Tues Emergency RateCut - Fed VERY Worried re: US Banks

The Federal Reserve's charter mandates its responsibility and first priority is to maintain the health of US Banks. It's emegergency rate cut of .75% Tuesday was not to help the stock market, but to try to RE-LIQUIFY US Banks by increasing the yield spread (between what they have to pay the Federal Reserve for loans to thenmselves, and what they pay us for our deposits and the interest they charge us on the loans they make to us). Example: They pay Fed 3.75% to get a $100,000,000 loan now that used to cost them 4.5%. They decrease the interest rates on our CD's to 2.5% and do not change credit card interest rates. Bingo, they make more money.

What's the issue? Several major US Banks are having SEVERE liquidity problems (the assets on their books, like mortgage-backed securities and Private Equity (Leveraged Buy-out) loans are now worth less, sometimes much less, in the market place than their stated book values. This type of thing can lead to insolvency.

Why an emergency rate cut? Because of SEVERE problems with what are called monoline insurers, like MBIA and Ambac. During Housing (Real Estate)and Private Equity (PE) bubble, Wall Street Banks sold bonds to pensions funds, foreign banks, smaller US banks, etc. called asset-backed securities whose collateral was the Real Estate or corporation recently taken private. Since many buyers require AAA ratings on bonds they buy, Wall Street Banks bought what is called a credit default swap (CDS), which is really just a fancy word for insurance. MBIA and Ambac "lent" their AAA rating to bonds, and promised to pay "insurance settlement" on the bonds ("asset backed securities") if any of these bonds went bad.

Well, a lot of "asset-backed securities" or bonds are going bad and failing, MBIA and Ambac don't have the capital base to pay up, and in fact are in serious danger of losing ther AAA rating. If they lose that AAA rating, by law, things like Money Market Funds and Pensions Funds can no longer hold the bonds MBIA and Ambac are "insuring", and would be forced by law to sell them. THAT WOULD CREATE CHAOS IN THE BOND MARKETPLACE AND IN SOME CASES INSOLVENCY FOR SELECT BIG AND small BANKS.

You are talking about a serious banking crises that the Fed is trying to prevent. Also remember that the bond market is much bigger than the stock market and major problems there could sink the "real economy".

Some good, more detailed discussions on this at http://www.nakedcapitalism.com/, http://calculatedrisk.blogspot.com/, http://www.2000wave.com/article.asp?id=mwo012508

I'm honestly wondering if I should pull it out for a while. If that money goes I'm in deep trouble...

Have you looked into Treasury Bills?

I don't have any, but have friends who suggest them as fairly safe (but obviously not quick growth). Research on your own, please.

Their logic is: Yes, banks can go under, but if it gets bad enough for the Treasury to go under, your money won't be worth anything anyway.

My first stop (and this is advice) go to your bank. Talk to somebody there and tell them you are nervous and would like to move some of your money into something secure. Unless they are total dicks, they should be more than willing to help. That's their job, it's why they get paid.


My Favorite Master Artist: Karen Parker GhostWoman Studios

If there is a situation where your bank (or lots of 'em at the same time) becomes insolvent/is subject to panic and bar the doors, you're gonna need cash to make do. I know lots of "responsible" people already just keeping a bare minimum in their checking/savings accounts right now - enough to pay bills.

Consider transferring accounts to a smaller credit union - though there is no guarantee they may not be affected, also - banks are going to start going down like dominoes, and who knows what extent many banks are involved with this sub-prime shit.

Also, what TalkingDog posted above about T-Bills is a *VERY* good idea.

Don't wait too long...

JMVHO.

It is federally insured if it is less than one hundred thousand dollars.

Also, Wachovia Bank is not really thought to be in much trouble...........like most big banks they have been hurt by all this, but they have gone the straight and narrow path for the most part.

But I wouldn't go more than the FDIC amount in any bank.

The fed can keep loaning, but as long as they aren't paying 90% of america to do jobs at a fair rate, we can't get new loans, or pay for the ones we have.

I've heard the M3 rate is already insane. It looks like the ship is sinking, and they are telling us that they're not capable of paying us to bail.

thanks for the info.