On The Brink

Over the past couple weeks, the topics have gone from bank failures to illegal government spying on our citizens. The rest of the week we will look further at problems in the banking industry and the government's role in the matter.

Today, I will share the first part of a blog post from Mike Shedlock from July 24, 2008 titled "Evidence of the US Banking System Teetering on the Brink of Collapse". In it, Mike lists 25 reasons why we are on the brink of collapse in the banking world.

Here is Mike's list of reasons:

1. Paulson (US Treasury Secretary Henry Paulson) appears on Face The Nation and says "Our banking system is a safe and a sound one." If the banking system was safe and sound, everyone would know it (or at least think it). There would be no need to say it.

2. Paulson says the list of troubled banks "is a very manageable situation". The reality is there are 90 banks on the list of problem banks. IndyMac was not one of them until a month before it collapsed. How many other banks will magically appear on the list a month before they collapse?

3. In a Northern Rock moment, depositors at IndyMac pull out their cash. Police had to be called in to ensure order.

4. Washington Mutual (WM), another troubled bank, refused to honor IndyMac cashier's checks. The irony is it makes no sense for customers to pull insured deposits out of IndyMac after it went into receivership. The second irony is the last place one would want to put those funds would be Washington Mutual. Eventually Washington Mutual decided it would take those checks but with an 8 week hold. Will Washington Mutual even be around 8 weeks from now?

5. Paulson asked for "Congressional authority to buy unlimited stakes in and lend to Fannie Mae (FNM) and Freddie Mac (FRE)" just days after he said "Financial Institutions Must Be Allowed To Fail". Obviously Paulson is reporting from the 5th dimension. In some alternate universe, his statements just might make sense.

6. Former Fed Governor William Poole says "Fannie Mae, Freddie Losses Makes Them Insolvent".

7. Paulson says Fannie Mae and Freddie Mac are "essential" because they represent the only "functioning" part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages. Is it possible to have a sound banking system when the only "functioning" part of the mortgage market is insolvent?

8. Bernanke testified before Congress on monetary policy but did not comment on either money supply or interest rates. The word "money" did not appear at all in his testimony. The only time "interest rate" appeared in his testimony was in relation to consumer credit card rates. How can you have any reasonable economic policy when the Fed chairman is scared half to death to discuss interest rates and money supply?

9. The SEC issued a protective order to protect those most responsible for naked short selling. As long as the investment banks and brokers were making money engaging in naked shorting of stocks, there was no problem. However, when the bears began using the tactic against the big financials, it became time to selectively enforce the existing regulation.

10. The Fed takes emergency actions twice during options expirations week in regards to the discount window and rate cuts.

11. The SEC takes emergency action during options expirations week regarding short sales.

12. The Fed has implemented an alphabet soup of pawn shop lending facilities whereby the Fed accepts garbage as collateral in exchange for treasuries. Those new Fed lending facilities are called the Term Auction Facility (TAF), the Term Security Lending Facility (TSLF), and the Primary Dealer Credit Facility (PDCF).

13. Citigroup (C), Lehman (LEH), Morgan Stanley(MS), Goldman Sachs (GS) and Merrill Lynch (MER) all have a huge percentage of level 3 assets. Level 3 assets are commonly known as "marked to fantasy" assets. In other words, the value of those assets is significantly if not ridiculously overvalued in comparison to what those assets would fetch on the open market. It is debatable if any of the above firms survive in their present form. Some may not survive in any form.

by Mike Shedlock
http://globaleconomicanalysis.blogspot.com

Tomorrow, we will get into the rest of Mike's list of reasons our banking system is in dire straits and on the brink of collapse. Stay tuned ...

" 'Because they lead my people astray, saying, "Peace," when there is no peace, and because, when a flimsy wall is built, they cover it with whitewash, therefore tell those who cover it with whitewash that it is going to fall. Rain will come in torrents, and I will send hailstones hurtling down, and violent winds will burst forth. When the wall collapses, will people not ask you, "Where is the whitewash you covered it with?" Ezekiel 13:10-12 (NIV)

If you have questions or comments, please feel free to contact me at the address below.
Email: DeltaInspire@panama-vo.com