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Diversify with banks

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February 26, 2008 – Comments (5)

CR has a post on the number of banks at risk and on a watch list.

There were 3 bank failures in 2007, and now there are 76 banks with $22 billion in assets on a "problem list."

 Lending construction is creating a growing problem.  There are 2368 banks with construction loans exceeding capital, out of 8500 institutions.

On another point, there is yet another debt problem, VIEs,vehicle interest entities, which were also known as special purpose vehicles before the Enron collapse.

"Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in "significant unconsolidated VIEs," according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch & Co., which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights. "

Well, I am starting to get a picture as to where all these "derivative" things are hiding, a small picture.  I think I only know about 10% of what they comprise. 

5 Comments – Post Your Own

#1) On February 26, 2008 at 3:28 PM, DemonDoug (60.67) wrote:

"Doug, I read somewhere else that that money is constantly being rolled over, a bunch of stuff comes due and it is re-auctioned off.  I really haven't studied it for myself."

Wanted to reply on your most recent blog post:

This is true, but it's actually worse than that.  You would think, with the so-called credit contraction, that the fed couldn't or wouldn't lend more.  But this is precisely what they are doing.  The TAF loans can get rolled over ad infinitum (ie, evergreen loans), and the Fed, in breaking with a 100 year tradition, is taking paper other than US t-bills as collateral.  What the fed is basically doing is trying to inflate the currency faster than the banks write down their assets.  So far, it looks like this is indeed happening, because otherwise we would have a true deflation.

This is why anyone who argues that we will see deflation is out of their mind.  The Fed has made it their policy clear: they will print so much damn money that it will be a cold day in hell before we ever get deflation.

Here's the thing though.  Just because the fed prints, it doesn't necessarily mean everything will go up.  So like, if our food and gas goes up, even though the currency is worth less, we aren't left with enough money to pay for big ticket items - so it's entirely conceivable home prices could go down another 10 years while food and gas prices double or more.

This is the theory behind owning gold, silver, other PM's and base metals.  It took me a while to understand the whole mechanism myself, but as I see it, while Fed intervention IMO is too much, if they never intervened at all, we could well see the dow at about 1000 and we might have had half the banks in the country go out of business in the past 6 months (because things are that bad - as you keep pointing out :) ).  As it is, banks are going to fail and the market is going to go down, even with the printing presses on full bore. 

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#2) On February 26, 2008 at 3:34 PM, AnomaLee (28.64) wrote:

Interesting article, but I found a better video!!! This is going on Facebook! Woot!

Thanks again dwot!

 

 

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#3) On February 26, 2008 at 5:04 PM, Harold71 (22.09) wrote:

I don't know if deflation folks are "out of their mind."  There are many significant deflationary forces at work.  But you're right, it looks like the Fed is doing everything it can to inflate.

If you believe that the market is going down, I don't think you'll be overly pleased with base metals long-term.  I think they are just the market on steroids (high beta).  When the market thinks it will be inflation, they skyrocket.  Love the inflation.  When the market starts to worry about the banking system toppling over (causing deflation), the base metal stocks get kind of concerned.  As in, "time to shed 25 percent" concerned.

The Fed says it promotes economic stability.  What a cruel joke.  Why we keep putting up with the Fed and their bubble mania is beyond me.

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#4) On February 26, 2008 at 5:04 PM, zygnoda (27.31) wrote:

haa Great video.

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#5) On February 27, 2008 at 12:45 AM, dwot (49.32) wrote:

Doug, I still don't understand it enough to comment, other than I don't think I am out of my mind... :)

AnomaLee, I have serious bandwidth problems so I don't see the videos.

Harold, we may end up being wrong, but I agree, there are deflationary forces...

 This story is being repeated quite a bit...

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