Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
9:00 AM EST Tuesday, July 15, 2008: The
new game on Wall Street is Pick the Next Bank to Fail and short it. Apparently
the FDIC has a secret list of dying banks it's watching. How good the list is
open to question, since apparently IndyMac Bank wasn't on the list and it collapsed
big time. How big? CNN covered its re-opening yesterday with gruesome interviews
with pissed-off depositors who'd waited all night to get what was left of their
is now a full-fledged "industry" devoted to proffering advice on how
much money you should and shouldn't have in your local failing bank. The widespread
assumption is dozens of other banks will collapse in coming days. And the last
thing you want is either your money in them or having to deal with some spooked-out,
stressed-out Federal agency now running your erstwhile favorite bank.
all know you can have $100,000 in a failed bank and the FDIC will give it back
to you, in single dollar bills if you wish -- probably of the new issue, viz:
We all know you
can have more and it will be insured -- for example if you and the spouse do
a joint account, each of you do individual ones and you have $250,000 in an
IRA. In fact, I saw someone's convoluted calculation how they could actually
get to $1,000,000 in FDIC insurance in one bank. The problem with all
this calculation is paperwork. If your paperwork isn't one thousand percent
perfect -- perfect for the bureaucrats -- than you're out of luck and you won't
get your money. I kid you not. Lousy paperwork will cost many IndyMac depositors
a lot of money.
In view of all
this, your job this morning is to go to your bank this morning and remove every
nickel you have in thatl bank above $95,000. That $5,000 under $100,000 allows
a little cushion for interest, which some banks actually still pay. Take the
excess money out and distribute it among other local banks. I'm shopping for
a new toaster. (Fat chance.)
Should I be seriously
worried about my local bank? This is a picture of its "health." I've
disguised the name and last night's close.
It's not a pleasant
story. Last night the Wall Street Journal's MarketWatch wrote,
-- Banking stocks came under intense selling pressure Monday as investors
and analysts worried that worsening housing and credit problems could claim
more banks after the failure of IndyMac Bancorp Inc.
Regional-banking shares led the decline in the financial-services sector on
Monday. Among the biggest losers were National City Corp. (down 14.7%), Washington
Mutual Inc. (down 34.7%), Zions Bancorp Inc. (down 23.2%), Sovereign Bancorp
Inc. (down 14.1%), KeyCorp (down 10.9%), First Horizon National Corp. (down
24.8%) , M&T Bank Corp. (down 15.6%) and Regions Financial Corp. (down
Read those declines
again. They range from 11% to 35%. That's not a decade or a year's decline.
That's one-day! That's serious crisis. You can lose a lot of your money you
need to pay tomorrow's food or next week's business payroll.
If I haven't made
myself clear, I'll say it again. Your first job this morning is to get down
to your local bank and remove every nickel of yours in that bank above $95,000.
I'm am not panicking.
(Yeah.) Nonsense. I am panicking. As I wrote yesterday, this is the worst
financial crisis since The Great Depression. I did a Google image search this
morning on "IndyMac Bank fails" and this is the number one image.
(Google is telling us something?)
This black and
white photo wasn't yesterday. This next picture shows the line of customers
yesterday outside a branch of IndyMac Bank in Pasadena California. They do not
look like happy campers. They also look heavier than in the ones in the 1930s.
In fact, they
weren't happy campers. A big percentage had more than $100,000 in the bank.
And to their luck, the FDIC declared a "dividend" of 50% of uninsured
deposits, to be paid within 30 days, before the final distribution of cash (hopefully
more than 50%) to uninsured depositors from the final assets. That 50% uninsured
dividend won't necessarily happen for other bank failures, but is happening
in this case. You can read more on the FDIC's web site: FDIC
Dividends from Failed Banks and also Information for IndyMac
Bank, F.S.B., Pasadena, CA.
The MarketWatch article continued:
Mutual shares closed the session off nearly 35%. Lehman Brothers analysts in
a report Monday said WaMu could be forced to "substantially" boost
its reserves to cover an estimated $28 billion of losses on the balance sheet,
with $21 billion coming from mortgages. They said home prices and mortgage credit
are showing no signs of stabilizing.
rebounded almost 9% during the evening trading session after the lender said
it significantly exceeds all required capital levels for "well capitalized"
banks. The lender also said it has more than $40 billion of "excess liquidity,"
which usually refers to assets that can be sold for cash quickly without affecting
City shares were briefly halted Monday amid a panic-driven plunge before the
company in a statement tried to quell what it labeled market rumors. "National
City is experiencing no unusual depositor or creditor activity," the
Cleveland-based bank said. The stock rebounded from a low of $2.99 but still
finished the day down almost 15%.
market collapse remains the alpha and omega of the financial crisis. With
house prices still in freefall and likely to fall a further 15-20%, asset
write-downs will continue," added Richard Iley at BNP Paribas in an investor
destruction will continue to sap the commercial-banking system, which entered
the credit crisis unusually exposed to the consumer following a breakneck
expansion of balance sheets this decade," he said.
In May, MarketWatch
reported that IndyMac was one of the financial institutions most likely to
be claimed by the credit storm. IndyMac shares closed down 57% at 12 cents
were selling regional-bank stocks across the board Monday on concerns of another
potential run or failure.
"Market rumors, especially in this environment, can become somewhat self-fulfilling
prophesies," wrote BMO Capital Markets analysts in a report Monday, raising
the specter of Bear Stearns.
Poor's on Monday lowered its fundamental view on regional banks to negative.
on early earnings reports from U.S. regionals, we think that loan credit quality
continues to deteriorate, led by non-performing loans to housing developers,
who are dependent on a housing price recovery," said Erik Oja, S&P
regional banks analyst.
likely to lead to higher levels of loan loss provisioning expenses in '09
and '10 than we had expected," Oja said. "In addition, this could
lead to banks needing to further shore up their capital levels, an action
which may result in dilutive common and preferred stock offerings, and/or
additional dividend cuts." ...
to report later this week include Citigroup Inc. (down 6% yesterday),. J.P.
Morgan Chase & Co. (down 4.3%) , Bank of New York Mellon Corp. (down 3.6%)
, PNC Financial Services Inc. (down 7.9%) , Capital One Financial Corp. (down
7.4%), State Street Corp. (down 6.5%) , Northern Trust Corp. (down 4.7%) ,
U.S. Bancorp (down 9.9%) , Wells Fargo & Co. (down 6.2%) , Marshall &
Ilsley Corp. (down 10.4%), Huntington Bancshares Inc. (down 17.2%) and Zions,
according to Thomson StreetEvents.
Yesterday, I wrote:
We are in
our worst financial crisis since the Great Depression. As an investor your strategy
is sixfold -- modified slightly for today:
You should not have more than $100,000 on deposit or invested in any bank. That's
all the FDIC insures. That's all you'll get back quickly if and when
your bank fails. The depositors in IndyMac are getting their $100,000 plus 50%
of what else they had -- though they'll have to wait 30 days.
As you know, there was a run on IndyMac bank last week and it failed -- the
first major bank to shut its door since the mortgage crisis erupted a year or
so ago. You should also check your IRA. It's insured only to $250,000.
can start for any number of reasons -- most of which have nothing to do with
the underlying financial soundness of the bank. Runs start with rumors. I'm
not trying to start one. But it is important to get your business and personal
monies in excess of $100,000 out of your local bank into other local banks.
don't believe I can predict which will be the next bank to fail. Nor do I necessarily
think that falling stock prices are a necessary condition to a failure. But
they sure add to people's panicking.
reader asked this morning "What about online brokerage accounts?"
My son, Michael, has a trading account with Schwab. I'm happy to report that
the Charles Schwab Bank is FDIC insured. I have an account with Fidelity. I
couldn't find anything on their web site about FDIC insurance.
You should not have your money in a short-term money market fund -- without
checking what it invests in. Don't be surprised at the junk you find.
You should not be invested in any hedge fund that uses leverage.
You should not be invested in any overtly financial stock like a bank or an
investment bank, or a stealth financial stock, like GE which last year got more
than half its profits from finance.
Cash is King. I've intoned that boring mantra since mid-November, when I said
"Go 100% to cash." But I reiterate it today again. I see too many
cockroaches around affecting too many stocks (not just financials). Cockroaches
include high oil, inability to raise money for capital projects or new important
acquisitions, etc. Not to be inconsistent, I'm willing to allow you to go long
with 5% of your investable monies. I mentioned some interesting stocks on Friday.
You should take another 5% and go short. It's not too late. Be wary and keep
a close eye. If your shorting goes 7% against you, cover.
6. The only "safe"
investment is to short financials. You have many choices. They're all cratering.
This is the story of a popular young Rabbi who, on Sabbath Eve, announces
to his congregation that he will not renew his contract. He explains that he
must move on to a larger congregation that will pay him more.
There is a hush.
No one wants him to leave.
Sol Epstein, who
owns a couple of Toyota and Lexus dealerships in the city stands up and proclaims:
'If the Rabbi stays, I will provide him with a new Lexus every year and his
wife with a Toyota Sienna to transport their children!'
sighs in appreciation, and applauds.
a successful entrepreneur and investor, stands and says: if the Rabbi will stay
on here, I'll personally double his salary, and also establish a foundation
to guarantee the college education of all his children!!'
More sighs and
age 88, stands and announces with a smile, 'If the Rabbi stays, I will give
There is total
silence. The Rabbi, blushing, asks her: 'Mrs. Goldfarb, whatever possessed you
to say that?'
Sadie's 90 year
old husband Jacob is now trying to hide, holding his forehead with the palm
of his hand and shaking his head from side to side.
His wife replies: 'I asked my husband how we could help? He said, 'Fuck the
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from software
scanning the Internet for email addresses to spam. I have no role in choosing
the Google ads on this site. Thus I cannot endorse, though some look interesting.
If you click on a link, Google may send me money. Please note I'm not suggesting
you do. That money, if there is any, may help pay Michael's business school
tuition. Read more about Google AdSense, click
here and here.