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Be afraid, be very afraid...

As I've said before, I'm a big admirer of The Economist magazine (despite their stand on the Bush/Blair/Iraq debacle).

In recent years I've especially enjoyed the magazine's articles warning that a property bubble was building in many countries of the world, with the US at the top of the list. The first time they issued this warning was about 4 years ago, if I remember well. Since then they've repeated the message many, many times. But, no-one listened. Or, wanted to listen.

My father used to say 'If you don't wanna hear, you must feel', just before he laid in with the belt. Now it's time for the banks to feel. This extract from a respectable investment newsletter I just received:

"The last four days have seen the already distressed US banking sector lurch towards the precipice of a full blown financial system meltdown. Banks that have already seen stock price falls of as much as 90%, were again hit today, with many falling a further 5% to 10% on fears that a series of cascading bank failures were about to be triggered following the collapse of Indymac bank on Friday, when a run on the bank had panicking depositors withdrew funds at the rate of a billion a day.

"The Federal regulators stepped in to seize the assets and guarantee 100% of the first $100k of depositors' money. Meanwhile, another far bigger crisis was unfolding, as Freddie Mac and Fannie Mae (they insure or manage more than half of US mortgages) were also on the brink of collapse.

"The problem the US banking system now faces is that the failure of Indymac, and bailout of Fannie Mae and Freddie Mac to prevent a far worse collapse, are not an isolated instance, but systemic of the whole banking system. The New York Times estimates that as many as 150 banks could go bust and thus require the Fed to step in to seize assets during the next 12 month, with many of the remaining banks cutting back on their branch networks.

"However, this estimate may still be just the tip of the banking crisis iceberg as the Savings and Loans crisis of the early 1990's witnessed the number of bank failures explode and eventually saw more than 1000 financial institutions go bust. Given that the US is today experiencing the worst housing market crisis since the Great Depression, the banks may be in for an even worse fate.

"The FDIC had some $53 billion of funds available to pay depositors of defaulting banks, of which up to $8 billion has now been eaten up by Indymac, which means the US tax payer will be forced to step in to the tune of several hundreds of billions of dollars if not for over a trillion dollars, if anywhere near the number of anticipated banks fail.

"There is also a risk of an across the board loss of confidence in the banking system, culminating in a series of panic runs on US banks, accompanied by a collapsing US Dollar, as the US national debt levels explode (as the liabilities of these failing banks are taken over by the government) and depositors / investors seek shelter in more secure currencies and assets such as precious metals. The question now is: who will be next on the list to go bust?"

end of extract.

Afterthought: Just another sensationalist investment newsletter writer? My guess: No. Unfortunately not.
15.7.08 13:15


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