S. bank closure. With more to come, according to the head of the Federal Deposit Insurance Corporation. MarketWatch reporter John Letzing wrote this evening:

A tumultuous week for financial markets was capped Friday with the closure of Northfork, W.Va.-based Ameribank Inc., the 12th U.S. bank closure so far this year.

The Federal Deposit Insurance Corporation said in a statement late in the day that deposits at Ameribank’s Ohio branches have been transferred to the Citizens Savings Bank, and Ameribank’s three Ohio branches will reopen Saturday as Citizens Savings Bank branches.

Ameribank’s West Virginia deposits have been transferred to Pioneer Community Bank, and Ameribank’s five West Virginia branches will reopen Monday as Pioneer branches, according to the FDIC.

As of June 30, Ameribank had $115 million in total assets and total deposits of $102 million, the regulator said.

Earlier today, FDIC Chairman Sheila Bair predicted there will be additional bank closures in the future. From the CNBC website:

There will be more U.S. bank failures as the global credit crisis continues, Federal Deposit Insurance Corp Chairman Sheila Bair said Friday.

“There’s going to be more, no doubt about it. We are in a challenging environment,” Bair said at a panel discussion at the New York Stock Exchange.

Banks have been struggling to survive amid a severe downturn in the housing market and tight lending conditions.

“We have industry reserves of $45 billion, but we also have longstanding lines of credit with the Treasury, so if need be, we have wide flexibility to borrow from the Treasury,” Bair reassured investors on CNBC.

“We’re explicitly backed by the full faith and credit of the United States government. People really don’t have anything to worry about,” she said.

And that’s when the red flag went up…

Note the fine print

Sources:

“Ameribank folds, 12th bank closure this year”
John Letzing
MarketWatch, September 19, 2008

“More US Bank Failures Coming: FDIC’s Bair”
CNBC, September 19, 2008

U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

Money Market Fund ‘Breaks The Buck’

It was only a matter of time. MarketWatch’s Jonathan Burton and Sam Mamudi wrote this morning:

One of the original and largest money market funds has put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1, in a rare instance in the fund industry of what is called “breaking the buck.”

Primary Fund, managed by New York-based money market fund inventor The Reserve, said late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero.

As of 4 p.m., Eastern, the value of the fund’s share was 97 cents…

While Primary Fund’s Lehman holding was small compared to the fund’s overall size, the fact that it froze redemptions reflects a surge in redemption requests by investors.

The size and speed of the withdrawals was stunning. At 3 p.m. on Tuesday, Primary Fund’s assets stood at $23 billion, a $40 billion hit from the $62.6 billion in the fund on Friday, a spokeswoman for The Reserve told MarketWatch late Tuesday.

Disturbing, with a capital “D.” Burton and Mamudi went on to explain:

Money market funds pride themselves on their liquidity and the safety of their investments. All money market shares are priced at $1 — a figure so important to the industry that fund companies take losses to keep the share price from dipping below $1, which is known as breaking the buck…

This is only the second time that a money market fund’s net asset value has dipped below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate.

Source:

“Money market breaks the buck, freezes redemptions”
Jonathan Burton, Sam Mamudi
MarketWatch, September 17, 2008

Bank Deposit Insurance Fund May Require Taxpayer Dollars

Marcy Gordon of the Associated Press reported yesterday that the insurance fund for protecting bank deposits has run into a bit of a problem. She wrote:

Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday…

Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators. Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC’s insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.

“We’ve got a … retail bank run forming in this country,” said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics…

Gordon noted the FDIC has turned to the Treasury Department before. She wrote:

If the FDIC doesn’t have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.

Source:

“Federal bank insurance fund dwindling”
Marcy Gordon
Associated Press, September 16, 2008

How Main Street Views Wall Street’s Crisis

Earlier today, Bloomberg’s Laurence Viele Davidson and Michael Janofsky wrote an interesting piece on the reaction of the American public to the chaos going on down on Wall Street. As I read the article, a number of words came to mind to describe how Main Street sees the latest financial crisis:

Ignorance

“I’m trying to absorb all this,” said Palladino, 48, a television writer, as he had coffee yesterday at the Farmer’s Market in Los Angeles and read newspaper accounts of the demise of Lehman Brothers Holdings Inc.

The significance of the 158-year-old New York firm’s bankruptcy filing eluded him, he said. “I don’t know more than anyone else, financially,” he said. “A bank to me is an ATM and a checking account.”

Blamethrowing

Linda Burke, 57, a customer service consultant with AT&T Inc. in Atlanta, said she figured her retirement savings would take a hit and added that she was angry, though she wasn’t sure at whom.

“If I knew more,” she said, “I could find someone to blame.”…

Jay Leslie, 60, of East Brunswick, New Jersey, said he may not be able to retire as planned in five years.

“I may have to work longer,” said Leslie, who sells women’s clothes. He said he blamed Washington, not Wall Street. “The government didn’t have any idea how serious this was,” he said.

Litigation

That wasn’t the view of Gary Jones, 67, an Atlanta retiree who said he was “so concerned I stayed up the last two nights moving my money into T-bills and other safe havens.”

“We ought to sue the heck out of every board of director for the last 10 years,” he said.

Apathy

For Shelley Sims, 44, who lives in Lawrenceville, Georgia, and works for Georgia Pacific LLC’s import-export division, the failure of storied companies was a wake-up call. She said she would start paying more attention to financial markets.

“When you see names like these in the news, it’s alarming,” Sims said. “It made me get my mortgage papers and investment documents.”

??????

For Chaz Harris, the developments didn’t convince him that the U.S. was in any trouble.

“The economy’s pretty bad, but people are still spending money on what they want,” said Harris, 20, an unemployed warehouse worker who lives with his parents in Weehawken, New Jersey. Referring to the Take-Two Interactive Software Inc. video game, he said, “I mean, ‘Grand Theft Auto’ did half a billion in seven days. So the economy’s not that bad.”

New economic indicator?
Source: WikiGTA

Source:

“Americans Certain Lehman’s Bad, Just Not Sure It’s Bad for Them”
Laurence Viele Davidson, Michael Janofsky
Bloomberg, September 16, 2008

Vanguard Founder Warns Of Difficult Economic Times, Drawn-Out Credit Crisis

John Bogle, the founder and retired CEO of the Vanguard Group, appeared on Bloomberg Television earlier today from Valley Forge, Pennsylvania. Bogle warned of “difficult economic times that very clearly lie ahead.” He added:

We’re going into something, or are in the midst of something, you might call the great unraveling, of all that excess credit, all that low-quality credit, that built up to such enormous levels in, say, the previous decade. So, that’s going to take a long time to unravel.

Bloomberg’s Betty Liu asked Bogle how far along he thought we were in the credit crisis. Bogle, who is still active with the second largest fund family in the country, replied:

None of us really know. I’m certainly among those that don’t know. But I’d say a third of the way through would be more like it. I’d say we have several more years to go. And they’re not going to be fun years for any of us.

He also added that he expects more bank failures and more bailouts during this time. According to Bloomberg, there have been $509.6 billion in credit losses and asset write-downs since the beginning of 2007.

You can view the 7 minute 12 second interview here.

Source:

John Bogle Interview
Bloomberg, September 3, 2008