The Age of Bank Failures

By Greg Hunter’s USAWatchdog.com 

The U.S. stock market surged yesterday on news the European Union (EU) would deploy a two trillion euro rescue fund to help get its sovereign debt crisis under control.  This news was so good even battered Bank of America stock jumped more than 10%.  Crisis averted?  Hold on, not so fast.  Some big French banks are in trouble because they are up to their necks with sovereign debt.  Naturally, President Nicolas Sarkozy wants action now.  Yesterday, the Financial Times (FT.com) reported the French leader said, “. . . an unprecedented financial crisis will lead us to take important, very important decisions in the coming days.”  Raising the sense of urgency, the French president added: “Allowing the destruction of the euro is to take the risk of the destruction of Europe. Those who destroy Europe and the euro will bear responsibility for resurgence of conflict and division on our continent.”  (Click here to read the complete FT.com story.)     

Jim Rickards of Tangent Capital says you have to distinguish between the bonds, banks and the euro.  He said recently in an interview on King World News, “The bonds are definitely going to crash and burn.  The bonds are toast. . . . The banks own the bonds, and if the bonds are toast, the banks are toast. . . . But that doesn’t mean the currency is toast.”  (Click here for the complete King World News interview with Mr. Rickards.)  Rickards expects the euro currency will survive, but many banks will not.  

Reggie Middleton of Boombustblog.com says the reason for the coming bank failures is simple—high debt loads.  Middleton says many European banks have 40 to 1 leverage.  He recently explained how dangerous this was by saying, “I take a dollar and I borrow $39, and I go out and buy something with it.  All you need is a 2% move to totally wipe you out—100%.  And we all know a lot of sovereign bonds have moved a whole lot more than 2%.” (Click here to see more of Middleton on the Boombustblog.com.)  Middleton is expecting more European bank runs as the crisis picks up speed.   

Dr. Martin Weiss of MoneyandMarkets.com is also predicting “European megabanks will collapse.”   In a recent post, Dr. Weiss said, “Sovereign debt defaults will trigger more bank failures. More bank failures, in turn, will precipitate more sovereign debt defaults.  This vicious cycle will cut off the flow of credit to businesses and households, sink the global economy into a depression, and perpetuate the vicious cycle.  Ultimately, we will see an extended period of great economic hardship for billions of people on every continent.” (Click here for the complete Moneyandmarkets.com report.)   

The risks associated with the European sovereign debt crisis are not overblown.  Some of the top government financial officials know all too well the real world consequences of a daisy chain of out-of-control debt defaults.  Just last month, Bloomberg reported Treasury Secretary Tim Geithner’s warning to the EU.  The report said, “. . . Geithner pressed European policy makers to intensify their efforts to end the 18-month sovereign debt crisis and avoid the “threat of cascading default, bank runs and catastrophic risk.”  In his strongest public push yet for Europe to step up its crisis-fighting, Geithner said strains in the euro-area’s budgets and banks are the “most serious risk now confronting the world economy.” (Click here for the complete Bloomberg report.) 

The EU can’t save all the banks, but that is not going to stop them from printing money to pick and prop up winners.  As we all know, every bank cannot be a winner.  The problem is so big that European banks are allowed to lie about the value of their assets to project the image of solvency.  The same is true for American banks.  When European banks start failing, there is no way U.S. banks will be able to avoid being sucked into a vortex of default.   For anyone who thinks this crisis can be resolved with a pain free plan—forget it.  Welcome to the age of bank failures.

Comments
  1. Kevin

    Yep, the big boys are battening down the hatches:

    Oct. 18 (Bloomberg) — Bank of America Corp., hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

    The storm…it’s a comin’. A trillion ways to read into this one….

  2. droidX-G

    Greg, the cartoon says it all. Great article.

  3. bob D

    hi Greg,

    nice piece on our euro fiasco

    some folks never learn that when a process, such as euro union,
    does not work then you either fix it or cancel it……

    the dummies
    operating eurounion do not have a clue what is wrong and even if
    they did they dont have the skills to fix their mess,

    is sort of like
    getting stuck on potty training,
    on into adulthood,
    not a good deal

    they, germany, should have known better than to gather the sheep
    into a union that they, germany, devised as a clone of usa, exactly
    to compete with usa, and thus shot self dead at the onset

    now the only solution to their potty chair mess is to clean it up
    by gettig rid of the union, shut down the eurocurrency, let it all
    revert back to each member union being wherever they can get a
    foothold, and go forth on their own merit, skills, currency, etc
    until they are their own former unique self and go for the gold,
    they must have the loser goldman sacs advising them and operting
    their currency, etc, no one else could be as stupid as goldman folks,
    no one else is a born idiot and stays in world affairs, etc

    so when each euro nation reverts to self and become self and thereby
    goes forward, you have a nice competition and the players make deals
    and every one lives happily ever after,

    once they payoff their debt
    from fooling around as members of a euro union,

    which is the same as
    one family of a dozen kids who spend all their time beating
    each other up ad never go out into the world to make a living,,,,

    no it is not
    that europeans are stupid, they are genetically top of the line, but
    does no good to be top winner if they game you play is redoing
    potty training

    thanks for this article, is neat

    • Greg

      Thank you Bob for the comments.
      Greg

  4. MILE

    THEY CAN DROP A BULLET FROM A SATELLITE AND ZOOM IN ON THE RADIO FREQUENCY OF A SPECIFIC PERSON, BUT THE CANT FIGURE THE RADIO FREQUENCY OF A SPECIFIC CANCER AND USE MODULATIONS TO DESTROY IT…..ER………………… AND IF EVERYTHING GOOD IS TO GO TO CRAP DOES THAT MAKE THE 125 TRILLION DOLLARS OF DERIVITIVES THAT BAC OWNS GOOD..????IF THE HELP DOES NOT LOOT THEM FIRST LEAVING THE SHAREHOLDERS WITH BUPKISS ZERO……”GEE WE USED TO HAVE A QUADRILLION DOLLARS OF FRAUDULENT BOGUS BOGUS DERIVITIVES THAT GOT MISSING..??????? ON THE RUMOR OF THEIR HAVING A GROWING VALUE..?????????/..

  5. nm

    I was reading somewhere that the bond market is headed for collapse and they gave the following reason.

    “Treasuries are in many portfolio’s only because of their AAA rating. Once this rating is lost, institutions by definition must unload their treasuries. The big money will be repositioning itself in stocks and gold in anticipation of the inevitable collapse in bonds”.

    If the above is true, why didn’t these institutions unload treasuries when the US got downgraded?

    • Greg

      NM,
      The Treasury market is the biggest and most liquid in the world. If you want to park a billion bucks the Treasury is the only place to go. You can’t exactly park it in an account that is is insured for $250,000. That’s the short answer.
      Greg

      • droidX-G

        Greg,
        It is a fact that big money is being parked in short term US Treasuries. There IS NOTHING AS LIQUID. That being said, when something of equal liquidity is available there will likely be an exodus of funds out of TBILLS and TBONDS. The point is that people are afraid and the stockmarket is rigged. Even the big boys are willing to sacrifice profit to persevere capital. It is no longer about making money as much as it is abou saving what you have.

        • Greg

          Droid-X,
          Good point. Thank you.
          Greg

          • Lazlo Toth

            Also, the 91 day t-bill market figures to be the last to default. If it’s terms are changed in any way, nobody will ever loan the Gov. a penny again.

      • IndianaJohn

        So I just don’t know why a billion bucks don’t want to buy 20 tons of gold. Surely a billion bucks would want to protect itself.

        • Greg

          IndianaJohn,
          Many central banks around the globe are putting billions into gold, oil farm land and other tangible assets on a regular basis.
          Greg

  6. Denarius

    Greg, you have done a great job aggregating all these pertinent articles. I had read about half of them already. That resulted in visions of vast fields of erect dominos teetering on their bottom edges, each bank/domino causing others to fall, the numbers in proportion to each one’s leverage. It is so bad that, for the first time ever, I find myself agreeing with Tim Geithner, especially his assessment of a “threat of cascading default, bank runs, and catastrophic risk” and his characterization of the bank strains as the “most serious risk now confronting the world economy.” Wow!
    I guess that’s what happens when you allow greedy sociopaths to run amok for decades without serious adult supervision. Thanks a bunch, Lyndon Johnson, Dick Nixon, Gerald Ford, Ronald Reagan, Alan Greenspan, Bill Clinton, and Sarbanes/Oxley for delaying the crash of fiat currencies for the time it took me to prepare for it – my adult life.
    What about Barak Obama and Ben Bernanke? Two more obvious “fall guys” I have never seen. Ugh!

    • Greg

      Denarius,
      Fall they will. Thank you for weighing in.
      Greg

    • g.johnson

      denarius,

      why are the bushes not included in your list?

      • Denarius

        Just to see if anyone is paying attention.
        And the winner is . . . g.johnson.

  7. Fluffy

    Would smaller banks and credit unions be affected by the wave of defaults? Is any financial institution safe if the meltdown happens?

    • Greg

      Fluffy,
      The phrase that keeps coming up over and over again is “systemic risk.” If the system melts down I am sure you would be affected. I feel you would be better off in a credit union because they have little to zero counter-party risk in the derivative market. I hope this helps answer your question.
      Greg

  8. Diane Carol Mark

    Greg,
    Guess that grandma’s idea about stuffing your bucks under the mattress isn’t so crazy after all.

    :) Diane

    • Greg

      Diane Carol Mark,
      I wouldn’t trust the currency. It is going to go poof someday.
      Greg

      • Vendeta

        LMAO…”poof” means shafted right?

        • Greg

          Vendeta,
          Yes shafted through inflation and some pretty high inflation at that. The true inflation rate right now (calculated the way it was done in 1980 by BLS) is more than 11%.
          Greg

  9. Frank Rizzo

    Can the Euro group hold it all together until 2012? What should I do besides stocking food/water and obtaining precious metals?

    • Greg

      Frank Rizzo,
      Jim Rickards says yes, and he is a real market insider.
      Greg

  10. DayOwl

    And then there are the derivatives…

    Check out how BoA is transferring Trillion$ in derivatives to an FDIC insured arm of the company (and default onto the taxpayers):

    http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

    • Greg

      DayOwl,
      Weasels!! Thank you for this info.
      Greg

  11. Mountainaires

    Bank of America’s stock was saved because the FED supported the latest outrageous boondoggle and hoodwink of depositors with their Merrill Lynch derivatives transfer to an FDIC protected subsidiary:

    http://globaleconomicanalysis.blogspot.com/2011/10/bank-of-america-moves-merrill-lynch.html

    France is in trouble:

    http://dailycapitalist.com/2011/10/18/spain-dinged-is-france-next/#more-14778

  12. Mountainaires

    Rickards could be right about the bonds v. the currency. On the other hand, the currency could fail too, as a result of the staggering sovereign debts being racked up to save the bonds, right? Love Weiss & Middleton too. You’ve got a great roster of reading here.

    • Greg

      Mountainaires,
      Nothing these days is a sure thing. There will be many wild cards flipped over in the months to come. Thanks for weighing in.
      Greg

  13. Mitchell Bupp

    Hi Greg, What is BOA exactly doing to create a hook to get the taxpayers to pay for BOA bad debt?

    You are so correct when you talk about the “moral hazard” created by a banking system that is controlled by the megabanks. Now they are in the process of tying the taxpayer to the banks bad debt …. I smell a reason to use the RICO laws against the banks and their corrupt system of pawning off bank debt as taxpayer debt!

  14. Sandy

    If the big banks fail, who will buy the governments debt? The recent nationalization of Dexia occured because they purchase municipal bonds. The big banks, the Fed, and the Government are all in cahoots. The Government sells bonds to the big banks with money the Fed prints up. It’s what keeps the game going. Why do you think nobody has been prosecuted for mortgage fraud? The same thing is happening in Europe. We live in interesting times.

    • Greg

      Sandy,
      All very good questions.
      Greg

  15. g.johnson

    sandy,
    (scenario) the chinese will buy the debt and consider it title. default would give them grounds for foreclosure. how’s that for a pretty picture?

    good to be aware of the financial situation on planet earth. but this is more a symptom than the problem. the problem (step back and widen your focus here) is that the stage is being set for a huge war. the purpose of this war is major population reduction. and this war will not come about by accident.

    what we have here is the gordian knot and the sword of damocles hanging over our heads. some would find utter despair in this, others may see that the solution is presenting itself in graphic living color. so, who’s gonna grow a pair and reach for that sword?

  16. nm

    “You can’t exactly park it in an account that is is insured for $250,000. That’s the short answer”.

    So, if that’s the answer, then the bond market won’t collapse because people have no where else to park their money, no?

    • Greg

      NM,
      For now, the answer is yes but if the world starts selling, that is a different story. When will the world start selling? That is the million dollar question. You just have to be ready.
      Greg

  17. W Raft

    If people are smart enough to elect Ron Paul, the banks will be foreclosed.

  18. Mike

    Again, an excellent and informative article on “the Banking Industry”. Keep up the good work. Thank you.

  19. Vess

    1) Some European banks are leveraged more than 40:1. Dexia was leveraged about 52:1 – and we all know what happened to it, don’t we? Trouble, Deutsche Bank is in the same ballpark, too (37:1). If I remember correctly, Bear Stearns failed because it was leveraged 15:1.

    2) Greece will default in a matter of days – weeks at most. Notice how only a relatively small additional amount of money was lent to it this time? It’s just enough to buy the (little) additional time Germany needs to prepare its banks for a Greek default.

    3) Greece is not the problem. The problem will be when the same kind of stuff starts happening to Spain and Italy. However, there is no way for either of them to default this year – so there is still time left till Armageddon. :-)

    4) The EU should have remained the way it was designed originally – as a “common market”, designed to facilitate the free trade between the members and minimize the taxes and tariffs. This “unification” stuff of laws, regulations, interest rates and monetary policies is pure nonsense. Never gonna work. You can never even compare adjacent countries there, let alone “equalize” them. And I am not talking about Germany/Greece – even countries like Italy/Switzerland are worlds apart. Different people, different thinking, different cultures.

    5) It is still possible for the banks to default in an orderly way, without causing a global meltdown. There is just not the political will for it. All that has to be done is to force the bondholders and the shareholders take the losses from investing in companies (banks) with foolish management who didn’t know how to manage risks. Once this is wiped out, there will be plenty of other assets left that can be sold and the proceedings used to cover the obligations to depositors. No public money will be needed. The governments will need just to provide framework and guidance. Never gonna happen, of course. It’s much easier to pour public money (or to print money) in a bottomless pit and hope that “it will sort itself out, just give it a little time”. :-(

    • Greg

      Good stuff Vess! It will be interesting how it all shakes out.
      Greg

  20. David Conrad

    Once again, my friend, I am afraid that you are correct. The banks appear to me as a long line of dominos ….. I fear they may all collapse soon.

    • Greg

      David,
      This is a great line ” The banks appear to me as a long line of dominos …” Some will fall very hard.
      Greg

  21. Cathy

    There are four banks here dumping derivatives into FDIC insured
    banks, to the tune of $600 trillion. i think it’s a black hole
    not a vortex.

    • Greg

      Cathy,
      It’s trouble, big trouble, no matter what youn call it. I like black hole too!
      Greg

  22. Ambrose

    Greg,

    The question is when and how will the banks foreclose themselves?

    Here is the list of failed banks (since October 1, 2000) from FDIC: http://www.fdic.gov/bank/individual/failed/banklist.html

    When the banks failed in 2008, overhaul the U.S. banking system would be painful but it was probably doable. Unfortunately nothing has been done to fix the system. The Fed has been telling the American people that the U.S. economy is recovering. Compounded with the problems of the congressional party war in Washington and the Euro-crisis, the banks are now in much bigger mess.

    Here is a good solution to the Euro-crisis: http://www.politicalcartoons.com/cartoon/ee98cfc3-0a9f-480c-ab0d-7dc88db2254c.html

    Ambrose

  23. rio

    Greg, great article as usual!

    • Greg

      Thank you Rio for your comment and support.
      Greg

  24. Brad

    So Bank of America transfers assets to FDIC-covered territory. FDIC is broke and contiues to limp along, looking as if it were solvent, but they are in the red. I don’t understand quite how they play the shell game and bail out any banks at all. Would not the trillions that BOA is shifting there be the rather large straw that breaks the camel’s back of FDIC or the shout out from the crowd that the king has no clothes? An FDIC failure to perform would certainly provoke a run on banks across the nation. How will they be able to pull this off?

    • Greg

      Brad,
      After the Fed covertly pumped out $16 trillion nothing will surprise me. This is a suicide policy that’s for sure. Hear any of the bought and paid for politicians standing up for the peoples interest’s? NO. We have sell-outs and Rats in high places.
      Greg

      • Brad

        Greg, Of course! I was thinking in too linear a fashion. We are the only ones who are forced to actually follow the rules. The powers that be have the power and they just ignore the rules they don’t like. They will just paper it over with paper money they print up for the purpose. Thanks for clearing that up.

  25. nm

    “but if the world starts selling, that is a different story”.

    Selling to who? and once sold…parking it where?

    • Greg

      NM,
      The open market and to any and all participants. It would be parked in a variety of places but as I said, there is no bigger market (at this time) than the U.S. Treasury market.
      Greg

      • Denarius

        Greg, with all due respect, any analysis of events following the saturation of a trading market cannot presume that operations will resemble normal patterns in the slightest way, imo. I wrote the following monograph to illustrate that condition.

        When a Market stops trading, is there a sound?

        No more than on that fateful day in 1970 when the Texas Railroad Commission quietly moved their oil well allocation percentage from 99 to 100, thereby marking the precise moment of Peak Oil in the USA. No bells rang, no whistles blew, just another tic on the graph. Such is the case for a well-regulated industry run by adults. But the fallout from that point in time continues to this day and for all days into the future. The sound echoing around the world from that silent event we can recognize as the cacophony of war.

        When the Bond Market reaches the point of saturation, bidding will cease, there may be a short pause, then the mad dash to the exits will erupt. Few will participate; most will either not notice or be frozen in disbelief at events they have never witnessed before. Trading computers being mostly silent, there will be heard the sudden intake of breath, the clutching of chests, and the unmistakeable thud of bodies hitting the floor amid the clatter of pill bottles doing likewise. Only one voice will be heard; it will say, “All Offers and No Bids — this Market is CLOSED.”

        In the metal trading pits across town, a brief stunned silence at the Bond Market news will be followed immediately by countless computers loading their “Plan Omega” programs. Tension will build in silence through trillions of nano-seconds, each one an eternity unto itself, until a single voice will dare to intrude. It will say, “All Bids and No Offers — this Market is CLOSED.”

        The announcement from the White House will be given in plain language at a measured pace as if it had been rehearsed. It will outline freezes on prices, wages, fees, bank and brokerage accounts by Executive Order. Martial law will not be mentioned but everyone will understand that it need not be made explicit.

        Wire transfers of funds will already have been halted. Air traffic will be ordered to stop at each plane’s next scheduled landing point where it will be removed from service. Fuel deliveries will be allowed only to emergency air, land, and water craft until an allocation program (rationing) can be put into effect. . . . . .

        Grocery stores will be allowed to sell their entire stock of products but will not be permitted to restock the shelves until protection from looters is in place. Coin dealers and jewelry stores will remain closed and pawn shops will be given protection as required. . . . . .

        By and large, no one will care that all the stock, bond, currency, and commodities markets are closed for the foreseeable future. They will be too busy walking to their food markets and standing in line for whatever they can get. Shoes of all kinds will be at a premium. . . . . .

        Well, what were you expecting, to go on holiday?

        While the preceding version of coming events may seem fanciful, it is based on one overwhelming certainty : “Every thing will change, no thing will remain the same. This includes us.” Prepare.

        • Greg

          Denarius,
          I cannot argue with your points here. We are in uncharted waters and you really must be ready for the extremes. There’s and old saying and that is “I’d rather have it and not need it than need it and not have it. Your points and warnings are valid! Thank you for the comment and analysis.
          Greg

        • Brad

          Hi Denarius,
          Your scenario beautifully demonstrated the certain outcome of the crashes that will happen here. The ingredients are already baked into the cake and the oven is warming up. There is no turning back. Those who would collapse our system have finally succeeded in saddling us with enough debt and promises to make a similar scenario inevitable. There are not enough resources on earth to turn it back. As the first panicked people frantically try to salvage what they can of their investments, and try to prepare for a difficult future they will spook the rest of the herd and the stampede will be off in an unstoppable cloud of dust and trampled carcases. Thank you for your post. It is brilliantly done. And thank you Greg for a wonderful site. Yes, prepare NOW!

  26. charles

    Good analysis….but are you going far enough? When banks fail, what happens next, it just doesn’t end there. The economy will continue, money will still circulate, governments will struggle on etc., big banks always collapse, we have seen it in the past, they are swallowed up by new ones.

    What are the aftermath? Will all the small and large banks collapse, will new ones take over? What about all the bonds and mortgages, will they simply disappear or will someone take them over? And finally if the currency is over-inflated and watered down, will it be re-set and the economy restarted from square one?

  27. Eric

    It seems reasonable that the money in treasuries is parked there and losing at the rate of inflation isn’t it’s final destination but just waiting for something. As that something draws closer you might expect to see the money being stored in shorter and shorter term treasuries (requiring the Fed to buy the long end and sell the short to maintain a market as long as possible).
    If this is so, and we see a proven strategy come into play, many if not most of the banks will become insolvent and the money parked in the treasuries will be deployed to purchase assets for pennies on the dollar. These transactions are usually prearranged with the big money picking over everything prior to the public catching any wind of the failures. Usually these are played as “liquidating assets to shore up the banks”. When it is possible to purchase assets with huge discounts, losing a few percent to inflation for the opportunity to score really big gains is just good planning.
    This won’t be the first time that assets were concentrated in banks as holding companies for a vast liquidation to insider money. We commoners, however won’t fare so well as the money hits the secondary markets, causing both prices on necessary goods to soar.

  28. Rob

    Hi Greg!

    Yes the elite need a banking crisis to impliment their agenda which is a casless system requiring a mark to buy and sell. All thats needed at the moment for the elite to roll out the temporary rescue to the crisis they created is a covenant among the G20.

    If #1 takes place during the G20 meeting in Canes, France on 11/3-4/11 #s 2, 3, 4, 5 will follow quickly there after.

    Here is the order of things to come:

    1) Dan 9:27~And he shall make a firm covenant with many for one week.

    2) Rev 6:2~And I saw, and behold, a white horse, and he that sat thereon had a bow; and there was given unto him a crown: and he came forth conquering, and to conquer.

    3) Rev 6:4~And another horse came forth, a red horse: and to him that sat thereon it was given to take peace from the earth, and that they should slay one another: and there was given unto him a great sword.

    4) Rev 6:5~And when he opened the third seal, I heard the third living creature saying, Come. And I saw, and behold, a black horse; and he that sat thereon had a balance in his hand.

    5) Rev 6:8~And I saw, and behold, a pale horse: and he that sat upon him, his name was Death; and Hades followed with him. And there was given unto them authority over the fourth part of the earth, to kill with sword, and with famine, and with death, and by the wild beasts of the earth.

    To better understand the things that come quickly please check out our web site http://www.unleavenedbreadministries.org

    In CHRIST! Rob

  29. therooster of Christ

    Greg … I think you may know that the solution to this crisis is to add asset based (debt free) liquidity such as gold in circulation and thus allow debt to be purged back to nothingness ? Are you aware that this must be a market action, however, bottom-up? We also need a much higher gold price, which is also a market action. Are you being held back by TPTB on encouraging such action at the individual level ? We can each monetize and circulate bullion based currency, fully backed, over the internet where the currency amounts to the ownership title denominated by weight …. and the dollar acts as the real-time measure for this real-time gold-money. “Support gold …. purge debt” is basically the simplified mantra. Gresham’s law is starting to reverse because it was predicated on a FIXED value on gold, so people hoarded it, historically.

  30. bob D

    the problem with those who are solving the problem of
    a defunct eurounion, via their solving their bankrupt euro,
    is they do not believe “there is no sense kicking a dead horse”

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