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)