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Saturday, March 15, 2008

Bear Stearns and your preperation for the big crash

In the last few weeks things seem to be moving faster towards some kind of big financial crash. Yesterday it was Bear Stearns an old and established investor bank that required a huge bailout to head off what was expected to be a bank run.

In case you don't know a bank run is the scene in It's a wonderful life where everyone rushes to the bank to demand their cash back only to find because of lending the back actually has only a very minor fraction of it's assets liquid for withdrawal.

Banks are required to keep a certain level of reserves based on only certain types of accounts. So while they may have 7% of your savings account in reserve they are not required to have any portion of a chequing account, CDs, T bill accounts, RRSPs etc. It's been estimated that U.S. banks have only 1/4 of a cent for each dollar on deposit in all forms. When the fecals hit the fan only those first few in line get anything before the doors close.

In fact, recent statistics show that US banks industry wide have show Non Borrowed Reserves that are negative, meaning the only liquid money they have is borrowed making banks on average insolvent. It's not as if they can sell of CDOs, mortgages or other assets off to other banks because they are all in the same situation.

Now you say this is a U.S. problem but in reality it's a world problem, HSBC, CIBC, UBS, banks all over the world have taken loses based on the packaging and selling of bad mortgages, aggressive futures and derivative trading and high leveraged hedging. This could well happen here too.

The U.S. and the UK have both had one real Bank run with Country Wide and Northern Rock and a run on Bear Stearns was just barley averted, at least for this month.

So what should you do just in case?

Make sure you know what is and is not covered with deposit insurance in Canada, I'm not going to tell you it's like doing stock due diligence you must check for yourself so you are secure with the information.

Change banks if you think yours has taken too many loses, or at least split your business between two banks. This will actually increase your chance of getting hit but lessens your chance of being wiped out.

While there is Deposit insurance, how fast do you realy figure they will pay out? That's right not fast enough!!

I would suggest take out 2 or 3 months of cash from the bank and hide it. Utilities, property taxes etc can go months without being paid before you get those nasty letters but if your bank card and accounts are frozen how do you buy food, gas, medicine, the things of daily life.

This is a real threat, that picture at the top shows the run at Northern Rock, never say never!!Recommend this Post


The Mound of Sound said...

The head of America's National Bureau of Economic Research, Martin Feldstein, officially declared the US in recession yesterday. Feldstein's outfit is the official word on these things in America. He predicted this is going to be bad and protracted - possibly the worst since WWII.

It almost makes you want to stop reading Krugman in the NYT.

GAB/Canadian silver bug said...

I believe it will eventually be a depression and I further believe most of the powers that be know this. This is the same tactic they always use death my a thousand cuts, they don't dare give us all the pain at once or the torches and pitch forks would be out so, it starts with the lone voice in the wilderness saying recession then a choir then the loan voice says depression and waits for the others to validate him.