Monday, April 06, 2009

Banking on the Recession

The current national (and even global) financial melt-down is likely to grow worse before getting better. Yes, the Federal Reserve was put into place to prevent a major banking crisis from wrecking havoc on the nation in a 1929 style run but keep in mind, despite the stabilizing efforts of the Fed, inherent differences also place the system at risk. For example, derivatives were all but non-existent. According to the Office of the Comptroller, the five biggest banks in America control 96 percent of the total derivatives. This means a new round of failure, bail-outs and banking crisis could hit the nation at any moment should even one of these banks be exposed to major losses. Remember, banks must "make good" on those losses but with only 10 percent or even less of the capital required to pay out a claim, banks are simply unable to do so; creating the risk of a domino like default scenario.

This is another reason banks are not lending - they are frantically attempting to hoard as much cash reserve as possible in order to hedge against the risk of a default looming in the future. Again, savvy short sale investors should recognize the ongoing threat of tighter lending standards far into the future -without government intervention (and even with it), purchasing a home for decades into the future may simply be out of reach for many Americans.

Make sure you are doing business with a solid bank. Either deal with small local banks that have strong bottom lines, didn't engage in derivatives or other risky investments and are able to work with you personally...or, work with one of the A rated big banks. To find out how your bank is rated, visit or which publishes a list of the best and worst banks in the US.


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