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9:00 AM EST Wednesday, July 16, 2008 Update2: I got a couple of free tickets to the U.S Tennis Open, a free safe deposit box and a free checking account, but not a toaster, from opening a $95,000 account with Chase yesterday. Them's not bad rewards given that the only thing I cared about was getting a $100,000 of erstwhile uninsured cash to be insured. In simple English I had more than $100,000 in one bank. And $100,000 is all that the FDIC insures -- which it does by tax-ID number. It's true I could have opened accounts using other tax IDs. But this way was actually easier. And I got all the goodies, including being at a new branch, much closer to my house.

If you have more than $100,000 at any one bank and don't have it in separate accounts with different tax IDs (also called social security numbers) You need to get your money out TODAY. There is no way of predicting IF your bank will fail. Bank failures don't happen because of financial reasons (like lousy earnings, big losses or toxic assets on the balance sheet), they occur because depositors simply lose faith in the bank and demand their money back -- from one day to the next. Rumors, not reality, bring down banks. No bank has enough cash money to give everyone their money back. In fact, my erstwhile main bank, Sovereign Bancorp has $2 billion in cash to meet $49 billion of deposits. They call that 24.5 to one leverage!

I took the money out of Sovereign (SOV). I have no idea if I'm justified in worrying about Sovereign, except for several factors:

1. Their stock price has plummeted. Mr. Market always know more than I do.

2. They took a huge $1.6 billion write off in the December quarter.

3. I hear they've been messing with loans in high-risk areas, like Florida residential real estate.

The bottom line for all of us is that we all have money and securities and it's all sitting in various banks and brokerage houses. How safe are our assets? This is a real question.

You know my answer on the banks. Move your money around. That's what I did yesterday. If you decide you don't like any of them, simply put all your money in cash into a suitcase and send it to my new bank:

Actually, mattresses are good places for money -- well, almost. In 1956, my grandfather accused his grandson -- me -- of having stolen $9,000 from his mattress. He had lived through Germany's hyperinflation of the 1920s and the Great Depression of the 1930 and he didn't trust banks. Grandpa's stolen money became a major crisis in our family -- until I found his money in another part of his mattress. Apparently he turned in his sleep. And that turning had moved the money.

Mattresses have been a good place to have your money in recent months (i.e. out of the crashing stockmarket) -- though the problem facing Germany in the 1920s has some horrible analogies to what's happening here. Our wonderful government has simply been printing money to finance its wastefully extravagant spending and woefully unbalanced budget. Hence, the best mattress strategy is to convert the U.S. dollars into gold, Australian and Canadian dollars and Euros and stuff them in your mattress.

Seriously, everyone of us has money and securities in various accounts. Which ones are insured? Which ones are not? Answers:

1. Deposits in banks are insured to $100,000 by the FDIC.

2. Brokerage accounts are insured by something called the SIPC. Deutsche Bank's web site has this:

... the Securities Investor Protection Corporation ("SIPC") protects each customer's net equity, as defined by SIPC, in their accounts from broker insolvency and our clearing firm, Pershing LLC, provides additional protection ("Excess SIPC") through a commercial insurance company. Under regulatory rules, SIPC and Excess SIPC coverage is provided by our clearing firm, Pershing LLC, on all Deutsche Bank Alex. Brown customer accounts carried on their books. Pershing LLC is a member of SIPC and Deutsche Bank Alex. Brown customer accounts are protected by Pershing's coverage. The limit of SIPC protection is $500,000 per customer for covered securities. Cash balances are protected up to $100,000, which is included in the $500,000 maximum. With additional protection (Excess SIPC) purchased from Customer Asset Protection Corporation, a New York state chartered commercial insurance company, you are protected for the total net equity in your accounts. Excess SIPC protection also applies on a per customer basis. A customer who has several accounts with Deutsche Bank Alex. Brown in a single capacity would be considered a single customer for the purposes of applying these limits. A customer who maintains separate accounts in separate capacities would be deemed a different customer in each capacity.

A small number of customer accounts are not carried on Pershing's books due to specific account factors. These accounts are covered under Deutsche Bank Securities' SIPC membership. Deutsche Bank Securities does not provide Excess SIPC coverage. Your customer statement clearly indicates whether or not the account is carried on Pershing's books.

Securities which are held in a cash account or which are in a margin account but are fully paid for would be distributed to you in the event of an SIPC liquidation. Securities purchased on margin, if any, would be distributed on a pro rata basis. Any shortfall would be reimbursed to you up to the total value as provided by SIPC and Excess SIPC coverage. For further information, you may refer to the SIPC web site is located on the Internet at www.sipc.org.

While neither SIPC nor Excess SIPC covers losses in the market value of securities due to market fluctuations, you can be confident that Deutsche Bank Alex. Brown will continue in its efforts to give you peace of mind about the security of your investments.

Until yesterday I'd never heard of the Customer Asset Protection Company. I go to their web site and find:

Customer Asset Protection Company
A Licensed Vermont Insurer

Customer Asset Protection Company ("CAPCO") was formed in late 2003 to provide securities account protection for institutional and individual brokerage accounts of certain securities firms over the protection limits currently provided by the Securities Investor Protection Corporation ("SIPC") in the United States. CAPCO issued its first surety bond in early 2004.

The excess protection (sometimes referred to as "Excess SIPC") is provided to the securities affiliates of the 15 participants in the form of bonding coverage. This protection would be triggered only in the event of the financial failure and liquidation of a participating securities affiliate and if the customer's securities are not returned. This protection does not cover investment losses in customer accounts due to market fluctuation or other claims for losses incurred while these securities affiliates remain in business. The protection is also not triggered unless the customer's account exceeds the limits of account protection provided by SIPC. Other restrictions apply as contained in the applicable bond.

Hugh Ronalds, a reader, emailed me yesterday:

Harry Am I correct in figuring if I buy treasury bills in my brokerage account that money is safe (with the bills held in the account) as opposed to brokerage cash held in the brokerage money market?

I replied I didn't know. But I certainly would not make ANY assumptions today about the safety of ANY financial institution. I think the old rule of CHECK, CHECK, CHECK can now be safely modified to SPREAD, SPREAD, SPREAD.

Will Lehman Brothers go private? That was yesterday's speculation, which drove its price up slightly. Now comes a Wall Street Journal piece today with all sorts of concoctions. Earlier in this column I wrote that fear and fantasy are driving Wall Street. Read this stuff. I bet the Journal didn't even talk to Lehman before writing this stuff (which may or may not be accurate):

Lehman: Private Property?
Any Potential Buyer Would Need to Clear High Fiscal Hurdles
By DAVID REILLY
July 16, 2008

Buyout fever gripped Lehman Brothers Holdings Inc. Tuesday: The firm's battered stock jumped 6.6% partly because of talk that management could try to take the firm private.

But shareholders shouldn't pin too much hope on the possibility of such a deal. Nor should they assume that a bigger bank will rescue them.
[Lehman]

Given the potential for more losses in real-estate markets, any possible buyer has to consider not just the price to be paid but also the possible need for a recapitalization of Lehman.

If that doesn't scare off acquirers, it could cause them to pitch a price below the stock's current, depressed levels -- or wait for the stock to fall further.

Taking the New York firm private would be particularly tough. An unlisted Lehman wouldn't be able to tap equity markets for funding should the need arise. That could spook investors who buy Lehman's debt, raising the prospect that they could end up shouldering losses if write-downs eat through capital.

Chief Executive Richard Fuld could alternatively look to continue selling assets and try issuing more stock. But that could be costly, even if Lehman was able to find investors. At about $14 a share, raising even $3 billion would dilute existing shareholders by about 30% -- especially painful for those who bought new, common stock at $28 a share last month.

A sale to a bigger bank looks more credible, if Lehman's shares continue to reflect a massive loss of investor confidence. But big banks, with problems of their own, either haven't had the interest or the wherewithal to pursue a deal so far. Plus, a purchase at Lehman's current share price could potentially contain a big hidden cost.

Lehman's current market value of about $9 billion is equal to about 39% of the firm's stated book value, or net worth of about $23.2 billion after taking into account the firm's June capital increase.

Normally, that would make the stock a steal. But given the state of real-estate markets and the possibility of a severe recession, losses could continue to mount. Any potential investor would likely want to discount the value of Lehman's assets, and in turn its book value.

There is no exact way to determine an appropriate discount. But consider, for example, the affect of applying an aggressive 5% haircut to the firm's $161 billion in difficult-to-value Level 2 assets and a 25% discount to its $41.3 billion in extremely hard-to-value Level 3 assets.

That would result in a further write-down of nearly $19 billion. Such marks would bring Lehman's book value down to about $4 billion. At the current share price, a buyer would be paying a hefty multiple of more than two times book value.

But a buyer also would have to consider the additional equity the business would need. Those nearly $20 billion in additional marks would bring total assets down to about $620 billion.

Maintaining the firm's current leverage ratio of 24 times would require about $25 billion in total shareholders' equity.

Adding about $9 billion in preferred stock to the adjusted, $4 billion book value means a potential buyer would have to fill a $12 billion hole in the firm's equity.

Granted, that may be an overly pessimistic view. But Lehman's shareholders shouldn't expect anything less from any potential acquirer.

Good news, bad news: Writes my broker, Todd, "We got called on some of our ARP's Thats SUCKS--I WANT to hold these through the end of next year= that's how long this disaster will last. Up 3% beats the hell out of DOWN 23% and falling."

UBS is talking about redeeming all $3.5 billion of auction rate preferreds it, as a brokerage firm, sold its clients. This is a huge story. I'm guessing the Mass authorities found out some real dirt on the company. For more, go to my other web site, www.AuctionRatePreferreds.org. What UBS is doing is the same thing that Nuveen and others are doing -- trying to convert their auction rate preferreds into a security which money market funds will buy. It's important to note that UBS was not exactly an issuer of ARPS (it was the lead manager) and also, I believe, a supporter of the auctions -- in a conflicted position. You can't tell your clients the things were as good as cash and then drop out of the auctions, thus making them no longer as good as cash. Some regulator is probably on their tushy for this.

For more on the disasters and semi-disasters facing us.... A recent story called Nirvana out of American Reach in The Australian and today's USA Today Economic pain: 'Payback' for debt-fueled growth? The USA Today piece contains such depressing words:

If it wasn't clear before Tuesday, it is now: This is no ordinary economic crisis, and it won't be over anytime soon. In fact, problems are multiplying. A year ago, the financial virus seemed confined to subprime mortgages, defaults on loans given to those with less-than-perfect credit. Now, much of the banking system appears rickety, and the U.S. economy has slowed to a crawl. But thanks to robust demand from still-growing countries such as China, the prices of commodities from oil to food have soared — hitting Americans from the gas pump to the grocery checkout.

"There's no hope of an early recovery at this point," says economist Kenneth Rogoff of Harvard University. "The best-case scenario is we have a long but mild recession — and that's the best-case scenario."

Print this image out. Remind yourself to get your financial affairs in order, fast.

The cat's away
Moishe was recovering in hospital from prostate surgery. To make matters worse, his surgeon had told him that it would be six weeks before he could be sexually active again. Peter visited him to wish him well. Robert visited him to wish him a speedy recovery.

His partner Abe visited his wife.

Identity crisis
Isaac was sitting at a table in his favorite restaurant when he called over his waiter.

"Yes?" asked the busy waiter.

"Are you sure you're the waiter I ordered from?" asked Isaac.

"Yes, I am sure. Why do you ask?" replied the waiter.

"Because, by now, I was expecting a much older man."

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.
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