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1996-07-08
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From the Radio Free Michigan archives
ftp://141.209.3.26/pub/patriot
If you have any other files you'd like to contribute, e-mail them to
bj496@Cleveland.Freenet.Edu.
------------------------------------------------
BANKS ON THE BRINK
What to do if there's a bank holiday...
By Dave Saleh
The author is a staff research associate for the McAlvany Intel
ligence Advisor, a monthly monetary, economic geopolitical and
precious metals newsletter ($95 per year subscription: 2696 S.
Colorado Blvd., Suite 430, Denver, CO 80222. For more information
see end of this article) - The Editors.
AT no time since the Great Depression has the U.S. banking system
been in worse condition than it is today, with lower earnings,
declining profitability and more bad loans than anytime since the
1930s.
While most of us have relegated the horrible pictures to the
back of our minds, of desperate depositors pushing and shoving in
long lines at the bank few today seriously believe the government
would ever let our banks collapse. The experts say it can't
happen today like in 1933. Federal Deposit Insurance Corporation
insurance and the U.S. Treasury provide ample assurance that De
pression style bank runs and closures are a thing of the past.
Don't bank on it.
The ominous condition of American banks should be a warning to
all depositors and savers that trouble lies ahead, and all with
eyes to see and ears to hear take heed! You must take specific,
deliberate steps to insulate yourselves, your families, and your
businesses from what may be a repeat of the horror of 1933. What
would you do if during the weekend the president declared he was
closing all banks to prevent a run on deposits and bring stabili
ty? Could you pay for food, fuel, and housing without access to
your checking account? What if after your bank reopened you were
told you could not withdraw funds for two years? Could you or
your business survive?
The government has recently admitted that 1,000 banks with
nearly $500 billion in deposits are either insolvent (but still
open and taking deposits), or on the brink of insolvency, or
rapidly heading in that direction. Before the recession worsened,
at the end of 1990, there were 1,046 banks on the FDlC's problem
list with $408 billion in assets. If the recession continues
until the end of this year, the list could double to 2,000 or
more. Most of the money center banks, including Chase, Chemical,
and Morgan Guaranty, have less than 5 cents capital per dollar of
assets. A decline of just 1 percent from these levels will cause
them to fall below the bare bones level needed to survive a more
severe recession. If just one major money center bank fails, the
FDIC insurance fund would be completely wiped out and require a
massive federal infusion of cash to make up the shortfall.
In fact, Charles Bowsher, chairman of the Government Accounting
Office recently told Congress that by September 1, without anoth
er major bank failure, the FDIC will run out of money. The FDIC
at present has only 12 to 19.5 cents insurance for every $100 of
insured bank deposits (depending on whose estimates are used),
and is the weakest it has been in its 56-year history.
Efforts being made to bolster the fund are band-aid solutions at
best and will only cause more failures or even worse, a collapse
in depositor confidence. The Bush Administration has proposed
limiting bank customers to $100,000 per institution plus an addi
tional $100,000 for retirement accounts. But banking authorities
(including Charles Bowsher) and congressional leaders fear any
change in deposit insurance could be too much of a shock to our
already super fragile banking system.
William Seidman, who heads the FDIC, proposed that the fund
borrow $10 billion from the Treasury and that banks ante up a
special one-time super premium equal to 1 percent of their depos
its to raise an immediate $24 billion'.
This is absurd. The problem with the banks is not a "one time
problem" and is bound to worsen as the economy sinks. The ulti
mate cost of the S&L bailout will approach $1 trillion. Surly Mr.
Seidman doesn't believe that a mere 1/50th of that figure will be
enough to take care of the banks (potentially a far greater prob
lem).
In addition Seidman's 1 percent extra premium would reduce bank
capital by nearly 1 percent adding immeasurably to the burden of
their losses and causing even more banks to fail.
Controlling bank losses due to collapsing real estate values
and bad loans is one thing, but its infinitely more difficult to
cover massive withdrawals and related liquidity problems. Once a
nationwide run on the banks begins in earnest, end of story.
For this reason the FDIC has pursued its selective policy of
paying uninsured depositor claims. Called the "too big to fail"
policy, the FDIC has actually paid off uninsured depositors (over
$100,000) at big banks like Bank of New England, while only
paying 50-cents on the dollar to uninsured depositors at smaller
banks like Freedom National in New York. Such selective payouts
are unethical at best, but authorities believe that by showing
depositors at large banks they will make good their promise, it
will prevent catastrophic chain reaction withdraw at by large
depositors across this country.
Corporate America isn't buying it. Vulnerable to the collapse
of U.S. banks because of their large uninsured deposits, American
companies are looking for security overseas. CNN Moneyline pro
ducer Lou Dobbs reported on May 13 that U.S. corporate deposits
were leaving American banks and going to Europe at the rate of
$500,000,000 per week. Since the first of the year, says Dobbs,
U.S. corporate deposits in European banks have grown a staggering
66 percent!
Large U.S. companies aren't the only ones voting with their
feet. In January Taiwan announced it was pulling its $35 billion
out of U.S. banks with a senior Taiwanese official admitting,
"The shift is mainly to protect our reserves as we face more
risks by depositing our money in U.S. banks." Taiwanese Central
Bank Governor Samuel Shieh said, "They (the Taiwanese Central
Bank) are concerned about the entire American banking system...
the U.S. economy is in more of a shambles than you can under
stand"
Last year we saw other large foreign and domestic uninsured
depositors refuse to rollover their CDs, dump their bank commer
cial paper, and move into Treasury bills, cash, and gold.
Most alarming of all is that currency in circulation - much of
it dead money hidden in the mattress and not circulating - jumped
by $16 billion since the end of the first quarter 1991! This is
nearly double the $15 billion amount reported for the same period
in 1990 when consumers were far more confident and spending money
hand-over fist. Obviously, concerned depositors are moving to the
security of cash, further weakening the already weak banks.
This is particularly ominous when viewed from the historical
perspective of a similar period in 1933, just before our last
national bank holiday. During the weeks that proceeded 5 March,
1933, demand deposits at banks fell while there was a commensu
rate rise of currency in circulation.
Already the number of bank failures is reminiscent of the '30s
with assets of failed banks shooting into the stratosphere. From
1981 until 1989 over 1,000 U.S. banks have failed and that was
during a so-called economic boom! What will happen in this
recession?
Reports of illiquid banks denying depositors access to cash have
begun to increase. At this writer's investment consultation firm,
individuals from across this nation have reported that they have
been refused cash even though their accounts had sufficient
funds. A Washington, DC, resident was unable to withdraw $1,000
in cash, despite $70,000 in her bank account. Another person
complained that, although he made a $600 cash deposit that morn
ing, he could not withdraw $200 on the same afternoon.
Clearly, the day of the bank run has returned to America, but
government officials and the media have downplayed the facts. Not
the 1930s style run, but a far more dangerous "silent run" which
slowly bleeds it victim to death to the shock of those unaware of
the gaping wound.
On 1 January, 1991, within hours of being sworn in as governor,
Rhode Island Governor Sundlun announced a bank holiday, closing
45 banks and credit unions with a total of $1.7 billion in depos
its. Turning to the state for protection, the Rhode Island Depos
it and Indemnity Corp. (like the FDIC) was essentially insolvent.
The very same sour investments - real estate, junk bonds, and
commercial paper ad driven the RIDIC to the brink. Over 300,000
accounts were frozen, and to this day many account owners still
have no access to their money.
The nightmare that ensued for the next 36 days left tens of
thousands with only the currency and coin in their pockets. ATM
machines were turned off instantly, and all checks that hadn't
cleared the system bounced. Provisions were made for the truly
desperate, but in order to withdraw even a small portion of
funds, depositors had to prove that they had an emergency - a
dire economic need. To qualify, depositors had to show: 1)immi
nent foreclosure or eviction from principle residence; 2) neces
sary nonelective medical treatment; 3) maintenance of medical
insurance; 4) need for heating oil or food; 5) imminent termina
tion of a utility. Checks were mailed to those who qualified.
Businesses were out of luck, and many failed. Up to 1/3 of the
state's depositors were affected.
Since then several bailout plans have been proposed, but most
depositors at this writing are still locked out of their ac
counts. One solution put forth by the governor's office would pay
off depositors in non-interest bearing script which would mature
in 4 years. Anther solution would assist depositors at only the
15 largest institutions. All accounts up to $100,000 would get
100 percent of their money, and for each increment above $100,000
a depositor would lose at least 10-50 percent on a graduating
scale up to $500,000. This money would be released in 6-month
increments over a 3-gear period with no interest paid. This plan
would be financed by $1.15 billion from liquidating the failed
banks' and credit unions' assets, plus a small bond issue floated
by the state.
Just a few problems with this plan: 1) it will be 3 years or
more before some depositors see their money - if they ever do; 2)
a large portion of the assets of the 15 failed banks and credit
unions are in New England real estate which was collapsed as much
as 50 percent in some instances. Who is going to buy it and at
what price? ; 3) Rhode Island state government is $204 million in
the red and effectively broke. The entire government will shut
down one day every two weeks - 10 percent of its working days.
Such conditions will make selling these bonds next to impossible.
Would you buy them? 4) the plan makes no provision for deposi
tors outside the 15 largest failed institutions.
The economic impact on the state of Rhode Island for the next
three years is horrifying. Entire communities have been cut off
from their savings. Businesses are closing early (many permanent
ly). Tens of thousands of people will go bankrupt. How would you
survive if your funds or those of your customers were frozen?
Beatrice Tschohl, 81 years old, of Pascoag, Rhode Island, summed
it up when she said, "Big deal, so I can get all my money in
three years. Well, I'll probably be pushing up daisies by then.
Its too sad to even talk about."
Lest you say that could never happen to the federally insured
institutions, it is a fact that the private Rhode Island insur
ance fund (RIDIC) which failed had more backing per $100 of
insured deposits than the FDIC has right now!
Charles Bowsher (head of the GAO) testified before the Senate
Banking Committee on 3/7/91 and said, "Tinkering with deposit
insurance while the banking system is fragile could trigger major
runs nationwide. What we have here, unfortunately right now, is a
banking system that is on fairly thin ice... Even minor changes
on FDIC account limits could trigger panic among small
investors... Even placing more sophisticated big depositors at
risk could cause problems. Once the big boys (Ed. Note: like
large foreign depositors refusing to roll CDs), overseas banks
(Ed Note: like the Central Bank of Taiwan), and the big corpora
tions get worried (Ed Note: like U.S. corporate deposits in
Europe growing by $500 million per week), they move that money
instantaneously. That's the run that kills you on the banks, not
the people lining up outside the door. "
By now it should be obvious that we are heading for trouble. At
anytime President Bush could spring the bad news. Here is what
you should do:
1. Reduce your bank, savings and loan, and credit union depos
its to only 30-45 days of expenses for your household and busi
ness. Do it now.
2. Keep 30 days cash in greenbacks denominated in $10s and
$20s. This will ease the pain and discomfort of no access to bank
funds and keep you afloat until order is restored.
3. Invest large cash balances (such as business operating ac
counts) in Treasury bill only money market accounts or buy Treas
ury direct. Money markets are best because of check writing
privileges giving easy access to funds. Such are unlikely to be
frozen in a holiday, but if they are it will be very briefly.
4. Time deposits like CDs should be placed in Treasury Bonds,
notes, or mutual funds that invest only in same. Even better is
a foreign government bond mutual fund.
5. Buy gold and silver one-ounce coins while they are still
cheap. These have a tradition as money in the U.S. and will be
widely accepted under harsh circumstances. The best way to buy
gold is the $20 AU Liberty and circulated silver dimes, quarters,
and halves.
6. Obtain a supply of shelf stable storage foods. The brewing
financial crisis goes far deeper than just the banking system.
Excessive debt., overpriced real estate, and speculative invest
ments of all types have not yet hit the fan and may tumble in the
1990s. Disruptions in food distribution networks are likely.
7. Check up on the financial condition of your bank, savings and
loan, and insurance company. Don't rely on media disinformation,
your insurance agent or banker. Get a rating from a disinterested
third party. Call (800) 525-9556, Ext. 134 for more information.
Obviously, the handwriting is now on the wall. Don't be misled
by congressional leaders, the media, or the current administra
tion who want you to believe everything is OK. Deliberate and
decisive action, taken immediately, may save you horrible finan
cial loss and leave you able to take advantage of investment
opportunities the majority of complacent bystanders (who trust
the banking system) will miss.
For additional information, or specific investment advice re
garding the above recommendations, call this author at (800)
525-9556, Ext. 134. Also available for $95.00 per year is the
McAlvany Intelligence Advisor - an in-depth monetary, geopoliti
cal, and economic advisory published monthly. Call for a free
copy.
Reprinted with permission:
AMERICAN SURVIVAL GUIDE/SEPTEMBER 1991
------------------------------------------------
(This file was found elsewhere on the Internet and uploaded to the
Radio Free Michigan archives by the archive maintainer.
All files are ZIP archives for fast download.
E-mail bj496@Cleveland.Freenet.Edu)