Let Bad Banks Go Broke – says, Howard Davidowitz – Otherwise All These Bailouts Will Crush The Economy

Howard Davidowitz is a bear on America. If you’ve watched any of the recent clips, you know he’s negative on stocks, the economy and the political system. (If you haven’t seen them, check the links below.)Much of Davidowitz’s frustrations stem from the bailout of our financial system. “If a bank is bad, you let it go broke,” he says. “The bondholders lose their money, because they should. The stockholders lose their money, because they should. Lots of people get fired job, because they should. That’s the solution to the problem.”In the 1980s, Davidowitz’s firm worked on the restructuring of then struggling retailer Toys “R” Us. “We kept the good, we cut the bad. That’s how restructuring works,” he says. The national retail chain was cut down to 13 stores, but was kept alive. Today, the company is preparing for an IPO, five years after private equity giant KKR purchased the company for $6.6 billion. Again, Davidowitz believes the same measures should have been taken with the banks. Sure, bankruptcy is a painful solution in the short-term, but he believes the government’s rescue of some of our biggest financial institutions has had, and will continue to have, catastrophic economic consequences. As economist and Carnegie Mellon professor Allan Meltzer once said: “Capitalism without failure is like religion without sin.”

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Do You Know If Your Covered? Learn FDIC Insurance Limits

What does the FDIC do?

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000 (through December 31, 2013).

What are the basic FDIC coverage limits?

  • Single Accounts (owned by one person):  $250,000 per owner
  • Joint Accounts (two or more persons):  $250,000 per co-owner
  • IRAs and other certain retirement accounts:  $250,000 per owner

What types of accounts are eligible for FDIC insurance?

FDIC insurance covers all deposit accounts at insured banks and savings associations, including checking, NOW, and savings accounts, money market deposit accounts and certificates of deposit (CDs) up to the insurance limit.

The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if you purchased these products from an insured bank or savings association.

Need More Information? Go to:  https://www.fdic.gov/edie/fdic_info.html#04

Sheila Bair Delivers Special Video Message Commemorating 100 Bank Failures

According to the FDIC, your money is safe.

“Astounded” by Goldman’s Upgrade Banks “Heading Into the Storm” Whalen Says: Tech Ticker, Yahoo! Finance

Goldman Sachs making headlines again. Today, it’s on two accounts.First, Bloomberg is reporting Goldman could earn about $1 billion should the troubled lender CIT Group, enter bankruptcy or otherwise end a $3 billion financing agreement. I’m sure it’s adding fuel to the fire for the “Government Sachs” conspiracy theorists, who probably see it as a repeat of what happened with the AIG bailout.For those that don’t remember, Goldman received $12.9 billion from AIG after the government rescued the world’s largest insurer. That raised suspicions of conflicts of interest and unfair treatment, since then Treasury Secretary Hank Paulson also happened to be a former CEO at Goldman.Chris Whalen of Institutional Risk Analytics is a Goldman conspiracy sympathizer and someone who “doesn’t like their politics.” But, in this case, he doesn’t necessarily think anything is askew. “Like any distressed lender they have a right to their payment. They took the risk,” he admits.What strikes Whalen as more curious is Goldman’s call on the big banks. Citing a positive outlook on earnings, Goldman analysts raised the outlook on banks from neutral to “attractive” this morning. They also upgraded Wells Fargo to “buy” from “neutral”, Comerica to “neutral” from “sell”, and added Capital One to their “conviction buy” list.Whalen is “astounded” Goldman would make such a move “when the banking industry is heading into the storm.” Contrary to the Goldman call, Whalen says the earnings outlook will get worse over the next two quarters, culminating in a bloodbath in the fourth quarter. Part of the problem for Wells Fargo, according to Whalen, is the bank still has plenty of write-downs to come associated with the Wachovia merger, as detailed here. But Goldman employees and shareholders have no fear. Whalen is confident the firm will fare better than those it upgraded today, “because they’re not a bank.” Instead, he says, you must consider Goldman, “a trading operation with a private equity firm attached.”If there is a risk for Goldman, it is political. “They are so visible and so high profile,” Whalen speculates, “that if the economy doesn’t recover next year I think Goldman is in for some severe criticism.”And that, no doubt, would please the Goldman conspiracy crowd.

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The U.S. Banking System is Close to Insolvency

ALERT
RGE Monitor
January 22, 2009

The US Banking System is BankruptRGE Monitor Estimates $3.6 Trillion Loan and Securities Losses in the U.S.

Nouriel Roubini and Elisa Parisi-Capone of RGE Monitor release new estimates for expected loan losses and writedowns on U.S. originated securitizations:

* Loan losses on a total of $12.37 trillion unsecuritized loans are expected to reach $1.6 trillion. Of these, U.S. banks and brokers are expected to incur $1.1 trillion.

* Mark-to-market writedowns based on derivatives prices and cash bond indices on a further $10.84 trillion in securities reached about $2 trillion ($1.92 trillion.) About 40% of these securities (and losses) are held abroad according to flow-of-funds data. U.S. banks and broker dealers are assumed to incur a share of 30-35%, or $600-700 billion in securities writedowns.

* Total loan losses and securities writedowns on U.S. originated assets are expected to reach about $3.6 trillion. The U.S. banking sector is exposed to half of this figure, or $1.8 trillion (i.e. $1.1 trillion loan losses + $700bn writedowns.)

* FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize.

* In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

* Back in September, Nouriel Roubini proposed a solution for the banking crisis that also addresses the root causes of the financial turmoil in the housing and the household sectors. The HOME (Home Owners’ Mortgage Enterprise) program combines a RTC to deal with toxic assets, a HOLC to reduce homeowers’ debt, and a RFC to recapitalize viable banks.