Monday, March 10, 2008

How Safe Is Your Bank?

Ben Bernanke, chairman (or God as referred in the finance industry) of the American Federal Reserve expects a number of banks to fail within the next few years. These banks hold YOUR money. What seems unthinkable has become quite probable with the unfolding of the credit debacle. The mainstream media has downplayed this issue with subtleness while those in the know have become quite disconcerted.

Everyone has the right to become informed, and I want to bring you up to speed. Within the last decade, lobbyists had worked Washington meticulously and succeeded in blurring the line between commercial and investment banks. Long story short, commercial banks had begun to sell debt as investment vehicles along with insurance in the form of Credit Default Swaps or CDS.

The problem here lies in the mismanagement of risk. The existing mathematical models the bank analysts utilize assume a normal distribution with a fairly constant default rate of only 2-5% (or outside of 2 standard deviations) on the debts. Simply put, this is wrong. The credit market has a moderately positive correlation to the general economy, and in the face of a commenced recession default risks will naturally rise sharply. Stock traders had first realized this last July as the S&P500 index commenced to experience heavy dips.

The banks will hurt. They hold liability for the underlying debt within the CDS’, and their reserves are paper thin as it is with the “fractional reserve” policies. US banks have requested a rescue package from the US government of $700 Billion US dollars (that figure contains 11 zeros), as they expect to owe that much in the coming five years due to credit defaults. It has become apparent that some banks or financial institutions will fail without question.

Look up the information this article contains, verify the numbers, not just my words. We live in a financially treacherous time. The banks claim to recruit only the best from Ivy League. Then the next logical question points to whether this debacle originated from ineptitude or intentional negligence. Either way, the bankers deserve punishment, not the people.

Latest major publication regarding this,
"Banks face 'systemic margin call,' $325 billion hit: JPM"

As Featured On Ezine Articles

2 Reflections:

Dividends4Life said...

Interesting thoughts. I am more concerned as a shareholder than as a customer.

Best Wishes,

Rocko Chen said...

Thank you for the kind comment. From my experience, to mitigate any potentially devastating losses off company failures, you have the following options-

1) Take only short positions
2) Long only ETF's.
3) Start trading options :)

All the best, D4L