(Refiles to fix typo in headline)

* U.S. stocks slump as fear of more bank failures grows

* Dollar rises versus yen after strong U.S. factory data

* Oil slips below $69 a barrel on equities, strong dollar

U.S. stocks fell sharply on Tuesday as growing concerns about the U.S. banking system and over whether a recent rally in equity markets is warranted drove investors to the relative safety of bonds and the dollar.

Oil prices fell as the economic concerns outweighed surprisingly bullish U.S. data: the manufacturing sector grew in August for the first time in 19 months, while pending home sales hits a two-year high in July.

Government bond prices on both sides of the Atlantic rose as falling stocks enhanced the allure of lower-risk safe-haven debt despite the fresh evidence supporting the view of a global economic recovery.

There are “new concerns about the health of the banking system, the number of bank failures that continues to grow by the day,” said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

A sharp drop in bank stocks in late morning trading pulled the Dow industrials <.DJI> and the broad Standard & Poor’s 500 Index <.SPX> down 2 percent on fears of balance-sheet trouble in the U.S. financial sector.

The KBW bank index <.BKX> slipped 4.6 percent, with shares of Citigroup off 7.2 percent at $4.64 among top drags.

Three more U.S. banks failed last Friday, bringing the total to 84 so far this year, as the banking industry grapples with deteriorating loans on their books. Only 25 U.S. banks failed last year, while three failed in all of 2007.

The Federal Deposit Insurance Corp reported last week that its deposit insurance fund fell 20 percent to $10.4 billion at the end of the second quarter. Worries about the FDIC’s access to capital was also weighing on the market, Kenny said.

At 1:20 p.m. (1720 GMT), the Dow Jones industrial average <.DJI> was down 185.91 points, or 1.96 percent, at 9,310.37. The Standard & Poor’s 500 Index <.SPX> was down 21.34 points, or 2.09 percent, at 999.28. The Nasdaq Composite Index <.IXIC> was down 41.11 points, or 2.05 percent, at 1,967.95.

European equities closed sharply lower after mixed economic data, led lower by banks and commodity stocks. [ID:nL1126558]

The FTSEurofirst 300 <.FTEU3> index of top European shares ended down 1.8 percent at 954.15.

Net lending to Britons in July fell at its sharpest pace since records began in 1993, even as the number of mortgages approved rose to its highest since April 2008, Bank of England figures showed.

“The market is still overall concerned about the sustainability of the recovery,” said Orlando Green, interest rate strategist at Calyon, adding that government measures such as the cash for clunkers may have boosted the result.

“There are still doubts whether the economy can stand up by itself away from these government initiatives.”

U.S. crude oil for October delivery fell $1.21 to $68.75 per barrel, while London Brent crude dropped $1.13 to $68.52.

The dollar extended gains versus the euro to hit session highs on Tuesday as sharp losses in the U.S. stock market boosted the greenback’s safe-haven appeal.

The euro fell as low as $1.4221, and was last down 0.7 percent $1.4235 .

Copper prices slipped as investors worried about the pace of economic recovery in China, but they trimmed losses after the release of bullish U.S. manufacturing data.

The benchmark 10-year U.S. Treasury note was up 12/32 in price to yield 3.36 percent.

September Bund futures settled at 122.61, down 2 ticks from Monday, but it later traded up 23 ticks at 122.84.

A rebound in Chinese stocks <.SSEC> after Monday’s sell-off helped lift Asian shares. The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> rose nearly 1 percent, while Japan’s Nikkei <.N225> closed up 0.4 percent.

Sept 1 (Reuters)

Major U.S. stock indexes <.DJI> <.SPX> <.IXIC> were down nearly 2 percent in afternoon U.S. trading as investors fretted that chatter from hedge funds on a bank failure could prove accurate.

The decline came despite upbeat economic news from the United States and euro zone as well as a stabilization in Chinese shares after a rout on Monday.

The hedge fund talk “is a huge driver” of currency markets, said Dan Cook, senior market analyst at IG Markets Inc in Chicago. “When you have data like we had but the Dow drops, people are running for that safe haven.”

In midafternoon trading in New York the dollar index <.DXY>, which tracks a basket of six major currencies, was up 0.8 percent at 78.786, rebounding from a session low of 77.944, according to Reuters data.

The dollar was little changed against the yen at 93.01 yen, slightly above Monday’s seven-week low of 92.53, according to Reuters data.

But the yen was up 0.9 percent against the Canadian dollar , 0.7 percent against the Swiss franc , 0.8 percent against the euro and 0.8 percent against the pound .

The euro was down 0.9 percent against the dollar at $1.4205 , well below a session high of $1.4377 .

WHAT RECESSION?

The U.S. manufacturing sector expanded in August for the first time in more than a year and a half. The Institute for Supply Management’s index of national factory activity rose to 52.9 from 48.9 in July. For more see

Separate data showed pending sales of previously owned U.S. homes raced to a two-year high in July, further evidence the housing market was on a steady recovery path.

“Clearly, the U.S. data is surprising to the upside,” said Jack Iles, senior portfolio manager who helps manage $2.5 billion assets at MFC Global Investment Management in Boston.

But despite a batch of upbeat U.S. economic numbers, major currencies remained in ranges as investors continued to debate about the outlook for the global economy, analysts said.

“At the end of the day, the market is still in wait-and-see mode,” said Firas Askari, head of currency trading at BMO Capital Markets in Toronto. “We’re getting jostled around by every piece of data that comes out and I don’t think there’s a consensus that this economy has legs.”

Data released earlier also showed euro zone purchasing managers’ index (PMI) rose to 48.2 in August against forecasts for a 47.9 reading while German unemployment unexpectedly fell in August.

The data comes before a European Central Bank policy meeting on Thursday widely expected to keep benchmark rates steady at a historic low of 1 percent, with the focus on policymakers’ outlook on the economy.

Sterling erased early gains against the dollar and the euro after an unexpected dip in UK manufacturing in August, stoking concerns about the pace of recovery in the British economy.

Sterling was down 0.9 percent at $1.6135 , after touching a six-week low, and was little changed against the euro at 88.02 pence .

In other trading, the Australian dollar fell 2.1 percent to US$0.8265. The Reserve Bank of Australia, holding its cash rate at 3.0 percent as expected, said the current low level of rates was appropriate, countering speculation it would adopt an explicit tightening bias.

Sept 1 (Reuters)

Here’s Karl Denniger at the Market Ticker on why you should be concerned:

Let’s put this in plain language: The discount window is open for any bank that has good collateral at less than 1/10th of that interest rate.

Therefore there is absolutely no reason for any institution to go into the Fed Funds market for overnight money at 7% unless they have no good collateral to post against it and thus cannot go to the window.

So which bank was it?  That remains unknown.

But there’s absolutely no reason a well capitalized bank would borrow at 7% when they could do it at 1/10 of the price.  And the last time this fishy late night borrowing went down was right before the massive wave of bank failures of Lehman Brothers, Washington Mutual, and Wachovia.

This isn’t stopping banks from paying out huge bonuses (again). The banking hubris that got us into this mess has returned in full force.

According to the Wall Street Journal, Goldman Sachs “is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm’s $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007… Morgan Stanley, the only other huge U.S. securities firm left as an independent company, will likely pay out $11 billion to $14 billion in compensation and benefits this year, analysts predict.”

The return of the mega bonus just goes to show how hard it is to break Wall Street’s bad habits.  We suspect the financial geniuses are busily crafting the next bubble.  Any ideas what it might be?

Here she recommends to buy gold, invest in stocks with discrimination and keep your money liquid in treasuries.

This from Sandy:

The stock market did not react well to the government’s $787 billion economic stimulus plan.

On Feb. 23, 2009, the Dow tumbled to 7,114 – hitting an eleven-year low. The other major indices, including the S&P 500 and the Nasdaq, fell as well.

The latest economic numbers aren’t any better. The price of single-family homes plunged 18% and the Consumer Confidence Index, which was down slightly in January, plummeted more than 12 points in February to 25.

The combination of bad economic news and a tanking market means this recession will take longer to recover than most analysts expect.

Bombarded by bad news, average investors are on the verge of dumping all their shares entirely. But is that best thing to do with your money now?

The answer is no. Here are a few investing strategies that make sense given the current market conditions…

(1) Buy gold. The surge in gold prices means investors are anxious to protect their capital against inflation, currency depreciation and bank failures. The rise in gold (which is sitting near $1,000 an ounce) is consistent with other indications that the market is bracing for a delayed upturn in inflation between 2010 and 2012.

There would have to be “growing positive sentiment” towards the banking sector before gold prices fell. But that isn’t likely to happen anytime soon. Morgan Stanley came out with a report saying that gold would go up over the next three years. The reasons: a falling dollar, higher inflation and a flight to safety.

Morgan Stanley predicts gold will average $1,000 in 2010 … $1,050 in 2011 … and $1,075 in 2012, up as much as 34% from previous estimates.

Adam Lass, senior editor of WaveStrength Options Weekly, suggests buying shares of the SPDR Gold Trust. Adam writes, “I expect the dollar to resume its habitual relationship to the euro, yen and gold shortly, and recommend that investors continue to buy shares of the SPDR Gold Shares Trust (GLD:NYSE), which has gained some 25% over the past four months.”

(2) Buy stocks, but do so discriminately. This week the Dow fell to levels not seen since 1998. One year ago, the Dow was sitting at 12,694. As I write, it’s at 7,365. But you don’t need me to tell you this. You see the damage to your portfolio every time you look at your 401(k) statements.

As prices decline, this also means there are companies you can buy for less than the cash they have on hand. In fact, in an academic study done by Berardino Palazzo of New York University’s economic department, he found that companies with highcash-to-assets carry a positive premium for investors. Palazzo explains, “Firms that are sensitive to economic shocks tend to use cash holdings as a hedge against future cash flow shortfall, and this conservative management approach pays off.”

There are certainly plenty of companies with cash on hand to choose from. In a study done by Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, he found corporate balance sheets showed that cash as a percentage of total assets is as high as it’s been since the 1960s.

Chris DeHaemer of BreakAway Investor offers these companies for consideration:

**AuthenTech (AUTH:NASDAQ) is a technology company that provides fingerprint authentication sensors. Its fingerprint sensors allow users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor. The sensors are used in various applications related to security, password replacement, financial transaction authentication and personalization applications.

Its sensor-related products are used in GPS navigation systems, cell phones, memory keys, laptops… even desktops.

The company has zero debt and roughly a cash equivalent of $2.21 per share. It currently trades around $1.37 per share.

**Exxon Mobil (XOM:NYSE). If you prefer a non-technology-related company, there’s always Exxon Mobil with $39 billion in cash, which is equal to $7.72 total cash per share. Exxon reported a profit of $45.2 billion for 2008. This amount breaks the record for an American company.

Zachary Scheidt of Taipan’s New Growth Investor suggest buying companies in sectors that will continue to thrive during this economic crisis.

One such sector is healthcare. There are basically four individual factors that combine to make this quite an exciting opportunity:

• Stability and growth: Healthcare stocks offer plenty of stability, but the growth is potentially astronomical;
• Demand has little do with economics: A person’s health sits right at the top of just about everyone’s priority list;
• Demographic trends point to more demand: The current population (domestically and internationally) is aging and in need of more care than ever seen in the past;
• Political agenda favors healthcare: One of Obama’s campaign promises was to re-work the healthcare system and to make sure affordable care was available to all.

(3) Another way to protect your money is to keep it liquid in treasuries or certificates of deposit.

Because of the scandal that broke loose with the SEC charging Allen Stanford in an $8 billion fraud case (using certificates of deposit), you’d think that all CDs are time bombs.

But that’s not the case. The dead give-away in the Stanford case is that his “certificate of deposit” promised double-digit returns. Stop right there. Certificates of deposit don’t yield high returns. They’re low risk, which means low yield.

A CD has a specific, fixed term – often three months, six months, or one to five years – and carries a fixed interest rate. They are also insured by the FDIC (up to $250,000). The longer you are willing to have your CD investment locked up, the higher the CD interest rate your bank will offer you.

CDs are best used for cash that you want to stay liquid. As the market continues to implode, you might want to consider putting a portion of your money into a CD. As the market begins to bottom out, you’ll have access to that cash to buy stocks at reduced prices.

While most major banks offer CDs, we recommend the Ultra Resource Index CD offered through EverBank. EverBank asked our group’s opinion on creating a CD that would allow investors to take advantage of global markets.

We suggested a CD made up of six countries with strong resources and strong cash reserves, including Australia, New Zealand, Singapore, Hong Kong, Canada and Norway. You can lock in terms for three to six months with no account fees.

EverBank is a healthy and stable company. It enjoyed strong growth during the first three quarters of 2008, posting a 129% increase in earnings compared to the first three quarters of 2007, or $50.1 million. The company also has assets worth $6.5 billion and serves 440,000 customers worldwide.

I do have to tell you that we have a business relationship with EverBank, and we receive a financial benefit from the sales of this product. But we firmly stand behind EverBank and their products and think they are a solid way to grow your wealth.

If you’d like to learn more about the Ultra Resource Index CD – to get in on an once-in-a-lifetime opportunity to profit from today’s currency boom before the masses – you should check out this Special Report we’ve put together for you. Download this FREE Report now.
Source: What to Do With Your Money Now

This from Whiskey and Gunpowder:

The Inauguration is over. It’s PRESIDENT Obama now. So let’s get back to work.

What can we discern about the incoming Obama administration? I had a long talk with an old friend who is a self-described “rabid Democrat.” Let me rephrase that. He’s a rabid Democrat in the way that Pittsburgh Steelers team owner Dan Rooney is a rabid football partisan. This friend of mine loves his Democratic Party. Just as Mr. Rooney wants his Steelers to win the Super Bowl, this guy’s focus in life is for his political tribe to do what’s right for the country. This friend of mine is also privy to the inner circles of Democratic politics. He’s just plain plugged in. He’s on a first-name basis with many on Team Obama.

So what’s on Obama’s plate? “Well, the first thing the new group has to do is stabilize the banking system,” he told me. “Things are still precarious with the banks. Liabilities exceed assets by a large margin. We will probably see more bank failures — small and even some large banks. That would hurt worldwide investor confidence and lead the stock markets down. We could test the old lows of last fall.”

This Democrat insider then got into other issues. “The housing crunch still has more rope to hang out, as well. A lot of the problem is isolated in a few states and regions of states — California, Arizona, southern Florida, the New York City metropolitan area, Massachusetts and a few other places. But it affects a lot of people. We’re dealing with populous, overbuilt places. We are also on the cusp of a lot of failures of government entities, from localities and school districts to counties. We’re going to have a lot of municipal bond defaults. We’re going to see municipal bankruptcies. Some large states are insolvent. California can’t meet payroll.”

And there’s more from this guy. “The next big wave will be that consumer spending dries up. This will lead to a failure of retail businesses all over the country. It’s going to be a huge unwinding. We spent the past 25 years spending more than we could afford. Now we as a nation have to pay some big bills. It’s time to save. It’s a good thing, in the big scheme, for people to save. But it’s going to put a lot of pain into the retail sector of the economy. We’ve overbuilt retail, and everything that goes with it. Too many stores. Too many buildings. Too much inventory. Too much shipping capacity. Too many containerships unloading too much stuff made in China and elsewhere. And a lot of people are going to lose jobs. I mean a lot of people. Everywhere.”

“The Next Two Years Are Going to Stink”

Here’s more from the Democrat insider. “The next two years are going to stink for the economy. Obama will face one financial crisis after another. He’s going to hate Wall Street. He’s going to hate bankers. Every time he turns around, the money people are going to be screwing him. He’ll try to fix one problem, and five more problems will spring up like weeds. (“Only five?” I asked.)

“The coming financial issues will test the ability of the legislative branch to act with integrity in the face of a media-driven clamor. States will be lining up to borrow money from the feds just to pay unemployment compensation, let alone to fund Medicaid and road maintenance. It will test the legal system as well. Expect more petty crime and a lot more bankruptcy. But fewer people will get divorced. Who can afford that anymore?

“And think about the foreign policy issues that the financial crises will cause. Just think in terms that when U.S. prosperity declines, it takes the world down with it. The economic contraction is going to set some societies back by decades. Will people take that lying down? Or will they riot in the streets and burn down the capitol building? Expect a rash of failed states. We’ll be surprised at some of the names that fall off the map. Wow, we might look back and wish for the days when the world hated us just because we invaded Iraq. Now they’ll blame us for stealing their future.”

“The Republicans will make political hay out of it. Unless they are totally incompetent, which you can’t rule out. Democrats will probably lose seats in the House and Senate in the 2010 elections, as well as in state legislatures and governorships. But Obama will be working his own game of building consensus. He’s from a new generation of politician. He’s not nearly as in-your-face confrontational as the Democrats of the 1960s and 1970s era, the Kennedys and Waxmans and Barney Franks. Obama will build coalitions out of whomever he can get on board. You might not like him on issues like gun control or abortion, but you’ll deal with him on tax cuts and energy investment.”

Where Do You Go From Here?

So where do we go from here? Well, here’s my post-Inaugural advice. Build up some cash reserves. Got that? Hold Cash! Cash in the mattress. Cash in the bank. Certificates of deposit. Don’t try to get too fancy. Just save some cash where you can get hold of it in case you need it pronto.

Next, buy precious metals like gold and silver. Bullion coins or bars are my favorites. But it never hurts to buy a few quality numismatic coins as well. Don’t get spooked out of precious metals if we see a price dip in the near to medium term. The dollar is in serious trouble, and eventually the precious metals will come back. Precious metals are a way of preserving your purchasing power over the long term.

As for stocks, in the near future, we could see some severe market declines. Initially, this might look like large trading spikes up and down. Unless you are a serious trader, be careful about trying to “play” the swings. Don’t be afraid to sell any stock that makes you nervous. You have to be able to sleep at night. Along these lines, I’ll keep addressing the OI portfolio in future updates.

There are certain investment ideas that will probably work over the long term, like really good precious metals miners. Kinross Gold (KGC: NYSE) and Goldcorp (GG: NYSE) come to mind. The point is that you want well-capitalized miners with solid reserves and good production facilities.

Source: Inside The Obama Huddle: Housing, Banking, Life and Crisis

This from Taipan Daily:

“Widespread property foreclosures have led to bank failures, and further to much unemployment and a disastrous decline in manufacturing and agricultural production.” Sound a tad familiar?

No, it is not another of my dreary “ripped from today’s headlines” quotes. Rather, it is a contemporaneous description of the chain of events that lead to, and resulted from, the Panic of 1819.

And while the storyline may be some 189 years old, the circumstances are eerily familiar. Washington (the place, not the man – our first president had passed away 20 years earlier) had borrowed heavily to finance the War of 1812, severely depleting bank reserves.

Free Money and Real Estate Bubbles, 19th Century Style

To cope, Washington and Wall Street did what they have done so many times since: they simply changed the rules. This time around they suspended specie payments – a complete violation of depositors’ contractual rights.

With the onerous restriction of actually repaying debt with real coin lifted, most every ambitious soul with a pen and a checkbook rushed into the banking business. The sudden increase in the “money” supply encouraged the most insane sort of speculations (real estate being a particular favorite).

Soon, the whole deal was snowballing out of control. When the Second Bank of the United States finally tried to take away the punchbowl, this hollow economy collapsed in on itself… leading to the aforementioned 1819 crash.

A Haunting Refrain

As you can see, today’s dire warnings of market collapse and recession are not quite as unique as we might hope. Rather, they are simply the latest refrain in a long, long (long) ballad.

Cold comfort, perhaps, to know that our forefathers were just as inclined as we toward such feats of over-stimulation, overextension, and excess speculation. Still, there is some comfort to be found reading through our long tale of financial foolishness.

Over the past 210 years or so, we have “enjoyed” 17 recessions, lasting anywhere from a few months to more than two decades. While the worst, the “Long Depression” of 1873-1896, lasted some 23 years, the average duration has been a mere four and a half years.

Damned Modernism

Now don’t go reaching for the bourbon just yet. We’ve put all sorts of systems in place since those bad old days. Many of you like to curse the day in 1913 that saw the birth of the US Federal Reserve, and are wont to describe Fractional Reserve Banking as “the tool of the Devil” (or at least Joe Stalin).

Damned or not, these institutions do exist. One could even argue their arrival on the scene marks the beginning of our “Modern Economy.” If we were to restrict our list of recessions to said “modern” period only, the average breakdown is reduced to just under three years.

Now dial the clock forward again. If one were to begin counting with the day in 1971 that Richard Nixon finished off the remaining tatters of the gold standard, the average duration of recessions is reduced to a year and three quarters.

Have You Heard About the “Black Widow Trade”?

Here’s how you can turn Wall Street’s PAIN into a 146% GAIN in 12 weeks. Read on now for detailed trading instructions…

Rounding Second and Halfway Home

The history may be a tad twisted, but my point here is straightforward enough. While there is certainly no guarantee that we could not invent a way to extend our little debacle another year or six, the odds are that we are already a third – if not halfway – through “the crisis of 2007-2009.”

Which brings us to what I like to call the “Window of Serenity.” Near-term, things do still look quite dreadful. And long-term, I have no doubt that we are embarked on the path of monetary ruin described so exquisitely by the Austrians.

But if you look in the middle, beginning some 18 months out, one can see where the ramp-up to the next major bubble ought to be taking place. The question is: how do you navigate the choppy waters between here and there?

How to Stay In the Game

Once again, I have to tell you that mere “trading stops” won’t work. If that’s the limit to your methodology, then perhaps you really ought to just sit things out until the next cycle is obviously underway.

But what if you are intrigued by the values that are out there (and I will grant that the survivors of this current trough are apt to double many times over come said ramp-up – especially in its earliest days)?

If that’s the case, then there is only one tactic I know of that will allow the safe accumulation of shares in current circumstances. And that is the careful matching of put option contracts on weak players to share purchases of strong players.

Buying Survivors

For example: Let’s say you wish to invest in a venerable old retailer like Macy’s (NYSE:M), currently trading under $10 for the first time since 1995.

Heck, they’ve been around in one form or another since 1924, and have weathered seven of the recessions on my list. That fact alone reassures you that they ought to still be here in another 18 months.

Now, I’m not saying you’re right or wrong with this trading theorem. But I can tell you how to survive Macy’s going to $5 while you find out.

A Cure For the Pain

Simply buy some put options on a real deadbeat low class player like, say, Kohls (NYSE:KSS). While Macy’s shares were getting cut in half over the past few weeks, select Kohl’s puts gained as much as 200%.

Your gains on Kohls’ pain become your safety line against losses on Macy’s shares. Heck, you could even use your profits to buy more shares.

These are admittedly hard times, friends. Fortunes are being lost daily. But situations like these, when everyone else has their head buried in the sand, are possibly the most potentially lucrative trading set ups you will ever see.

Source: How to Make 200% a Month Handicapping Recessions

The sagging fortunes of real estate, retail, auto companies and a host of other sectors.

But a closer look at second quarter earnings reports reveals that so far only four of the S&P’s 10 sectors are reporting negative profit growth: consumer discretionary, materials, financials and telecom. Of those four, the biggest loser by far is financials. Their profits are down by 85 percent compared to the second quarter of last year.

So, banks are being punished for turning in such a terrible second quarter performance, right? Strangely, that is not what is happening. Let’s take a look at the KBW Bank Sector Index.

Earnings go down and shares go up? Does this make sense to you? It does if you knew that Wall Street is breathing a huge sigh of relief over banks. You see, the government has stepped in (yet again!) to make emergency cash and loans available to banks in need.

But that’s not all. The FASB recently gave banks permission to continue hiding losses on their off-balance sheets, as reported in the following from Bloomberg:

“The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.

“FASB proposed having companies put new securitization structures on their balance sheets for fiscal years starting after Nov. 15 this year. The Securities Industry and Financial Markets Association and the American Securitization Forum complained that the changes, which could affect as much as $11 trillion of off-balance-sheet entities, may make companies appear short of capital to regulators and lenders.”

Despite all this coddling, hundreds of banks are still expected to fall by the wayside.

The Stanford Group says that “regulators are expecting 100 to 200 banks to fail”. There were no failures in 2005 and 2006 and only three in 2007. So far this year there have been eight.

What we’re seeing now is not the end of banks’ slide, but a mini-rally cheering the government’s latest moves. Banks are getting a little reprieve. They better enjoy it. It won’t last long.

Source: Banks Are Lending on Borrowed Time

But IndyMac had long focused tightly on mortgages to customers who can’t provide the documentation required for conventional home loans – what are known as “Alt-A” mortgages. This sharp focus left no other business line on which the company could lean, he said.

Other analysts share that view.

Frederick Cannon of Keefe, Bruyette & Woods Inc. said IndyMac had only “a limited focus on the deposit business,” a high- return business that is the bread-and-butter of traditional savings-and-loan companies. On March 31, IndyMac reported $18.9 billion in deposits, 40% more than a year earlier. However, 36.4% of the company’s deposits are expensive and volatile brokered deposits.

The bulk of brokered deposits are likely to be withdrawn soon or run off within the next 12 months, Arnold and Cannon said. IndyMac disclosed two weeks ago that about $100 million of deposits had already been withdrawn after U.S. Sen. Charles Schumer, D-N.Y., raised concerns about the company in a letter to Federal Deposit Insurance Corp. Chairwoman

Sheila Bair.

At least 150 banks will fail in the US during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.

If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990’s, the number of failures will be much higher this time around — probably as high as 300 of them, by RBC’s reckoning.

“Late payment rates on subprime US mortgages stayed above 9% even when the cost of borrowing sank to a four-decade low (and stayed there) between 2002 and 2005,” says Adrian Ash in The Daily Reckoning UK.

“Teaser rates of just 1% interest, in other words, left almost one-in-ten subprime borrowers unable to meet their monthly mortgage bills. So the profits assumed by ‘resetting’ those rates to 7% and above two years down the line were never going to show up.

“As in not ever. Any bank day-dreaming otherwise deserves euthanasia, let alone bankruptcy.”

“The so-called ‘first wave’ of the credit crisis hit banks’ trading books,” says William Patalon III in Money Morning. “But the second lightning strike will hit lenders where it hurts the most – right in their lending businesses […] The impact on the economy will be devastating.

“Here’s why. The banking system’s ‘originate-to-distribute’ model changed the rules of the game. No longer did banks make loans that were based on very careful risk-of-loss analyses. Under the new system, banks make loans – such as subprime mortgages – which are then ’securitized’, or packaged together, into debt instruments that the trading operations of banks, investment banks or institutional investors might then purchase, believing it was a way of achieving higher returns.”