We find the report on the front page of the International Herald Tribune:

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” said the main man at the Fed, speaking to an audience at the London School of Economics.

He went on to say that he didn’t necessarily like bailing out Wall Street, but it “appears unavoidable.”

Nothing particularly exciting about that. But then we turn to page 12:

“Bernanke warns that bigger bailouts needed around the world,” is the money headline.

And then, the report gets down to business. The world economy is dangerously ill, says Dr. Bernanke, or words to that effect. We’re going to have to try some experimental drugs to rescue it.

“Beyond buying troubled assets from banks, Bernanke said, another option was to provide asset guarantees under which the government would absorb part of the banks’ losses in exchange for warrants and other forms of compensation. [Of course, if the banks had any means of compensating investors they wouldn’t be in this fix.]…

“Bernanke also expressed support for the idea of creating a so-called bad bank that would allow the government to buy financial assets in exchange for cash or equity.”

Here is where we laughed so hard we thought we might damage our midriff.

Create a ‘bad bank?’ Is he kidding? The world’s full of bad banks already – banks that did just what Bernanke is proposing to do; they bought financial assets, notably mortgage market derivatives, for cash. Now, they turn to the taxpayer, desperate for a handout to keep them from going under.

And the baddest bank of all? Next to the Central Bank of Zimbabwe it’s the US Fed. What’s it doing? It’s buying trash and paying cash. In this way, the mistakes of rich bankers are transferred to the people… via the people’s bank – the Fed. Of course, the people don’t know what’s going on. And they won’t notice either when the Fed eventually unloads these toxic assets – in the dark of night.

We have not checked the gold market this morning. Yesterday, gold held steady at $820 and appeared ready to drop into the $700 range. If gold doesn’t go up this morning, investors are not paying attention.

Let’s go back over the fundamentals. The world economy is correcting. The feds are trying to stop it. They tried their Friedmanite monetary stimulation – cutting rates to zero. And they’re sweating like Sisyphus, trying to make Keynes’ fiscal stimulus work too.

Both will fail – for the reasons we explained in these Daily Reckonings. You can’t help an alcoholic by giving him free hooch. And you don’t do a fat man any good by offering him another dessert.

That concern came into particularly sharp focus last week, when Switzerland’s largest bank, UBS AG, said it expected to write off a staggering US$40 billion in sub-prime losses.

So far, financial regulators have succeeded in preventing a widespread banking panic. The closest we’ve come to that nightmare scenario is in the United Kingdom, where the government nationalized Northern Rock Bank after a run on the bank by depositors last September. Not to mention last month’s mysterious acquisition by JP Morgan-Chase of Bear Stearns.

It remains to be seen whether regulators can continue to sweep multi-billion-dollar portfolio problems under the rug through expanded borrowings, selective capital injections, or further nationalizations. But if you have substantial assets in any bank – either abroad or in your home country – you don’t want to wait for the regulators to act. You should take action now to evaluate how safe your assets really are in your accounts.

The assets in your account at any bank are either on or off the bank’s balance sheet. If your assets are on the bank’s balance sheet, and the bank becomes insolvent, then your assets are at risk. Your funds may or may not be protected by a national deposit insurance scheme. If they’re not, you’re simply another unsecured creditor of the bank.

Assets that are on the bank’s balance sheet include checking accounts, savings accounts, money market accounts the bank operates, “unallocated” holdings of precious metals, and (at some banks) CDs. The basic operating account for a bank (called a current account, giro account, or other names) is also on the balance sheet. At offshore private banks, this operating account is the springboard for all other investments.

When you purchase securities – stocks, bonds, etc. – through your offshore account, the bank establishes a “safe custody” account for these investments. Those assets are off the bank’s balance sheet. Precious metals the bank holds for you in “allocated” storage are also off its balance sheet.

Naturally, investments in safe custody are subject to market risk, but they won’t be affected if the bank becomes insolvent. However, if your offshore bank goes belly up, it will likely be part of a larger economic catastrophe that would decrease the value of any securities portfolio. Also, there may be a period of time where the securities an insolvent bank holds in safe custody can’t be traded.

I’ll be discussing additional ways to protect yourself from catastrophic losses in your bank accounts, both domestic and offshore, in an upcoming issue of The Sovereign Individual, the members-only newsletter for The Sovereign Society.

MARK NESTMANN, Privacy Expert &
President of The Nestmann Group
www.nestmann.com