[lbo-talk] Speaking of banks...

Marvin Gandall marvgandall at videotron.ca
Mon Apr 14 14:57:53 PDT 2008


I recall reading recently that at the tail end of the S & L crisis in the late 80s, there were 1500 troubled banks on the FDIC's watch list, representing 10% of the banking universe, of which about 1000 subsequently failed. Today, there are reportedly less than 100 institutions being monitored by the FDIC, ie. less than 1% of all banks. But these are early days, and that figure will grow.

That estimate of 500 potential failures, which I've also seen, is probably characteristic understatement by bankers, politicians, and regulators seeking to ward off panic at each stage of an unfolding crisis. This time, they are saying that banks are on average better capitalized and more geographically diversified than they were during the S & L crisis, before the lifting of restrictions on interstate banking and other forms of deregulation.

But beneath the reassurances aimed at the public, as others on the list have noted, it's clear there's a palpable sense of panic at the top, reflected in the widening credit freeze, flight to Treasuries, and recent Fed interventions.

The latest example is a piece in today's strong-dollar WSJ by John Makin, an analyst from the conservative American Enterprise Institute, desperately urging the Fed to "print dollars" to contain the growing credit and housing crises. His "sigma" numbers registering the flight to safer Treasuries this time round compared to previous financial shocks make interesting reading:

"...consider the sharp widening of the gap between the fed funds rate and the yield on three-month Treasury bills.

"That gap, usually close to zero, measures the intensity of demand for riskless assets relative to the Fed's target rate in the interbank market. At the time of the Bear Stearns crisis on March 16, the fed funds rate was an extraordinary 250 basis points above yields on three-month Treasurys. This corresponded to a "10 sigma," or ten-times-the-typical deviation from the mean event.

"Statistically, 2 or 3 sigma is a very unusual event suggesting, in this case, an unusually strong preference for riskless T-bills. Four or 5 sigma represents a serious risky event, and 10 sigma is an outright panic.

"Based on this gap criterion, the August 2007 crisis onset was a 5-sigma event, while the October 1998 LTCM crisis and the 1987 stock market crash were each 4-sigma events. This suggests that even at those earlier times of crisis there was less fear as expressed by a run into riskless Treasurys. Ominously, after dipping close to 5 sigma after the Bear Stearns crisis, the gap has crept back above 6 sigma."

In Canada, cash and GIC's (ie. CD's) are insured up to 100k, but money market funds aren't. It's the same in the US, isn't it?

----- Original Message ----- From: "Steven L. Robinson" <srobin21 at comcast.net> To: <lbo-talk at lbo-talk.org> Sent: Monday, April 14, 2008 3:36 PM Subject: Re: [lbo-talk] Speaking of banks...


> But if accounts are FDIC insured and the banks fail, aren't we protected?
> I recall that during the 1980s, when some S & Ls failed, it took a while
> for depositers to get their money - in one case I know, it took them YEARS
> to get access to their safe deposit boxes. SR
>
> -------------- Original message --------------
> From: Marta Russell <ap888 at lafn.org>
>
>> I was told Wells Fargo is safe by someone I trust. Washington Mutual
>> is in trouble.
>> Marta
>>
>>
>> On Apr 14, 2008, at 10:50 AM, 123hop at comcast.net wrote:
>> > I read somewhere fairly mainstream that they were expecting about
>> > 500 banks to fail in the U.S.
>> >
>> > For anybody who is tracking this, which are the safer banks? Wells
>> > Fargo? ...
>> >
>> > Joanna
>> > ___________________________________
>> > http://mailman.lbo-talk.org/mailman/listinfo/lbo-talk
>> >
>>
>> ___________________________________
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