Financial Black Hole: Close To Nationalization?

Noah, did you see what Roubini is saying?

Very scary.

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aS0yBnMR3USk

Hello brokers, the banking system is insolvent.

Yes, Noah, prices will go to 1995 levels, we're in big, big trouble.

yep, included a section of it in the previous discussion.

Im hearing that any nationalization will not have the severe domino effects that some are talking about. One CDS trader tells me that if C is nationalized, a credit event will be orderly. I wonder about that but this guy is brilliant!

Noah:

Great post. Do you see a potential run on the banks, or at this point are we merely witnessing common share holders running for the hills? I sold all my BAC at 9, a far cry from the 28 where I averaged in at. That being said, once the dividend was wiped out, I could see the writing on the wall. I have no idea why these banks are not already trading at close to zero.

C just cut dividend to 0.01/share AFTER how many statements that dividend is safe! Go MER WHITNEY!

mh23 - actually, no I dont. Maybe some forced selling to raise cash by HFs, and other big funds, but I dont see any bank runs. This is prob going to be less powerful because of when it is occuring, what we already been through, and the warnings we have seen already.

With that said, stocks could certainly plunge again, and they are. But I dont see any bank runs because I think as events unfold, we will be able to absorb it rather well. Lets see if Im right. I need to be positive somewhere!

Noah - slightly OT, but what do you see as the risk, if any, of having significant financial assets in an account at a place like Fidelity or Schwab?

over the 250K mark that is backed by FDIC? If so, I would consider diversifying although for me, it would be for peace of mind to stay under the govt insured level.

I would also make sure a small portion of significant assets is in gold as a hedge against inflation/fiat destruction/end of world scenario where it wont really matter how much paper money you have. I dont see end of world coming, again, for personal peace of mind. Def have some hard assets outside of real estate/land

Actually, Noah, I believe the SIPC protection applies to brokerages, including Fidelity and Schwab. That limit is $500K, not $250K.

That said, I'm wondering if you or anyone else on this board can comment knowledgeably on the risk of a Fidelity or Schwab actually folding. Being more custodial firms than risk-taking banks/brokerages, I would think they pose less risk. But I would welcome any and all thoughts on the subject.

As for gold, I would never suggest someone invest a significant portion of their wealth in gold, for many reasons. But that's just me.

I think places like Fidelity, Scwab, Vanguard, Dreyfus are reasonably safe.

anon - oops sorry about the mistake of 500K, yes you are right regarding brokerages coverage.

BUT, as I check up on this again, SIPC is NOT insurance like you may think! It is a fund setup by member brokerage firms in case a firm fails! The govt does not back up SIPC. If your broker is stealing from your account but the firm is up and running, SIPC coverage doesn't come into play. And, it only covers losses due to theft or proven unauthorized trading. Losses due to fraud are not covered.

Basically, it protects customers whose securities were misappropriated, never purchased, or stolen. Commodities or futures contracts are not covered.

http://en.wikipedia.org/wiki/SIPC

If you are covered, and you owned stock, it may take time for you to file a claim and get stock certificates back, during which time you cant trade out of the position. So the coverage is a bit different from say FDIC coveraged of 250K per account in insured banks, that I erroneously referred to last comment. Enough to warrant being safe in my mind.

But, please notice that I said: "a SMALL portion of significant assets is in gold"

...NOT a significant portion of ones wealth; always diversify! And I would have said the same thing in 2007 and in 2008, and chances are it would have performed well for you. I still say it now. Keep a small portion, maybe 5-10%, depending on your own research and risk tolerance of course, in precious metals at these levels.

And like I said, if it were me, I would transfer funds if you are over the 500K insurance for peace of mind even though I too consider those names safe.

What use is gold? Even physical gold?

If the dollar becomes so worthless, then is the corner bodega going to sell me my milk and frosted flakes for krugeraands?

Are they going to give me change in pieces of silver?

Seriously, there isn't enough physical precious metal to meet the currency needs of trade if (when?) the dollar fails.

Thisson - VERY TRUE! But that wont stop gold as an asset class from out-performing the broader market! if it comes to what you said, Id rather have bread, water, and wheat.

Call it capital preservation.

Sometimes NOT losing money is a great investment!

Places like Vanguard, Fidelity and even Schwab are not in the business of taking principal risk the way an investment bank or commercial bank is. Therefore, the risk is very small that you would have a problem. Indeed, the main risk (which isn't a risk IMHO) is fraud.

Even at places like ML, money market assets are ring-fenced so only if management "borrowed" money from the MMA and used it elsewhere would you have a problem. Of course, YMMV.

Lars - that's my take as well.

Also, suppose you have cash in a treasury money market mutual fund, isn't it also true that if the mutual fund holdco goes under (i.e., Fidelity, Vanguard...), the mutual funds themselves are still intact as separate companies. And, since mutual funds are regulated entities which hold in trust (and don't mingle) their underlying securities, the only concern again would be fraud?

anonymous 9:25 pm

Yes.

I should add to my yes that I am not an expert in bankruptcy. Hence, YMMV. But am putting my own money in the Vanguards of the world and, notwithstanding I don't sleep well at night given the current mess, it has nothing to due with Vanguard risk.

Thanks for the comments about those two firms LARS!

Just curious, why is it then that you have trouble sleeping? Just the overall situation?

My money is in Schwab, Etrade, Lightspeed Trading, and HSBC personal / business accounts. Etrade is the only one I worry about and I only had my account there before I re-opened my trading account. Likely will cash out there and move to Schwab.

Noah,

I worry that the dollars I have so carefully accumulated are going to become worthless as the FED and Treasury debase the dollar's already debased value.

We seem hell bent on easing this crisis by printing money to save the day for having printed too much money. The only saving grace that I see at this point is that every nation is on the same path (debase currency by printing way out of mess, though this raises concerns as to the likelihood of success). So the dollar decline may not prove to be as bad as I think (obviously so far this has been the case with thw $). Still, I am very fearful the FED pushes the presses too far, the rest of the world finally gives up on the US as reserve currency, and then we, and my measly stash of dollars, are in serious trouble.

Lars - yes that is why I own gold. Ive been thinking about this alot recently and the more I research the more I think any destructive dollar debasement may not come.

For one, in a deflationary environment the us dollar should strengthen. As it did before the quick reversal a few months ago. Now its strengthening again.

Second, the printing that the fed is doing is to fill a hole that has occurred in the shadow banking system that saw asset values completely wiped out. So that spike in adjusted monetary base and excess reserves I think is a bit misleading. That money is not entering the system, whereby you would have a huge multiplier effect. In fact the opposite is occurring. Cash is being hoarded as the recapitalization process continues and M1 multiplier is actually diving. Again, symptom of deflation.

Now, the quantitative easing the fed recently started, IS creating money out of thin air and depositing that into primary dealer accounts as they buy up agency MBS and treasuries. That is inflationary but I dont think it is anywhere at levels that could cause a hyperinflationary environment or complete dollar destruction.

As you say, everyone is doing it too. This is how I understand it right now. Im trying to learn more as I go about this confusing situation in terms of printing, mutliplier effect, surge in monetary base, and what it all means. For now, I think the fed is printing LESS than the amount that has been destroyed in shadow banking system.

I know credit is contracting and that certainly is not inflationary. But in years to come, of course that is different story the effect of all this.

I worry too, and I am trying to understand the best I can. Thanks for comment

Noah, considering the dire straits of these banks, is it conceivable that a bank like Citibank or JP Morgan Chase may not show up at the closing table with the money they committed to lending to a borrower? Is that a legitimate buyer concern for someone closing in the next month or two?

Well Im not a mortgage guy so I will ask mortgageman to comment on that

over $2 billion has flowed into the XLF today alone. clearly, the banks going wallpaper is not a widely held sentiment - at least for today LOL!

Noah, even though I've been saying the same thing you just said for some time (as we know), I am also still occasionally up at night on the dollar/inflation front.

That said, we should all watch how inflation/deflation plays out in the UK. They may be the first litmus test of the effects of wildly aggressive monetary policy and nationalization in an industrialized country - since I expect it to play out worse there.

Btw, is your inventory widget stuck?

faustus,

I find your comment interesting about the UK. Moreover, it was very much on my mind when I made my comments about beggar thy neighbor monetary policy. The decline of the pound against the dollar has been near incredible. It seems to be showing some resistance at the 1.38-1.39 levels for now. Personally, I expect it to continue its downward plunge. The UK is in far, far worse shape then even the US.

Of course they are in worse shape. They've had central banking longer. haha.

it just occurred to me that a better comparison for the current decline is not relative to other declines' percentage loss of index value but rather as a percentage of nominal GDP during each time period. any one have a chart that shows decline in total market cap as a percentage of GDP? i guess you could inflation adjust both data series or just take the unadjusted resulting index. i am just wondering if what we are missing here is the liquidity factor - its just easier to pull money out today than it was in '87 or '32, etc.