Tuesday, March 2, 2010

Post 223. Of Banks Worldwide.

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Of  Banks  Worldwide.

The worldwide domino effect of the crisis began in the finance sector. The first to fall were the banks. The economic collapse then moved on to the economy, with the closure of many companies (which is still ongoing) and an increase in unemployment. Next in line, after the companies, are the Countries like Greece and Iceland, which will certainly not be the last to fail. But what about the banks where the collapse first began? Are they truly safe or are we perhaps looking at a game of snakes and ladders here?
Text:
More than 150 USA banks failed
Hello to all of you Blog readers, welcome. This week I will attempt to address one of the major questions that are plaguing not only people with savings, but also investors all over the world, namely: "Is the worst really over for the banks? Is it truly over?"
In order to answer this vexing question, I suggest that we need to look back to 18 months ago, namely to the implosion of Lehman Brothers in October 2008 and the consequent ups and downs, the domino effects on the stock markets and the period of financial stress that the major banking groups had to endure.
Since the collapse of Lehman Brothers, to date another 150 US banks have failed, all of which have one thing in common, namely that they have a territorial vocation. They are the so-called “Community Banks”, banks that, in terms of their articles of association, collect money in a given territory and then in turn lend the money out to other customers, much like what happens with our Rural Banks, Savings Banks and Credit Societies.
What is particularly disconcerting is that none of the major Banking Groups found themselves in any difficulty during this period, only the small operations. Two years ago, being smaller was equated with being stronger, better able to weather the financial storm, while the larger operations were at the mercy of the huge waves and stormy seas. Had most of the institutional authorities, from the central banks through to the various governments, not intervened to support the major financial institutions, it is highly unlikely that we would still have any well known major banks able to continue operating.
400 small banks fail and the large ones remain influential
The Community Banks issued a warning. US Treasury Minister Tim Geithner warned that, over and above these 150 bankruptcies, there were another 400 potential bankruptcies waiting to happen. This does not mean that they will, however, but there is still one question that we have to ask ourselves, namely, why did the smaller banks fail while the major ones continue to maintain their position and their ability to influence the markets, and why, when the average unemployment rate throughout the United states is estimated to be in the order of 12%, do certain states have unemployment rates that are nudging 15%, and up to 20% in the metropolitan areas?
And so the smaller banks that lent out and collected money within their applicable areas are now finding it extremely difficult to get the granted loans repaid, firstly because businesses are disappearing and secondly because unemployment is rising, so it is easy to understand how the ability to remain afloat has suddenly decreased within a very short space of time, estimated to be within 6/9 months.
Mortgages for the well-to-do
There is yet another risk facing the financial markets, namely that of the IOARM mortgages, an acronym that stands for "Interest Only Adjustable Rate Mortgage". In essence, these are mortgages granted to particularly wealthy customers, in other words nothing to do with mortgages that are converted into investments and then sold in the markets, which enables the bank to pass on the risk by spreading it across the market.
The IOARM mortgages, instead, are still held by the credit institutions because the banks did not securities them since the mortgages were granted to wealthy clients. These mortgages provide for discretionary repayment, but what precisely does this mean? It means that the minimum basic mortgage repayment consists of interest only and the borrower then decides when and how much of the capital he/she will pay off during the 15/20/30 life span of the mortgage.
With all that has happened, including the increasing job losses, even some of the people in senior positions were terminated and consequently they were unable to pay back their mortgages. The banks suddenly found themselves stuck with certain types of mortgages sitting on their balance sheets, a situation that is set to explode within the next 18/20 months
The American mutual bank fund to protect deposits is now in difficulty
In addition to the scenario already depicted, I would also like to mention the difficulties now being faced by the FDIC, or the “Federal Deposit Insurance Corporation”, the organisation that acts as a lender of last resort for the United States’ banking system (the nearest equivalent we have is possibly the Inter-Bank deposit Protection Fund), which has let it be known that it would have great difficulty should it have to intervene to support large-scale defaults. Based on facts such as these, it would be extremely difficult to support a statement along the lines of "Yes, the worst has passed for the banks ", because we may yet see more cases of financial stress, or more financial press releases, perhaps even in the second half of 2010, regarding default by both small banks and large institutions.


Comments
There is a third reason why small American banks are going under: the big banks (saved by taxpayers) are drowing small banks by offering services small banks can't afford to offer. It won't be too long before all small banks will be devoured by the "too big to fail" banks. Once the small banks are gone we will be at the mercy of Lehman Brothers and the rest of the gang. What's worse is that taxpayers' money is used to bankrupt "community banks".
Posted by: Louis Pacella | March 1, 2010 01:11 AM

1 Comments:

At March 13, 2010 at 3:26 AM , Anonymous Anonymous said...

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