That Lot Of Leverage, Kemosabe

11 04 2008

Some interesting tidbits on the economy from the market oracle:

It seems that the Federal Deposit Insurance Corporation is getting ready for more financial institutions to fail as world credit markets convulse in the wake of the US housing collapse and a flight from SIVs… structured investment vehicles which are highly leveraged, complicated, based on assumptions now proven to be plain wrong, and now considered “toxic”.

“The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships.
Many of these agency veterans likely worked for the FDIC during the late 1980’s and early 1990’s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.‘Regulators are bracing for well over 100 bank failures in the next 12 to 24 months’…” Damian Paletta, Feb.27, 2008 Wall Street Journal .

There have been a number of articles over the past few months referring to the FDIC increasing its staffing levels. I find it interesting. But then I usually get distracted thinking about my tax rebate, and I think, “When that comes, I really need to get it out of the bank and stick it under my mattress.”

Who would have thought we’d see Bear Stearns (the fifth-largest US investment bank) start the cleansing process off and fail after having survived the Great Depression and a dozen recessions over the past 85 years. Bear shareholders were horrified to see their investment vaporize from $170 twelve months ago to the $2.00 offered by JP Morgan in a Fed-backed bail-out orchestrated to head off a full scale global rout.

Meanwhile, Standard & Poor’s has just downgraded Goldman Sachs and Lehman Brothers from “Stable” to “Negative Outlook”, and some analysts are wondering whether Citibank (which two years ago was leveraged 22:1 and is now leveraged 42:1) may be a good “short”.

The Fed-backed bailout (a private corporation that printed money to purchase a failed business to prevent a cascading cross-default which threatened to crash the house of cards that is the American economy) of Bear-Stearns artificially raised the share price for a time, but the real value is lower than 2.00 per share.

I was talking to Tonto about Citibank’s being leveraged 42:1, and he said something I’ll never forget. He said, “That lot of leverage, Kemosabe.” He also told me later that, “Earning interest from bank – immoral; keeping money in bank interest-free just plain dumb.”




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