Wednesday, July 23, 2008

BANKS – How do you describe them?

(With apologies to Shakespeare and Shylock!)

The description that has grabbed my eye was “Modern day Shylocks”

In one form or the other banks have been around for a very long time but the earlier and current versions have one thing in common.

They often fail, cost their depositors and shareholders considerable sums of money, and largely treat their moral obligations to society as of lesser importance, by far, than their alleged duty to Shareholders.

It is interesting to observe that while failures in the 1800s were large for their time the impact on 80% of the population was minimal. As the development of banks and savings and loan associations progressed, more and more of the population became within the ambit of these organizations.

Now practically everybody in the developed world has a relation with Banks, S&L Associations, either through direct relationship or through the investment aspect and Pension Funds etc.

To put the current world situations in perspective the current rate of failures and value diminution is even greater than that of the 1930s. In the US the traumas of Fannie Mae and Freddie Mac are well known. Between them they owe or guarantee about $5.2 Trillion or $5,200,000,000!

The situation in the US now is much more serious than the late 80s bailout of the S&Ls or the case of the Japanese banks some years later. The impact on share values in both cases was dramatic.

A look at bank share prices in Europe, the US and of course Ireland gives some insight as to what happens to banks (and their share prices) when

a) they lose investor/customer confidence
b) their lending excesses catch up with them
c) the CEOs do not know, or understand, what their dealers, traders or lending officers are doing.
d) Their greed makes them lose sight of prudent practices or the lessons of history.
e) the globalization of financial services spreads the canker through society.

In the 1980s banks and institutions in the USA were considered highly leveraged at a 5-1 ratio. In the recent past Lehman Bros was leveraged 38 – 1.

If banks fail there are certain options open to the Authorities, Central Banks, The Federal Reserve in the USA (by the way - a private organization not owned or controlled by the US Government), or in the last reserve – Governments. These can range from bail-out (Northern Rock) to forced mergers (Bear Sterns) or liquidation (over 1000 banks in the USA in the 1930s).

In the US your general accounts/savings are insured for up to $100,000 but in Ireland the figure is up to 80% of E20,000 per individual.

Check your bank balances and spread the risk!

When you look around the developed world it is surprising to realize that the various international type organizations such as the Fed(see above), the BIS (Bank for International Settlements), the World Bank are not Government owned organizations but essentially controlled and run as private operations.

On consideration one wonders if this is good or bad as governments and public or privately owned financial institutions seem capable of the same general errors of vision and management.

We have all heard of the “dead cat bounce” and the last few days have seen this in operation in the Airline industry and the Banks here and across the Atlantic.
It seems to me that the former have a more rational reason for that bounce than the latter.

However every market shares the factors of overbought/oversold and irrational exuberance or fear and dread.

My personal feeling still remains, like that of a person in Florida who hears a hurricane warning, when will it strike me?

Play it safe and hoard cash safely. The ultimate protection remains the precious metals.

Robert Mooney, is a contributing author to the free stock alerts, market alerts, and stock charts website