An Emergency Bank Holiday is Possible

[J]

Times Online

Which bank is going to follow the Bear?
Suzy Jagger, Christine Seib and Miles Costello

So who is next? As advisers to Bear Stearns struggle to find a buyer or funding in the next 28 days, Wall Street, the City and the financial district in Tokyo were scrabbling to find out who is the most exposed to Bear Stearns, either through loans or trading positions.

Traders in all three centres were panicking even for those banks not directly exposed to Bear. They feared that the problems experienced at the stricken bank signalled that the credit crisis has deteriorated to a new level.

Yesterday, traders began to look anxiously at the robustness of Lehman Brothers, which, although bigger than Bear, is small compared with JPMorgan Chase, Morgan Stanley and Citigroup.

Shares in Lehman dropped 11 per cent yesterday, a far bigger fall than its other rivals, which saw their stock decline by about 3 per cent.

Although Lehman is more diversified than Bear, it has a similar investment profile, with huge holdings in mortgage-backed debt. Lehman sought to reassure the market when it said yesterday that it had secured a $2 billion (£1 billion) credit line with Paolo Tonucci, the bank’s global treasurer, calling it “a strong signal from the market and our key bank relationships”.

However, Chris Whalen, of the Wall Street consultancy Institutional Risk Analytics, said: “This is going to go all the way up the chain. There is a risk that all broker dealers are going to become an endangered species if the credit crisis is not sorted out. If they can’t fund themselves, they will have to shrink. All the other firms are in danger, too.”

He said that should the US Federal Reserve, the US Treasury and the Securities and Exchange Commission not devise a broad rescue plan to address the credit turmoil on Wall Street this weekend, “I would not be surprised to see an emergency bank holiday announced. That hasn’t happened since Roosevelt.” During the Depression, 75 years ago almost to the day, Franklin Roosevelt declared a four-day bank holiday, which stemmed a frantic run on banks. Mr Whalen added that should banks such as Lehman continue to be unable to sell the billions of dollars of mortgage-backed securities held, they were doomed. He said: “Broker dealers have to be able to get rid of assets. If they are illiquid, they die.”

Over the past ten years, global banks increased their issuance of mortgage-backed securities to feed a growing appetite for what investors believed were high yet stable yields. In 1998, banks issued $16.4 billion of the securities, according to calculations by Thomson Financial. By last year, the issuance figure had ballooned to $366 billion. Issuance so far this year is $4 billion.

The Royal Bank of Scotland was the world's biggest underwriter of mortgage-backed securities last year. An underwriting bank takes responsibility for selling the securities into the market.

RBS underwrote $44.7 billion of securities, taking a 12 per cent share of the market. Bear Stearns was the eighteenth-largest underwriter in 2007, underwriting $6.3 billion of the investments.

Fears of a UK financial casualty were also alive in the Square Mile, with banking stocks among the biggest losers on the stock market yesterday. HBOS, the UK’s biggest mortgage bank, led the sector down as the FTSE 100’s biggest faller, dropping more than 6 per cent to 528p a share, while Barclays closed down almost 5 per cent at 433p. Their shares fell even though British banks have tiny exposures to the American mortgage market in comparison with the big US and European investment banks.

US media sources have been (un)surprisingly silent. According to rumours, several banks are now picking over Bear Stearns' books in preparation for a buyout if the numbers aren't too bad, and if the numbers don't add up they will assume the role of vultures when BSC goes kaput.

[Col. Crackpot]

Every day of this i thank whatever god there may me for RBS and it's conservative lending philosophy. I used to curse RBS Citizens' uber-strict underwriting guidelines. Now i sleep at night because of them. We flirted with the prospects of an inverted yield curve for a while... though we adjusted. And our default rate is looooow. People can bitch all they want about us being too strict, but at least were fucking solvent!

[The Star Marshall]

Every day of this i thank whatever god there may me for RBS and it's conservative lending philosophy. I used to curse RBS Citizens' uber-strict underwriting guidelines. Now i sleep at night because of them. We flirted with the prospects of an inverted yield curve for a while... though we adjusted. And our default rate is looooow. People can bitch all they want about us being too strict, but at least were fucking solvent!

Speaking as one of those RBS-Citizens underwriters I completely agree with you. Before the credit market destroyed itself I used to listen to the sales people complain about out standards being to strict and how it was costing us business. I haven't heard any of them complaining lately though. Its nice working for one of the few sane banks out there, and not coming in to work every day wondering if you'll still have a job next month.

[Elfdart]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

I wonder if the "lend money to any schmuck with a pulse" types learned economics from Tommy Chong in Cheech & Chong's Next Movie.

CHEECH: Hey Man, we're broke!

CHONG: No we're not, I just sold two lids this morning.

CHEECH: Allright! Who'd you sell 'em to, holmes?

CHONG: To me!

CHEECH: Shit Man, we're gonna starve

CHONG: Not with me, I'm our best customer!

[Uraniun235]

Shakespeare had it wrong when he said we ought to kill all the lawyers.

[Keevan_Colton]

Every day of this i thank whatever god there may me for RBS and it's conservative lending philosophy. I used to curse RBS Citizens' uber-strict underwriting guidelines. Now i sleep at night because of them. We flirted with the prospects of an inverted yield curve for a while... though we adjusted. And our default rate is looooow. People can bitch all they want about us being too strict, but at least were fucking solvent!

Which is particularly amusing since it was the RBS that originally invented the overdraft.

[Surlethe]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

Is terrible consumer confidence intrinsically bad? If consumers are unreasonably optimistic, then it seems they would continue to make poor choices on the assumption that things would turn out well in the end, which would continue to bolster the debt-based consumerism currently in place in the US.

[Col. Crackpot]

Every day of this i thank whatever god there may me for RBS and it's conservative lending philosophy. I used to curse RBS Citizens' uber-strict underwriting guidelines. Now i sleep at night because of them. We flirted with the prospects of an inverted yield curve for a while... though we adjusted. And our default rate is looooow. People can bitch all they want about us being too strict, but at least were fucking solvent!

Which is particularly amusing since it was the RBS that originally invented the overdraft.

two words: fee income.

[Admiral Valdemar]

Since the whole system is one that worships ever lasting growth, the last thing they want is to get people to be more frugal in living standards. You see how they are when they only have sales grow by 1.5% during Christmas, as opposed to an expected 2% and so on. The idea of cutting back on consumption in any way sends shivers dowm the retail and banking spines.

It is good to see RBS actually had the cajones to stick to it's principles and not dive into the money pit that is now a solvency abyss like everyone else. Being with HSBC though, I wonder how affected they are at the end of the day.

[Col. Crackpot]

It is good to see RBS actually had the cajones to stick to it's principles and not dive into the money pit that is now a solvency abyss like everyone else. Being with HSBC though, I wonder how affected they are at the end of the day.

HSBC will give a credit card to virtually anyone. At least in the past they did. I'm not sure of their mortgage/equity underwriting guidelines.

[Gerald Tarrant]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

Is terrible consumer confidence intrinsically bad? If consumers are unreasonably optimistic, then it seems they would continue to make poor choices on the assumption that things would turn out well in the end, which would continue to bolster the debt-based consumerism currently in place in the US.

US savings are at historic lows. Lower consumer confidence ought to coincide with changes in behavior, less consumption to more savings. The current American consumption/savings ratio is unsustainable, as there will be less and less resources available for capital investment. So any change which acts to correct that flaw is good.

There's another wrinkle though: Germany, Japan, and a few others have pursued "Export Led Growth" where the trade surplus pumped up employment numbers. To maintain this Central Banks had to buy excess dollars, the collapsing dollar showcased that this wasn't a feasible long-term strategy. Couple that with decreasing American consumption and those export industries are in a less rosy position. The amount of damage that will filter around depends on how quickly those companies and countries can restructure, or find new markets. It probably won't last as long as the US's upcoming recession, but the expectation is a quarter or two of lower growth.

[muse]

HSBC will give a credit card to virtually anyone. At least in the past they did. I'm not sure of their mortgage/equity underwriting guidelines.

HSBC used to mail me pre-approved gold & platinum credit cards with 5-figure limits when I didn't even have a job, and had all of $50 to my name.

[Broomstick]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

US consumers still have confidence? This one doesn't.

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

[General Zod]

US consumers still have confidence? This one doesn't.

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

Unless this holiday includes shutting down all the bank servers, I don't see why they wouldn't keep working as long as they have cash in them.

[J]

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

I think that if the banks decide to take a holiday they will shut down all their ATMs as the purpose is to keep money in the bank so they don't go belly up. They'll likely let you pay your bills with internet banking but I'd expect them to severely limit account transfers to prevent you from emptying out your account to another bank.

As a sidenote, just because you're not in the US doesn't mean you're safe. Canada's having problems as well, as are several other countries. Know the FDIC & other deposit insurance limits, and keeping a pillowcase full of cash just in case can't hurt either.

[Broomstick]

US consumers still have confidence? This one doesn't.

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

Unless this holiday includes shutting down all the bank servers, I don't see why they wouldn't keep working as long as they have cash in them.

Emphasis added - get even a small panic/bank run going and the ATM's will be out of cash in half a day.

I think that if the banks decide to take a holiday they will shut down all their ATMs as the purpose is to keep money in the bank so they don't go belly up. They'll likely let you pay your bills with internet banking but I'd expect them to severely limit account transfers to prevent you from emptying out your account to another bank.

The PROBLEM is that my local grocery store and gas station don't do "internet banking", and I'd rather not put such basics on a credit card. Assuming credit cards would be taken. The grocery store might honor debit/credit cards, but I'm not too sure about the gas station.

I mean, fuck the phone bill and rent - it takes well over a month for them to burn you on those. I'd rather NOT do without food and fuel. Well, we wouldn't starve, but it could get unpleasant if this hit at the wrong time, even if I do try to keep stuff stocked up. And most jobs require a car, so for damn sure you want to be able to get gas in order to get to work, else this whole thing starts causing even MORE problems....

[Col. Crackpot]

As a sidenote, just because you're not in the US doesn't mean you're safe. Canada's having problems as well, as are several other countries. Know the FDIC & other deposit insurance limits, and keeping a pillowcase full of cash just in case can't hurt either.

For the Record, FDIC insurance covers you up to $100K per depositor. an additional 100K of insurance can be obtained by naming beneficiares that are direct relatives. (in a simple Totten trust). IRA's are a different animal and can be inured up to $250K

The scam is that the FDIC, unlike an actual insurance company does not maintain funds sufficient to bail out much of anything. It needs to be funded by an act of congress. AKA, Lets go print some money. The FDIC would be hard pressed to bail out even a "Super Regional" (5/3rd, RBS Citizens, WaMu) never mind a Citi or B of A.

[Elfdart]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

US consumers still have confidence? This one doesn't.

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

Refusing to spend money because you don't have it is one thing. Having money and not spending it because you think the shit is going to hit the fan is worse because without a certain level of spending, the economy as a whole goes into the tank.

Let's take your idea of socking away cash. Up to a point there's nothing wrong with it. But if enough people do that (to say nothing of businesses) you have a lot of money sitting idle.

My finances are slightly better than they were three years ago, when I bought a new car. Would I buy a new car today? Only if I absolutely had to, and most likely something cheaper than what I got in 2005. I've been hanging on to my money as much as possible for the last few years for several reasons, as have most people I know. That can't be good for the economy.

[Col. Crackpot]

Refusing to spend money because you don't have it is one thing. Having money and not spending it because you think the shit is going to hit the fan is worse because without a certain level of spending, the economy as a whole goes into the tank.

Where the fuck do you get off, actually making sense?

[Admiral Valdemar]

Even the WSJ is telling it as it is now. I think the bubble of confidence is firmly deflating at a colossal rate.

EDIT: Oh, and this is going to hurt the City I can imagine. Ouch.

[Broomstick]

There was a reason FDR put an end to buying on margin, but people never learn. I don't know if they'd have the nerve to declare a bank holiday nowadays, on the grounds that consumer confidence would go straight into the shitter and wouldn't come out for years.

US consumers still have confidence? This one doesn't.

(Seriously considering stashing some emergency cash in the mattress so we can still gas the car and buy food over a forced "bank holiday". Would the ATM's still work in the meanwhile?)

Refusing to spend money because you don't have it is one thing. Having money and not spending it because you think the shit is going to hit the fan is worse because without a certain level of spending, the economy as a whole goes into the tank.

As I have no job at the moment, my personal economy has already gone into the tank, been flushed through the shitter, and is now heading towards the septic tank.

If I was as fully employed right now as I was last year at this time we'd purchase a new mattress for the bed, replace all the tires on both vehicles, buy a new microwave oven (we may have to in the near future anyway if it keeps having problems), and I'd still be supporting my local flight school/aviation businesses via regular trips on the weekends. A flat screen TV and music entertainment center, not to mention a laptop, would not be out of the question. Of course, that's one of the major problems: many people are now unemployed who were not a year ago.

I have money, but I'm hanging onto it because I don't know when I'll be getting more and food takes precedence over toys.

[Col. Crackpot]

As I have no job at the moment, my personal economy has already gone into the tank, been flushed through the shitter, and is now heading towards the septic tank.

If I was as fully employed right now as I was last year at this time we'd purchase a new mattress for the bed, replace all the tires on both vehicles, buy a new microwave oven (we may have to in the near future anyway if it keeps having problems), and I'd still be supporting my local flight school/aviation businesses via regular trips on the weekends. A flat screen TV and music entertainment center, not to mention a laptop, would not be out of the question. Of course, that's one of the major problems: many people are now unemployed who were not a year ago.

I have money, but I'm hanging onto it because I don't know when I'll be getting more and food takes precedence over toys.

I think Elfdart was speaking in broader terms... not toward your specific situation.

[Broomstick]

Again, the issue isn't so much with my personal situation (although, of course, it is near and dear to me) but how many other people are also in that position.

Even in the best of times a certain percentage of the population is cycling through unemployment/financial problems, but it's a low percentage. Right now, that percentage is rising. When it reaches a certain point (and where that is I haven't a clue - economics on a grand scale is not my strong point) then everybody has a problem. I keep hearing that we need to increase consumer spending, but anyone in my situation logically should restrain spending, for their own good. Too many people acting wisely as individuals will fuck with the greater economy. That's a "recession" or "depression" right there.

As it is, we're positioned exceedingly well for the unemployed - our savings outweigh our debts. That's not typical in the US. Not at all.

However, should I find more-than-barely-adequate employment in the near future I promise to go back to spending, m'kay?

[Admiral Valdemar]

I believe Stoneleigh's post over at TOD has a good summation of the predicament here:

Building infrastructure, or anything else for that matter, during a deflationary depression is highly unlikely. Credit is already evaporating far faster than central bankers can pump in liquidity, and the rate of credit destruction is accelerating all the time. In other words, deflation has already begun. IMO we have already reached 'critical mass' and tipped over into a rapidly self-reinforcing spiral of margin calls, defaults, sales of distressed collateral, depressed prices and further margin calls. Those margin calls will reach down the 'financial food chain' until the directly affect ordinary people - with the tightening of credit, margin calls and ultimately the calling in of loans.

Ordinary people won't necessarily even have the money they need to purchase the necessities of life, let alone anything beyond that. The private sector won't be interested in building anything when risks, and therefore long term interest rates, will be so high. (With credit spreads exploding, much higher longer term interest rates are inevitable.) The prospects for earning a profit will be minuscule compared to the present time, as those to whom companies sell goods and services will not have the money to buy them.

The public sector will be completely inundated with requests for assistance at a time when tax receipts will be falling off a cliff, and the ability to extract higher taxes from those still able to pay will be decreasing rapidly. I can't see much public sector investment in infrastructure - even for maintenance, let alone new construction - when all public services will be over-stretched and probably collapsing.

IMO there are no viable solutions, other than living through a long period of depression and eventually emerging from the other side, with greatly diminished economic capacity due to the effects of economic upheaval on energy supply. Our long credit expansion has created multiple and mutually exclusive claims to the same underlying pieces of real wealth pie (as opposed to dividing the pie into ever smaller pieces, as currency inflation would have done). Now that the expansion is over and contraction has begun, that underlying real wealth will inevitably be fought over. There is nothing that can be done to prevent this.

The dynamic is Enron-esque, meaning that a rapid implosion is approaching. Already we are seeing the market beginning to pick of banks one by one, and it takes little time for self-sustaining momentum to build up. If you're interested in daily coverage of the situation, click on my profile for the link.

[Broomstick]

Despite much criticism and the time and ever since, Roosevelt's various "alphabet soup" public works programs did maintain and build infrastructure during the Great Depression. Much criticism as to how "necessary" much of it was, and comments on inefficiency, but it did enable people to feed their families and pay for housing, which is no small thing. I think in some ways it was a return to paying taxes via labor rather than cash.

I have no idea if it would be feasible now, or how it would apply to our current situation. If there was even the politcal will to do it.

Comments on that thought?

(Yes, definitely putting vegetables instead of flowers in the garden this summer, uh-huh...)