Monday, September 29, 2008

Three Bank Monty - Monday's Global Bank Failures

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The nationalization of the world's banking systems took a big step forward on Monday, with major bank failures happening in the U.S., England, and the European continent. In all cases, the respective governments are getting a piece of the action. While it is generally acknowledged that socializing anything will lead to inefficient operations, general dysfunctionality, and substandard practices, apparently the governments of a number of developed economies have decided that socialized banking is an important component of the solution to the current economic crisis. These are of course the same geniuses that created the government policies that allowed the current economic crisis to take place and then remained completely oblivious to them as they unfolded.

In the U.S., Wachovia now no longer exists. Only last week it was the fourth largest American bank. Over the weekend the FDIC 'facilitated' troubled financial giant Citigroup's purchase of Wachovia's banking operations. Wachovia's own demise can be traced back to its takeover of mortgage lender Golden West Financial in 2006. Citigroup is supposed to be absorbing $42 billion in Wachovia's losses, but this will not happen if the banking bailout plan passes because the bill states that the taxpayers pick up the tab in such circumstances. The FDIC is supposed to cover any remaining losses and in exchange for doing so will get $12 billion in preferred stock. Nevertheless, in a statement that seems to lack both truth and consistency, the FDIC said that the Wachovia bailout won't cost its deposit insurance fund anything. Even though Wachovia's stock fell to 91 cents in Monday's before the bell trading (under one dollar is the market's statement that a company is insolvent), the FDIC claimed the Wachovia did not fail. If you believe that, you are also likely to believe that a pile of manure is a mountain or roses. Wachovia is indeed the largest bank failure in U.S. history (at least for now).

While Wachovia was collapsing in the U.S., the Benelux countries (Belgium, Luxenbourg and the Netherlands) had to bailout Fortis NV with a $16.4 billion cash infusion. In return, the three governments will get a 49% stake in the bank. The demise of Fortis should be seen as a derivative implosion similar to that which brought down U.S. insurance giant AIG. Fortis has had to write down its credit default swaps (CDOs) by 78% so far and this essentially made it insolvent. As was the case for Wachovia, the downward spiral for Fortis was also caused by it taking over a financial company with a dicey lending book. Fortis was part of a three bank consortium that purchased ABN Ambro in October 2007 (long after the credit crisis was front page news). The lead bank in that consortium, Royal Bank of Scotland, is on New York Investing's likely to fail bank list and its stock was down 11% in early Monday trading.

England doesn't have to wait for a future bank failure however. The British government on Monday was forced to nationalize Bradford and Bingley, taking over its $91 billion mortgage operation. The Brits also paid Spain's Banc Santander $33 billion to 'facilitate' its purchase of Bradford and Bingley's savings business. Bradford and Bingley specialized in mortgages for rental properties and it was reported that there had been no income verification for at least 17% of its loans. This was the second bank nationalization in England, Northern Rock was the first, and followed the government arranged purchase of HBOS Plc by Lloyds TSB Group only nine days ago. It is quite obvious that it will not be the last either. Total mortgage lending in Great Britain has fallen 95% (yes 95%) in the previous month. A credit collapse of this magnitude makes the dislocations of the 1930s Great Depression pale in comparison.

NEXT: A Bridge Loan to Nowhere - The Wall Street Bailout Plan

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


kevin r gallagher said...

thanks for all your writings and insights. wonderful!

Avatar said...

Swaps and Derivative are rather simple to understand. Did you know that you can payoff all the sub prime loans for $536,964,808,868. If you payoff the loans of those that had been late in the last 12 months it would be $227,136,207,581. Its a ponzi scheme look at the banks Revenues and compare them with their net income the annual reports are available online.


The cards are under the table.