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HomeCould The FDIC Go Broke?
Posted by Larry Doyle on March 5th, 2009 9:45 AM |
In very short order, the FDIC (Federal Deposit Insurance Corporation) has seen its reserves plummet from $50 billion to $18.9 billion at the end of 2008. At that pace and with the expectation of more bank failures, could this bedrock of our national banking system go broke? Well, FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year. Is Sheila Bair unnecessarily sounding warning signals? Am I running to the bank to withdraw my money? No and no.
Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations. (more…)
Mo’ Money…
Posted by Larry Doyle on March 3rd, 2009 2:48 PM |
There are a string of events in the market today that all highlight the need for entities to refinance debt and raise capital. Given the tightness of credit and the onerous terms being exacted within the bond market, many firms are massively capital constrained. These issues are global in nature. From our friends at Bloomberg, I offer the links to a number of these situations. In light of these types of situations, one does not need to be in a hurry to buy stocks. Additionally, given the demands for capital, I still maintain that rates are headed higher.
I will share with you some of the current problem situations getting serious attention:
1. GE Falls Below $7 on Concern Finance Unit May Need More Capital
2. Corporate Bond Losses Drive Investors ‘to the Bunker’
3. Metlife, Lincoln Sink as U.S. Stock Rout Increases Capital Need
4. German Real Estate Firms Owe Billions, Face Deadlines
LD
Why is George Soros Short the Euro? MUST READ!
Posted by Larry Doyle on March 3rd, 2009 6:10 AM |
In very short order, I have gained a deep respect and regard for our Economic All-Star, John Mauldin. I have come to appreciate that Mauldin and I view the market through the same lens focused on the global economy. While many media outlets focus on the day to day, if not hour to hour trading activity, I believe they are truly missing the forest for the trees.
While I have written twice over the last week about eastern Europe being the weakest link in the world of global finance, Mauldin and his colleague Niels Jensen of Absolute Return Partners provided insights and analysis that is numbing.
Why is George Soros short the euro? Let me provide a synopsis of Mauldin’s and Jensen’s “Europe On the Ropes.” Assuming those visiting Sense on Cents have an interest in the markets and economy, this piece is somewhat lengthy, but a MUST READ!! A link is provided at the end of my review. (more…)
A Virtual Smorgasbord
Posted by Larry Doyle on March 2nd, 2009 4:24 PM |
On the heels of the news about AIG, Berkshire, and HSBC, the equity markets have found no support today and are down 4%. While the malaise of the markets has much of the focus, let’s review a few other items that I see on today’s menu:
1. In regard to AIG, current CEO Edward Liddy and former CEO Hank Greenberg have started some public feuding over the nature of AIG’s problems. Greenberg is trying to make the case that the risks underwritten at AIG occurred after his departure. Liddy responded that the culture, the compensation system, and the division housing the bulk of AIG’s risk all developed under Greenberg. Wow!! When our country is screaming for leadership, we have senior executives playing the blame game and pointing fingers. How pathetic!! (more…)
When the Oracle of Omaha Speaks..
Posted by Larry Doyle on February 28th, 2009 4:20 PM |
Warren Buffett’s annual letter to shareholders is always a highly anticipated event by market participants. Given the fact that Berkshire is effectively a diversified holdings company, Buffett has a unique perspective into a wide array of businesses. He also has the wisdom of investing over many years and through many challenging markets.
Well, if misery loves company, it has a solid partner in the person of Warren Buffett because 2008 was Berkshire Hathaway’s worst year ever. In reviewing Buffett’s letter allow me to offer some highlights. For those who have an even passing interest in the markets and investing, reading this letter is akin to attending an opera by Pavarotti.
I beg your indulgence as I attempt to be the opening act and provide an overview of the “Oracle of Omaha’s” thoughts on the markets and economy: (more…)
“My Mama Told Me . . .
Posted by Larry Doyle on February 28th, 2009 2:20 PM |
. . . You Better Shop Around.”
What does that wonderful song from Smokey Robinson and the Miracles have to do with our economy? I’ll tie that in a bit later.
More and more people are inquiring of me how and why banks are making credit tighter both in terms of availability and in terms of rates charged.
This tightening of credit is due to the “crowding out effect” from dramatically increased government borrowing along with the actuality and likelihood of increased defaults across all consumer and corporate loans. In the face of those defaults, banks will set aside more capital in reserve to cushion those losses.
What is a consumer to do? There are two tactics:
1. Everything’s Negotiable which I highlighted in a post dated December 23, 2008. Talk to your bankers and/or credit providers. Put your banks and other credit providers in competition. Where does one start and how does one easily comparison shop? I’m glad you asked because that leads me to point #2.
2. Shop around (thank you, Smokey)! Sense on Cents provides links via our Primers (in the right sidebar) for a look across the market to virtually every consumer credit need. Remember I have NO professional relationship with any of these entities. From borrowing needs to investing, with many stops in between, I hope these primers help you navigate the economic landscape going forward!!
And now, a trip down memory lane . . .
Shake Hands With Uncle Sam
Posted by Larry Doyle on February 27th, 2009 5:30 AM |
When trading bonds on Wall Street, I always wanted to know what the largest accounts were doing. A handful of these accounts were so massive that in order to make a meaningful change in their portfolio they had to execute trades of monstrous size. In executing trades with these clients, there was enormous risk. That said, if I did not provide enough liquidity to the accounts then we would stop seeing their inquiry. Information is everything, so not seeing their business was even more dangerous than printing some of it. Given this balancing act, I would try to pick and choose my spots. Amongst these clients is the largest bond manager in the country, Pacific Investment Management Company, otherwise known as Pimco, headed by the legendary Bill Gross (one of our Economic All-Stars highlighted in the lower left sidebar).
Bill offers his thoughts on a monthly basis. Anybody with even passing interest in the markets should read his remarks. I will offer an overview: (more…)
Upon Further Review
Posted by Larry Doyle on February 26th, 2009 3:02 PM |
The FDIC just released its 4th quarter 2008 report. Read it and weep . . .
1. FDIC had a $26bln loss in the 4th quarter and now has only $18bln in reserves. (Little doubt that FDIC premiums — insurance premiums that banks must pay — will be increasing to rebuild reserves. All costs ultimately flow through to customers). In fact in today’s WSJ, FDIC Poised to Double Fees Charged to Lenders.
2. banking industry had first loss in 4th quarter 2008 since 1990
3. troubled institutions rose to 252 from 171 in 3rd quarter
4. banks have taken a total of $750 billion in writedowns on problem assets!!
5. banks have increased loan loss reserves to $69 billion from $32 billion
These numbers in conjunction with the Bank Stress Test lead me to make the relatively easy projections that:
— Government will have significant stakes in certain major institutions while continuing to take over and shut down many smaller institutions.
— Banks will continue to look to build reserves against future losses. This development along with a limited if not nearly non-existent “shadow banking system” (securitized consumer loan market) will mean that credit will be tight.
— As banks need to preserve capital, their ability to recruit and pay people will be severely restricted. I know employees are looking to leave these organizations to work at smaller shops without these problems.
— Although bank stocks are currently getting a bounce given government indications of support, these are not companies that have attractive growth prospects under these conditions.
LD
Put Your Brokers and Bankers in Competition
Posted by Larry Doyle on February 25th, 2009 12:00 PM |
Every global financial enterprise has been hard pressed to maintain, let alone grow, revenues given the economic turmoil. With assets held in portfolio experiencing increasing levels of delinquencies and defaults, these institutions are all forced to set aside more reserves. How do businesses respond? Cut expenses and increase fees wherever and however possible. Who pays? You!!
I regularly see a sleight of hand at work on behalf of banks, insurance companies, money managers and other financial intermediaries to generate greater fees. While you will regularly be solicited with new and improved product offerings, how often are you getting the call that a fee is being increased and you may want to shop around for a better rate.
In an attempt to help you navigate this landscape, I strongly encourage you to approach your brokers and bankers and request a grid-like structure highlighting the basic products on one axis and the fee structure on the other axis. While more structured products and specialized services can be worthy of higher fees, a whole host of basic products fall into the plain vanilla category. (more…)
