Another Financial Storm May Be Brewing

(6 pm. – promoted by ek hornbeck)

Buried in the sound and fury of the current financial storm, including the bankruptcy of Lehman Brothers, sale of Merrill Lynch to Bank of America, and the rumored imminent meltdown of insurance giant A.I.G. is something which I consider far more dangerous:

The alert have taken note that the failure of Washington Mutual, which looks increasingly likely, would consume the FDICs reserves and, as in the savings and loan crisis, force the agency to go hat in hand to Congress for more money.

But this is comparatively early in our burgeoning banking crisis for the bulwark of commercial banks to be tested. Worse, the concern is that uninsured depositors will flee weak banks, and in process, push more over the edge.

The scale of the problem?

Washington Mutual – the sixth largest bank in the US – has lost more than a third of its market value recently as investors fear it lacks liquidity and capital to survive the credit crisis…

The FDIC is respected for its operational effectiveness. But its $45bn deposit insurance fund is underfunded according to its own guidelines, at 1.01 per cent of insured deposits…

…analysts fear it may have to draw on its $70bn Treasury credit lines. Alan Avery, a partner at Arnold and Porter, said a single failure – if big enough – “would cause the FDIC to immediately draw on the Treasury credit”.

Washington Mutual had $143bn in insured deposits on June 30 – about three times the size of the deposit insurance fund, but less than half of its $307bn assets.

Emphasis added.

Both articles go on to further explain the various systematic risks of a failure of WaMu.  But the highlighted passages are, in my opinion, more concerning.

The FDIC-insured deposits at WaMu (which, I will point out, include my checking account), are greater than the combined total of the FDIC’s deposit insurance fund and their Treasury credit line.  By law, to obtain further funds to meet their deposit insurance obligations, the FDIC requires an act of Congress.

Which means delay.  In the case of a rapid meltdown at WaMu, some depositors may have reduced access to their funds, which is exactly what the FDIC is supposed to prevent.  Further, many business accounts at WaMu and other banks periodically have more than the insured $100,000 on deposit, in order to meet payroll obligations for example.  Those firms will need to either alter their deposit patterns or move their accounts to other banks in the next 48 hours to insure that they will not risk their deposits in case of failure.  Other depositors, concerned about the inability of the FDIC to immediately insure all deposits may withdraw funds in advance of the possibility.  As anyone who has seen It’s A Wonderful Life knows, this is what is called a run on a bank.  

But the problem goes further: if WaMu does fail and require FDIC assistance, there will be no funds remaining in the deposit insurance fund.

Yves Smith wrote yesterday, “I guess it is now official. We no longer have functioning trading markets, at least in terms of serving their alleged purpose of giving companies access to capital.”  I don’t know quite what to say.  I am officially well out of my depth.

I am not predicting disaster.  Our financial system is designed to be able to absorb crises such as these.  But I do not believe, nor can I fathom, that any model exists to absorb cascading crises happening simultaneously throughout the financial sector.  That does not mean that apocalypse will ensue; rather that delays and failures due to delays will occur.  

I absolutely hesitate to give any advice, particularly financial advice.  That being said, I have a few basic pieces of advice which I don’t feel are irresponsible to share.  What I  advise is that if you have more than $100,000 in any single FDIC-insured account, you remedy that as promptly as possible.  If you have a deposit account with a bank which is not FDIC-insured, close it immediately (this is always a good idea).  And if you have deposits with WaMu or other potentially threatened banks, it may be prudent to make sure you have enough cash or deposits in another bank to tide you over should there be a delay of several business days for the FDIC to restore your funds.  Don’t panic.  Be cautious.


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    • Jay Elias on September 15, 2008 at 13:16

    …please, please, please understand that I am not a professional economist or financial adviser.  Please do not take any significant action based on my advice or analysis alone.  

  1. dollars in the bank….

    Well. Never mind.  

  2. to put that 100,000 dollars would be in the mattress at home.

    My grandparents always kept cash reserves at home because they grew up in the Depression. I know a lot of their friends never got over their distrust of banks. Turns out the old folks were right.

    Why do I feel like I need to learn how to sew and go visit Mom to recall how to do fruits/vegetables in mason jars ect?

  3. as concerns these financial developments and outcomes!

  4. while watching the market numbers scroll by on Bloomberg I noticed that the only two arrows pointing up were Coke and McDonald’s. So if push comes to shove we can recycle Coke cans and use the money for ‘Mickey Dee’s’.


  5. The DOW closes at more than 500 points down!!!!

    DOW Closes…

    • robodd on September 16, 2008 at 00:50
    • Robyn on September 16, 2008 at 01:36

    …in the next office to see what she thought.

    Quote:  The markets will survive.

    But she did say that there would be shake-outs removing some major players until someone starts regulating mortgages enough to give people what they bought.

  6. WAY more than I do about this: but I still have a credit union account.  I’ve been using my bank account solely because the bank is just a 7-minute walk from my apartment; the closest credit union branch is a bus ride away.

    But as I understand it, credit unions, being nonprofits, cannot possibly be in the kind of trouble banks are.  And at my new (crappy) job, I at least have direct deposit, which my last job didn’t offer.  (Those ATM fees are killers, though.)

    Anybody else have any thoughts about this?

    • kj on September 16, 2008 at 05:19
  7. to social security right now had Bush & McCain had their way with investing it?

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