TedCo Software Financial Matters Blog

According to information in a Bloomberg.com article, “Banks in Georgia, North Carolina, Kansas Closed by Regulators“, “as many as 1,000 U.S. bank could fail in the next three to five years.” RBC Capital Markets analysts predict the failures will be related to commercial real estate loans.

Of course the FDIC insures deposits held in banks. The FDIC 2008 Annual Report states the FDIC insured 8,305 depository institutions with nearly $13.8 trillion in assets.

If the Bloomberg article is correct (or even close) 1 out of 8 U.S. banks could fail in the next three to five years. That doesn’t sound like good news.

The FDIC maintains the Deposit Insurance Fund (DIF). The DIF balance on 12/31/06 was $50,165,000,000. Let’s call it $50 billion. The report is here. The DIF balance has fallen to $17 billion by 12/31/08. The wrong direction.

Assuming the predicted bank failures are distributed evenly among banks of all sizes, the expected failures mentioned in the Bloomberg.com article will require resolution of $1.725 trillion dollars of FDIC insured deposits. That $17 billion DIF balance looks very small.

I am not a politician. I am not an economist. I am a taxpayer who has only been to Washington on sightseeing trips.

I don’t understand. And I believe anyone who claims to understand our current financial circus is not being truthful with himself or others. There are so many data points that simply make no sense.

You’ve heard the phrase, “too big to fail”. It’s used in reference to an entity believed to be so large and necessary that all possible must be be done to ensure its continued “success”. The weekend bailout of Citigroup, Inc. is an example of an action to save a company believed to be “too big” to allow “to fail”.

The Citigroup bailout is reported to be worth $30 Billion. It happened quickly, over the weekend, and didn’t stir up a lot of questions on the national scene. Why not?

Recently, all the big three automakers wanted was $25 Billion. They didn’t get it. Congress held hearings. The CEOs of the auto makers begged. The autoCEOs drove home empty handed.

The chaos that seems rampant in the U.S. may be a consequence of what I believe is a corollary to “too big to fail”.

If you’ve ever interacted with the different departments of an insurance company (I recently talked by phone to more than a dozen employees of my insurance company during a three week period) you begin to wonder if the corollary to “too big to fail” isn’t “too big to succeed.”

What if companies (and economies) become too big to succeed and the manipulative efforts like those being attempted now are doomed to failure.

Politicians proclaim, “I believe in a free economy.” But they don’t. Google the name Bush with the phrase “free economy”. You’ll see that “free economy” has become a political cliche. There is no free economy. A “free economy” implies that those companies which are “too big to succeed” are actually allowed to fail. They would not be bailed out. Instead, perhaps in a future iteration, something better would be given birth.

Nature has an object lesson: no tree grows to the sky.

J.P. Morgan Chase & Co. plans to help as many as 400,000 borrowers by modifying the terms of $70 billion in Option ARMS. 70 billion divided by 400,000 mortgages is $175,000 per mortgage. That’s a lot of help!

While this move by the bank may keep a large number of these borrowers in their homes, the bank is not doing this for charitable reasons. In fact, that JPMorgan Chase is making this move seems to indicate the bank has a negative view of our economic future. If the future were bright, I don’t believe the bank would be so willing to provide assistance to borrowers. No bank, no matter how large, wishes to own 400,000 homes.

Learn more in The Wall Street Journal article, “Massive Effort to Save Mortgages“.

I wrote yesterday about qualifying for a mortgage. The newspapers proclaim that “credit is frozen.” It is ironic then that lenders are feeling the heat. They were burned by a few years of loose lending.

Consequently, changes occurring in the mortgage lending industry will probably bring a return to more conservative lending practices. One of the former standard requirements in mortgage lending was a down payment.

Just a decade ago, it was common for lenders to require a 20% down payment for conventional, fixed rate mortgages. I expect down payments will become a standard requirement again. And the concept is simple.

Instead of lenders making loans that instantly put a borrower upside down in their mortgage, a down payment forces borrowers to have an instant 20% stake in their new home. From the lender’s perspective, this makes it less likely a home buyer will walk away from their mortgage.

If down payment requirements will be returning to mortgage lending, how does one determine how long it will take to accumulate enough of a down payment to purchase a home?

Real Estate Calculator Suite includes two Down Payment Savings Calculators. These two down payment savings calculators will help you determine how much you will be able to save during a period of time and how much time it will take you to save a desired amount.

To determine how much you save during a particular period of time, choose the “How Much Can I Save?” calculator. First, enter your current savings balance and the amount you will save each month. Then, enter the interest rate you’ll earn and the number of months you will save. The calculation results are displayed automatically.

Download Real Estate Calculator Suite and use it ten times for free to see if it works for you. If you like it, buy it for $39.95.

Interested in knowing what caused this current financial crisis?

A good place to start is with, “The $58 Trillion in the Room“, Jesse Eisinger October 15, 2008 article in Conde Nast’s Portfolio.com.

His opening paragraph contends the financial crisis has its roots in “a small team of bankers at J.P. Morgan in New York“. Eisinger builds his case well and provides a lucid description of credit derivatives, the invention of the J.P. Morgan team which left Morgan in a lurch.

This story has to be the poster child for America’s corporate leadership failures and excessive executive pay.

In “Nice work — if you can get fired from it.“, FoxNews.com reports Alan H. Fishman, the new CEO for Washington Mutual (the WaMu taken over by the Feds and handed to JPMorgan Chase this past Thursday night for pennies on the dollar) will receive more than $1,000,000.00 per day for his 17 days as CEO.

A $20 Million income for 3 weeks of work “leading” a bank into failure. Only in this America.

The last few days have been rough for the financial markets. And everyone seems to be talking about it.

Some are calling it a “Category 4 financial storm“. Talking heads on CNBC and other cable finance channels are talking as fast as they can to everyone they can find with a professional opinion. The financial headlines are moving from section C to the front page of newspapers. I can’t count the number of times I’ve heard or read, “We are in a financial crisis.”

What people want to know in a crisis is whether they are protected. If you live along the coast in an area prone to hurricanes, you plan ahead of time for higher ground. If you live in an earthquake zone, you keep in mind where you should go when your building begins to shake.

To prepare for a financial storm, you plan ahead of time to keep funds protected.

And, fortunately, much of that planning was done for you by the FDIC (Federal Deposit Insurance Corporation). If you want to learn how the FDIC protects your deposit accounts, the best place to learn more is on the FDIC: Are My Deposits Insured? web page.

While the FDIC insures deposit accounts (think traditional bank accounts; checking, savings, trust, certificates of deposit (CDs), and IRA retirement accounts), there are some accounts and investment products the FDIC does not insure.

Increasingly, institutions are also offering consumers a broad array of investment products that are not deposits, such as mutual funds, annuities, life insurance policies, stocks and bonds. Unlike the traditional checking or savings account, however, these non-deposit investment products are not insured by the FDIC.

Specifically, the FDIC does not insure: investments in mutual funds (stock, bond or money market mutual funds), whether purchased from a bank, brokerage or dealer; Annuities (underwritten by insurance companies, but sold at some banks); or stocks, bonds, Treasury securities or other investment products, whether purchased through a bank or a broker/dealer.

The general “limit” on insurance per deposit account is $100,000, but the FDIC website offers EDIE, their online Electronic Deposit Insurance Estimator. It’s an excellent tool that helps you discover exactly how protected you have.

The FDIC’s promise (on the EDIE homepage) is, “When your deposits are 100% FDIC-insured, you can’t lose a penny, no matter what.”

How we think about something often determines how we interact with it. This is especially true about money.

Most people want more money. But having more money does not make most people happier. It fails to do so because there’s no magic in money. It holds no eternal value. It can bestow nothing of true value upon those who possess it. Money is just money.

Few people think of money as a product that can be bought or sold. But money is exactly that.

Banks do not give money away. Banks are in the money-selling business. They sell it in the form of loans.

When you borrow money from a bank or other lender, you are actually buying the money. What you pay for it, the cost of money, is the difference between the amount you borrow and the total amount paid over time in the form of interest and costs.

Of course, some money costs more than other money. If one lender “offers” you an interest rate of 8.75% to borrow $100,000 and another lender’s rate is of 6.0% (all other terms being equal), buying money from the first lender will cost you more.

A quick way to compare 135 loans at once is to use the LoanSpread Loan Comparison Calculator. The LoanSpread(tm) calculator makes the cost of money obvious and LoanSpread’s Loan Summary feature shows the details of the costs.

Smart people shop around for the best price when they make a purchase. It’s amazing, however, how many people don’t do the same when they’re buying money. Remember, money is for sale. It’s always wise to shop around for the best price. And LoanSpread(tm) makes it easy to understand the cost of money.

I wrote last week in “Is Your Bank Safe? Is it Sound?” about BankRate.com’s bank rating service, Safe & Sound®.

Yesterday, Mish Shedlock wrote, “Don’t Count on the “Safe & Sound” Rating of Bankrate.com“, in his blog “Global Economic Trend Analysis” … and he offers a good reason.

On July 25, 2008, First Heritage Bank, N.A., Newport Beach, CA, was closed by the Office of the Comptroller of the Currency OCC and passed into Federal Deposit Insurance Corporation FDIC receivership without advance notice. The bank had a 3 out of 5 star rating from Bankrate’s “Safe & Sound” rating service.

This is enough to make one wonder about the reliability of bank rating services.

You Know The Banking System Is Unsound When….
Credit card rates can go up … well, just because
Debit cards for your 401k

Not a lot of good news or positive views in these three, but certainly important considerations. I’d read them in the order provided. First Mish’s take on the banking system, then the eye-opening results of a survey of credit card companies that raise rates “just because”, and finally the worst idea of all … a firm that offers debit cards for 401k accounts … absolutely dumb.