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Years ago, Dad and I often talked about the circular nature of history — the Crash of ’29 and the Crash of ’87 … the Florida land boom of the ’20s and the real estate bubbles of later years … the bank failures of the Great Depression and the bank failures of the 1980s.
“History repeats itself and has important lessons to teach,” he said, “but always on a different plane and never without grave risks to those seeking all their answers in the rear-view mirror.”
Now, this coming Thursday is the day Lehman Brothers failed three years ago, setting off a chain reaction of events, which continue to reverberate globally. The pattern back then was clear:
• A plunge in bank stocks in the first half of 2008, which was the prelude to …
• Massive losses revealed at the world’s largest banks, which triggered …
• Panic withdrawals by investors and lenders from banks and the credit markets, precipitating …
• The near failure of America’s and Europe’s largest financial institutions, prompting …
• Mammoth government bailouts, deficit spending, and money printing to rescue the banks and the global economy from the abyss, which, in turn, set the stage for …
• The sovereign debt crises in Greece, Ireland, and Portugal, beginning in 2010, plus …
• The deficit crisis that paralyzed Washington in the summer of 2011.
The lesson learned: A crash in bank stocks is the harbinger of bank collapses, deep recession, and widespread panic in the financial markets.
And now … here we go again!
Floyd Norris reports in the Friday New York Times that, among the 30 largest publicly traded bank stocks in the world, 29 are now down by MORE than they were at this point three years ago.
Worse, the shares of several major banking stocks have already plunged BELOW their deeply depressed panic levels of March 2009: UniCredit, Société Générale, Morgan Stanley, Intesa Sanpaolo, and others.
Short-term credit markets are beginning to freeze up again, with telltale signs of panic now rearing their ugly head. (For the proof, see Mike Larson’s Friday article, describing a “European bank run every bit as serious as 2007-2009.”)
And just as we saw back then in 2008, the largest American and European banks are teetering:
Bank of America is caught in a morass of sinking mortgages, costly home repossessions, big lawsuits, and high-risk derivatives. Its share price is down 29% just in the last five weeks and down 54% from its highs of the year, wiping out nearly $84 billion in shareholder value. (See my article of two weeks ago, “America’s Largest Candidate for Bankruptcy.”)
JPMorgan Chase, the biggest player in the high-risk derivatives market, still holds commitments of $73.6 trillion in derivatives, according to the latest report by the Comptroller of the Currency (table 12, pdf page 35). Its shares are down 33% from this year’s high, erasing $62 billion in value.
UniCredit, Italy’s largest bank, is swimming in bad sovereign bonds issued by sinking PIIGS countries. It came up short by 5.6 billion euros in its recent official “stress test,” despite the fact that the test itself has been widely derided as too soft. Its shares, down by 61% from this year’s high, lost a whopping 8.2% on Friday alone. And among the weakest of all …
Société Générale, France’s third largest, is also reeling from the sovereign debt crisis. It scored the lowest among its peers in the stress tests. Down more than 65% from their peak, it shares dropped over 10% just on Friday.
But it’s not just megabanks.
Based on the FDIC’s just-released second quarter database, Weiss Ratings senior analyst Gene Hirsch reports that U.S. banks of all sizes and regions are taking it on the chin …
Their net operating revenues fell for the second quarter in a row, compared to the prior year — with Morgan Stanley, Hudson City Savings, State Street, PNC Financial, Citigroup, and Goldman Sachs the biggest losers.
Among the 10 largest, nine suffered declines in interest margins, due to the Federal Reserve’s efforts to artificially shove down long-term rates.
Their favorite cash-cow business — overcharging consumers with all kinds of loan servicing fees — has plunged by a whopping 40.9%, compared to last year’s second quarter (thanks to banking reforms). Adding insult to injury …
Lawsuits are hitting hard! AIG has sued the Bank of America for $10 billion. The Federal Housing Finance Agency has sued 17 U.S. banks for undisclosed damages on $196 billion in securities bought by Fannie Mae and Freddie Mac. A long line of state attorneys generals have piled in as well, suing banks for mortgage fraud. And now, the American Banker reports that many of the nation’s largest banks may be under investigation by the Department of Justice for up to $6 billion in kickbacks they’ve received from mortgage insurers.
Whether there’s any money left to pay all the damages, fines, and legal costs remains to be seen.
The biggest immediate danger: Exposure to Europe!
One of Weiss Ratings’ primary data providers, SNL Financial, reports that, although U.S. banks have little DIRECT exposure to failing PIIGS countries in Europe, they do have big exposure to European banks which DO hold the bulk of the PIIGS debts.
That includes $370 billion to German banks, $375 billion to banks in the UK, $276 billion to France’s, plus another $143 billion to other European countries. These numbers are bad enough. But what they don’t include is the exposure to European derivatives, which is bound to be far larger.
Bottom line …
After all the bailouts and economy stimulus, we’re back to square one, confronting most of the same crises as 2008 — plus several more!
We have the return of bank stock collapses and a credit freeze-up. Plus, on top of that, we have the sovereign debt crises, the Washington deficit disaster, political gridlock, higher long-term unemployment, mass street protests in Europe, and monetary authorities everywhere running out of bullets.
The best evidence: Yesterday, the G-7 pledged to support failing banks. But it’s just talk. There was no meat, no muscle, and no MONEY behind their words.
Your course of action should be crystal clear: For most of your money, rush to the safest havens you can find — including cash and gold.
And for funds you can afford to risk, consider investments that are designed to rise when nearly all else falls.
Good luck and God bless!
Martin
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Hi Martin
Governments since 2008 have used up their goodwill and credibility and now have kept no powder dry to prevent this coming fire storm. With little public confidence to change from borrowing and spending to production and savings this train wreck will be unstoppable.
Now it is inevitable. Hope the pain is low for America and world.
I always do the opposite of what the folks at Weiss recommend.
“History repeats itself and has important lessons to teach,” he said, “but always on a different plane and never without grave risks to those seeking all their answers in the rear-view mirror.”
I like this wisdom. It states that looking in the rear window or that history doesn’t provide you all the answers for where the future will take us.
Recently I was looking at quotes by Thomas Jefferson and I thought what a gem for all times: “I believe that banking institutions are more dangerous to our liberties than standing armies.”
I should have followed the advice of Dr. Weiss when he wrote in 2006 to flee the stock market and buy gold. I would be many tens of thousands of dollars ahead!