“Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term,” Jennifer Blanke, director of the WEF’s global competitiveness network told The Financial Times.

And the United States is at the top. That’s the good news.

The bad news is that the safety of U.S. banks dropped to 40th this year from 26th in the WEF’s 2007 – 2008 report.

“Despite rising concerns about the soundness of the banking sector and other macroeconomic weaknesses, the country’s many other strengths continue to make it a very productive environment,” the report said of the United States.

But such a fall in the rankings for bank safety is a bit frightening for U.S. banking customers already spooked by the collapse of investment bank such as Lehman Brothers Holdings Inc. (OTC: LEHMQ) and regional banks such as IndyMac Bancorp Inc. (OTC: IDMC).

Summing a Country’s Competitive Balance Sheet

The WEF analyzes 110 economic indicators in 12 different categories for each of 134 countries to come up with its overall GCI ranking. One of those 12 areas is financial market sophistication, which is made up of factors such as “venture capital availability,” “strength of investor protection” and even “regulation of securities exchanges.”

But perhaps the most important factor in this category is the soundness of banks.

Confidence in a nation’s banks is what keeps citizens from stuffing dollars under a mattress. Banks need deposit assets to keep the wheels of U.S. industry turning, as deposit assets are used to fund the short-term credit markets that are so vital to the daily operations of many corporations.

And it’s an area where the United States ranks a disappointing 40.

Coming in behind such well-developed nations as Canada, which tops the list, or even Hong Kong in the 11th spot, might not seem so bad. But even the small African nation of Namibia ranks in at 17, illustrating the United States has some definite room for improvement.

While there are plenty of surprises at the type of the bank safety list, there aren’t many such surprises at the bottom. Algeria comes in dead last with Libya just above it.

Of the “BRIC” nations – Brazil, Russia, India and China – most moved up the list this year against better-developed nations. China landed in the top 30 for the first time as it moved up four spots to reach 30, but China’s banking system is still near the bottom of the list at 108. India, however, slipped two spots to 50 from 48 due to a widening budget deficit. India’s banks also slipped, falling to 51 from 46.

Meanwhile, Brazil was the biggest mover with an eight-spot jump to 64 on the overall list, and also tops the United States when it comes to the soundness of its banks with its 24th spot on the banking safety list. Oil revenues gave Russia a gain of seven to move to 51 from 58 the year prior, but Russia’s banks clocked in at 107 on the soundness rankings.

Slipping Bank Titans?

The United States wasn’t the only nation to find its ranking slipping in the bank safety category. The United Kingdom made a stunning plunge from 4th in the 2007 – 2008 survey, to 44th in the current one, after the emergency nationalization of banks such as Northern Rock PLC (PINK: NHRKF).

Even Switzerland, synonymous with banking to many, was hit hard by the global banking crisis, as it slipped from its top spot in last year’s banking soundness rankings to 16th this year. Swiss giants such as UBS AG (UBS) got caught with over-exposure to U.S. subprime mortgage-backed securities that necessitated government intervention while #2 rival Credit Suisse Group AG (ADR: CS) was forced to raise fresh capital.

Nations from Sweden to the United Kingdom to the Netherlands have all introduced government-sponsored packages to help support ailing domestic banks and avoid the fate of nearly bankrupt Iceland and Pakistan.

The United States $700 billion bailout package is by far the largest, but even that might not be enough to return the domestic banking industry back to safety.

The U.S. financial landscape has been changed forever as firms such, as Lehman Brothers – old enough to have weathered the Great Depression – toppled under the crushing weight of a credit market. The strong – Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) – have bought out the weak.

Bank of America bought both mortgage lender Countrywide Financial Corp. (CFC) and former standalone investment bank Merrill Lynch & Co. Inc. (MER). JPMorgan bought both regional bank Washington Mutual Inc. (OTC: WAMUQ) and the failed Bear Stearns Cos. Inc. Wells Fargo is buying Wachovia Corp. (WB).

But in the wake of such massive acquisitions, the United States is left with huge nationwide banking complexes dangerously close to the 10% regulator’s cap any one bank is allowed to have of domestic market share.

And with 117 financial firms on the Federal Deposit Insurance Corp.’s (FDIC) “Problem List” at the end of the second quarter, more bank acquisitions and rescues could be on the way. The FDIC’s list for the third quarter won’t be published until November.

The FDIC’s coffers have already taken a hit from the rescue of IndyMac and with the recent bailout law raising the cap for FDIC-insured deposits, it doesn’t seem like much of a stretch to imagine the nation’s banking insurance coming up short if one of the largest banks were to fail.

Bank Safety Plays

The FDIC doesn’t publish the names of the banks on its watch list, but luckily there are some simple ways to help ensure your banking deposits are safe. Here are three quick and easy steps from Money Morning Investment Director Keith Fitz-Gerald that you can take to determine if your bank is safe or not:

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. “If your bank doesn’t make the cut with a higher rating, then switch to one that does,” says Fitz-Gerald.

1. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. “But remember,” said Fitz-Gerald, “this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.”

1. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. “Like most things the government doesn’t make this easy, so that means more paperwork,” Fitz-Gerald said.

Source: Global Credit Crisis Takes a Toll on Former Titans of Banking

Well… The dollar continued to push the envelope against a handful of currencies yesterday. Up front and center, the high yielders got beaten about the head and shoulders by the dollar. Aussie, kiwi, real, rand, all took major hits from the dollar. It was one of the worst days I can remember seeing for these currencies. This huge sell off showed two things going against the high yielders… 1. Commodities (other than Gold) are getting whacked, and 2. The Carry Trade is Dead…

To add insult to injury, the Reserve Bank of Australia (RBA) surprised the markets with a shock 100 BPS rate cut last night. A short-lived rally in Aussie after the announcement leads me to believe that interest rate expectations are not driving currencies right now. Instead, we’ve got the same kind of strange thinking in the markets, much like in 2001 and 2002, where the markets rewarded currencies that had Central Banks that cut rates to promote growth… It was the first time I had seen currencies gain after being debased, but it was there right before my eyes, and now, this… It could be happening again…

Yesterday, Japanese yen actually traded for a good part of the day with a 100 handle! That was a 3.5% gain in one day VS the dollar! Talk about the Carry Trade being dead… WOW! I looked up from my attempt to work through trading yesterday and saw yen with a 100 handle, and shouted out… “Hey! Look here everyone, yen is 100, I told you all that yen would get to 100!” Then some smart alec yelled back… Yeah, you said that two years ago, now sit down and trade currencies! HAHAHAHAHA! Funny guys…

On the Very Serious side folks, is the news that we came across yesterday when attempting to deal in Icelandic krona… There was no forward market! Dealers would only quote spot transactions! The banking crisis had reached a point that basically shut the markets down. The currency dropped 33%!!!!! This was Serious Stuff folks, I was scrambling around trying to find a forward market so our CD’s could roll to the next maturity… But there was none… Well, maybe one could be found if the buyer wanted to take HUGE LOSSES… One’s that were 1000% away from the previous week’s bad forward points.

Basically, what happened is that, as I reported yesterday morning, the Icelandic Central Bank was waiting to hear from the Nordic Central Banks regarding a bailout, when they had to take the second largest lender, Landesbanki, into receivership… This news spread quickly, and caused the currency to drop to depths not seen in recent years. Since then Iceland has announced that they had received a 4 Billion euro loan from Russia to provide the banking system help and liquidity.

Now… The Central Bank has announced plans to peg the Icelandic krona to the euro at a value of 131. So… Like I said above, there is no forward market, the Icelandic krona CD’s that remain will have to be closed when they come due. And they can NOT be traded / broken ahead of maturity, as there is NO FORWARD MARKET. A sad ending to what was once an exciting currency to be in… But had faded badly since early this year when the banking crisis arrived on the Icelandic scene.

So… There are a lot of theories as to why the dollar continues to rally in the face of increasing debt burdens, job losses, factories nearly shutting down, etc. In the end it really is just a case of the U.S. and Europe being in a bind, and them coming back to dollars as a safe haven… There’s the CDO’s unwinding, there’s the capital requirements on toxic waste bonds, there’s a ton of things going for the dollar right now, and I won’t deny it… Which is why I said yesterday, that I needed to go sit in a corner with my back to the room, for not seeing this ahead of time… I was so myopic about all the bad stuff causing problems for the dollar, and didn’t see the bad stuff causing dollar strength… Just didn’t make sense to me, the dollar looked like it didn’t have a prayer…

OK the focus today, since the data cupboard is basically in need of a trip to the grocery store, will be on speeches… First, European Central Bank (ECB) President, Trichet, will speak at the World Policy Conference in France. That will be followed by Big Ben Bernanke talking at a Capitol Hill boondoggle. Fed Head, Stern, will speak in Chicago on Financial Shock, which should be quite current, eh? I think the thing to think about here is that Trichet, and the hawkish Fed Heads, including Big Ben, remember he said in June that he was an inflation fighter, are all going to have to back off their hawkish statements… This is not the time to be putting the fear of higher interest rates into the markets…

Things like the Wall Street Journal (WSJ) reporting yesterday that Bank of America (BAC) announced a cut in their dividend by 50% and raise $10 billion through the sale of common stock. Tell me that fundamentally the U.S. economic position is teetering… So, will the dollar’s run be short-lived? Well… As far back as July I was telling anyone that would listen to me that I thought the dollar strength would last through the elections and probably through year-end. So… That’s my story and I’m sticking to it.

We will see the color of the Fed’s FOMC meeting minutes from last month’s meeting… One would think that it would be, if they were honest with themselves, a picture of an economy in shambles… Plus that was the time when all the you know what was hitting the fan with Fannie (FNM) and Freddie (FRE), IndyMac Bank (IDMC), AIG, and a host of other problems… Should be interesting reading… If it isn’t, then they were hiding things…

OK… Let me go through this Gold and Silver stuff again… Some of you missed class the last time I talked about this, so here goes… The metals dealers don’t have ANY supply of coins or bars, PERIOD! Metals dealers haven’t received shipments in some time. The minters had stopped minting because of a backlog in orders. It really is a HUGE mess! And there’s nothing we, the dealers, or minters can do about it.

Now… I know what you’re saying… But Chuck, if there’s a shortage, the price should be going through the roof for the metals… And to that I would say, you are correct sir! (and Ladies!) Can you say, hanky panky? There’s hanky panky going on here folks…

BTW… Gold rallied yesterday… Oil was down… The dollar was up… And Gold rallied? That seems strange to even type much less say! But it’s true , it’s true, I did see a Gold rally! And… It’s rallying again this morning, up $22 right now on the day!

So, the turmoil in the markets continues today… Stocks were off 800 points at one point in the day yesterday before rallying back to close down “only” -370 points… The DOW is now trading below the 10,000 level… YIKES! All I can say is that I’m glad I sold all of my stocks last October! I have no idea what moved me to do that, except that I saw this all coming, as I had chronicled in the Pfennig, and for once in my life I have someone who needs me, no wait, for once in my life I acted on my thoughts for the market!

The euro seems to be in a mini-rally this morning, as I’ve seen it move higher throughout the time I’ve been here writing. There was profit taking in Japanese yen overnight, and the currency is trading back to 102, but 102 is still better than 110! I see where China’s renminbi moved higher VS the dollar, the most it has in one day, in 7 months! Remember, China was on holiday all last week, and therefore left the renminbi unchanged on the week… But that was quickly changed in the first two trading days, and that has to be a good sign for all that talk about a China slowdown!

The Chinese government indicated that the move downward in the renminbi before the holiday was too much, and that they want a “stable currency” to stabilize their markets. Makes sense, eh?

Our little Christine told me last night when we were leaving that she had received a truck load of CD breaks for this morning. UGH! This is not the time to sell into this kind of a market folks… It’s akin to catching a falling knife! But… It’s obvious that they are in panic mode, which I don’t blame them… I don’t know their personal investment situations… According to FDIC, CD holders must have a “financial reason” and a “need for the funds” to break a CD… So, that’s all I have to go on!

Currencies today 10/7/08: A$ .7160, kiwi .63, C$ .9070, euro 1.3585, sterling 1.7450, Swiss .8760, ISK (no quote), rand 8.8130, krone 6.1825, SEK 7.1250, forint 183.90, zloty 2.5350, koruna 18.07, yen 102.10, baht 34.52, sing 1.4640, HKD 7.7660, INR 47.95, China 6.8170, pesos 11.93, BRL 2.1790, dollar index 81.24, Oil $90.40, Silver $11.63, and Gold… $882.25

Source: Iceland Melts Down…

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. If your bank doesn’t make the cut with a higher rating, then switch to one that does.
2. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. But this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.
3. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. (But keep in mind, like most things the government doesn’t make this easy so that means more paperwork.) If you’ve got the big bucks, visit the Certificate of Deposit Account Registry Service, or CDARS, and learn how you can obtain full FDIC insurance on deposits up to $50 million – with a single interest rate on a single statement at a single bank. Ironically, a former U.S. Federal Reserve employee – someone who must have gotten “fed” up with the complicated FDIC insurance requirements and ownership restrictions – started this innovative service.

Source: Credit Crisis Safety Plays: Three Steps to Take to Make Sure Your Bank is Safe

The crisis, and the bungled attempts of the government to ‘fix’ it, is setting up some great contrarian investment plays.

“All it takes to make money on Wall Street these days is a ‘for sale’ sign,” says Andrew Snyder. “Companies in every industry are hurting from the financial crisis. Their only way out is to hope a buyer comes along. The action is creating a lot of great profit potential for investors.”

There are lots of big-name companies making big gains today. With all major indices soaring, it comes as no surprise investors are making money. What may be surprising is why these companies are surging in value.

Normally, share prices make double-digit leaps on earnings increases, product developments, or other positive news events. Lately however, a giant “for sale” sign is all it takes to catch the eye of the bulls.

Two companies making their investors happy today are Transmeta Corp. (NASDAQ:TMTA) and Top Ships (NASDAQ:TOPS). Both are selling for 20% more than they were yesterday thanks to news that the firms are on the auction block.

Transmeta, which tried to run its business in nearly every direction imaginable in the past few years, is waving the white flag, hoping it gets the attention of a suitable buyer. The company had a $15.50 per share offer on the table in February, but refused it looking for a higher bidder. One never came and now times are much more desperate.

It is a similar story at Top Ships, but one that may prove more lucrative to shareholders. With one bidder already willing to cut a check for $6 per share (a 50%+ premium) and rumors of more to come, investors that rode the plummet from over $10 have a chance at profits, albeit a small one.

Mega-gainer

And as you may have heard, shares of the troubled bank, IndyMac Bancorp (OTC:IDMC), are rumored to be a possible target of Goldmach Sachs (NYSE:GS) as it ramps up its banking operations. Shares of the company, which were selling for nearly $50 less than two years ago, were trading at $0.23 at the closing bell, a 228% gain on the day.

IndyMac could be a quick way into the banking industry and its desperately needed cash flows for Goldman. It will be interesting to see if the rumors are true.

The situation is similar across the investment spectrum. Wall Street is no different than the real estate market. Once values start to drop, they will continue to fall, dragging everything with them.

Remember, if your neighbor’s house plummets in value, so does yours. It is the same concept in the business world.

With so many companies hurting from the nation’s economic slowdown, more and more companies are going to look for buyers. It will create some real bargains and some fantastic opportunities for savvy investors.

Seek out the companies you think are ripe for a sale, invest appropriately and hang on for the ride. There is some big money to be made as this fire sale continues.

Source: Business for sale: Dozens of companies on the auction block

The FDIC levies a fee on all U.S. Banks. These are the reserves that insure your deposits. But here’s the problem: The reserves are running low this year. As of today, the FDIC’s reserves reported it had US$45.2 billion of reserves covering 1.01% of all deposits. This is considered historically low.

The failure of just one bank last month – IndyMac (OTC:IDMC) – is going to wipe out 10-15% of all reserves. That’s just one bank (let’s not forget that the S&L bailout cost us over US$160 billion). Consider that nine have already failed this year. In fact, I see on the FDIC website another bank failed on Friday.

When the reserves that insure your bank deposits drop 1.15%, then by mandate the FDIC must come up with an action plan. If you do the math on this, you’ll find we’re already there. But what “actions” can they take? They don’t have that many choices.

Remember they get their reserves by levying a fee on their member banks. That can be a vicious cycle. Let me explain…

Congress gave the FDIC the mandate to replenish their reserves by charging higher premiums on their members. The current fee that most banks pay is five cents for every US$100 of insured deposits. But high-risk banks now pay up to 43 cents to insure that same US$100.

That high-priced insurance is killing them. Especially since FDIC-insured lenders reported a net income of $4.96 billion this quarter, down 87 percent from $36.8 billion in the same quarter of last year. If the banks are called to increase their cost for insurance the money has to come from somewhere.

So here’s the problem: The FDIC needs more cash, but it comes from the banks. Right now, the banks need all their funds so they can make loans and clean up their balance sheets so they can stay in business. But the FDIC has to appear rock-solid, which means they need more than enough cash to cover all the banks.

The FDIC can’t let their reserves fall much lower. FDIC Chairman Sheila Blair said yesterday that they may need to borrow money from the Treasury due to “short-term liquidity issues”, but this is just a temporary fix.

The value of assets belonging to lenders on the ‘problem list’ has tripled to US$78.3 billion in the last quarter alone. That’s roughly twice the amount that the FDIC could currently cover. They’re going to have to raise fees and the inevitable outcome will be more bank failures.

This is a real mess without an easy solution. It seems only the strong will survive. So make sure your money is secure at one of the stronger banks. You can get more information about your bank here.

Source: Who Really ‘Insures’ the FDIC?

• Influenced by online retail giant Amazon.com Inc. (AMZN), web-based auction site eBay Inc. (EBAY) announced it would be reducing listing fees for sellers who choose the set-price “Buy it now” option. It’s a huge shift for eBay, but management hopes the changes will increase inventory and attract more buyers seeking the ease of “one-click” shopping, BusinessWeek reported.

• The Mortgage Bankers Association announced the level of mortgage applications is at its lowest point in eight years, as lending standards remain tight despite the drop in housing prices. The decline was due in part to the lack of new construction the nationwide association said, the Tampa Bay Business Journal reported.

• The Federal Deposit Insurance Corp. yesterday (Wednesday) announced plans to modify loan terms for IndyMac Bancorp Inc. (OTC: IDMC) customers in an effort to keep people in their homes and avoid foreclosure, CNNMoney.com reported. The FDIC has targeted 25,000 customers who are most delinquent on their loans and will begin working with them to provide more affordable payments and reduce investor losses.

• U.S. crude oil for September delivery settled 45 cents higher at $114.98 a barrel yesterday (Wednesday) after a day of volatile trading in which prices swung from between $112.61 and $117.03. The decline in gas stockpiles pushed prices higher, while the surge in oil supplies pulled oil lower, according to Neal Dingmann, director of equity research at Dahlman Rose, CNNMoney.com reported.

• Shares of Suntech Power Holdings Co. Ltd. (ADR: STP) shot up over 12% yesterday (Wednesday) with a gain of $4.62 to close at $41.75. The China-based solar energy company reported expectation-beating second quarter earnings and raised its guidance for the rest of the year, Forbes reported.

• Warehouse retailer BJ’s Wholesale Club Inc. (BJ) yesterday (Wednesday) reported fiscal second-quarter earnings increased to $36.5 million, or 61 cents a share, from $36.3 million, or 55 cents a share, for the same period the year prior. Earnings per share included a 5-cent boost from non-sales related cost cuts, Bloomberg News reported, and shares dropped almost $3 to close at $37.71.

• Hewlett-Packard Co. (HPQ) reported fiscal third-quarter 14% jump in profit that thrashed Wall Street expectations. HP said it earned $2.03 billion, or 80 cents per share, in the latest period, up from $1.78 billion, or 66 cents per share, a year earlier. Excluding one-time charges, HP’s profit was 86 cents per share, three cents higher than the average estimate of analysts polled by Thomson Reuters.

• The Tennessee Valley Authority yesterday (Wednesday) approved an electric rate increase of 20% — the hike largest in 34 years The Associated Press reported. The TVA cited sky-high fuel costs and a three-year drought that has sharply reduced its ability to generate cheap hydroelectric power. Most of the rate hike is a temporary fuel adjustment charge that varies quarterly, though TVA officials predicted the charges would continue to grow through smaller increases in the future.

Source: Global Investing Roundups Thursday, August 21st, 2008

Weak institutions were shorted so much that a bounce was inevitable.

Despite an SEC clampdown on shorting, Dan says legitimate shorting is vital for the stock market and is not to blame for the stategic mistakes of U.S. banks.

For those still looking for new short ideas in the sector, Dan says Allied Capital (NYSE:ALD) is a good place to start…

The recent financial stock rally has all the signs of panicked short covering, rather than typical buying. Consider how the depository institutions most likely to eventually join IndyMac (OTC:IDMC) in federal custody – including Washington Mutual (NYSE:WM), Downey (NYSE:DSL), and Huntington Bancshares (NASDAQ:HBAN) – are rallying the most. So many shares had been sold short that a violent rally was inevitable.

Eventually, though, this rally should prompt two things:

1. Mutual funds selling financial stocks into strength. We’ve finally seen a shift in psychology away from buying financials on the dips. Many managers are preparing for an extended bear market in the sector.

2. Banks with capital shortfalls will announce secondary stock offerings. This will lower the cost of new capital, because higher stock prices allow the banks to issue fewer shares to raise a fixed amount of capital.

The SEC is implementing rules that will make it a bit harder to sell short stocks that are difficult to borrow.

I think “naked” short selling (shorting a stock when your broker has not yet located shares to short) must be stopped. This practice gives legitimate short selling a bad name.

Stock should be located and borrowed before it is sold short, not the other way around. If your broker cannot locate shares to short, you should move on to another idea, or use put options.

But the hysteria about “rumors” bringing down financial companies has gone too far, I think. This is the defense of CEOs who are looking to blame someone for their own incompetence – incompetence that put their firms in a vulnerable position in the first place. Short sellers did not conspire to force Wall Street firms to enter the business of securitizing dodgy debts. Firms like Bear Stearns ruined their own companies with the poor strategic decisions they made. The free flow of opinions is vital for the health of the stock market. One should be very suspicious about executives who try to suppress any negative opinions about the value of their stock. Allied Capital (NYSE:ALD) comes to mind.

You can read about Allied’s crusade against David Einhorn in his excellent book, Fooling Some of the People All of the Time.

Allied is still a good short idea looking out beyond a year because it’s running out of attractive assets to sell and finding it harder and harder to issue new equity.

Short sellers need to do their own fundamental research and form their own opinions. Only fools buy or sell short stocks based solely on rumors. Legitimate short sellers are very beneficial for the market. They provide liquidity at market bottoms by buying to cover their positions, and they are often the first to discover and put an end to accounting frauds and stock promotion schemes that siphon capital away from legitimate businesses.

Timing is important in the banking business. Also, as in investing, it pays to be a smart contrarian. Ideally, banks should make as many loans as possible once the economy bottoms. In an improving economy, borrowers can more easily pay down debts.

Loans made with disciplined underwriting guidelines ahead of an economic boom can be both safe and profitable.

On the other hand, aggressively expanding a loan book at the peak of a credit cycle and an economic cycle can lead to disaster.

Once credit cycles turn, loan portfolios, or loan books, become sources of risk, rather than profit. Look at the experience of Countrywide, which just got acquired by Bank of America (NYSE:BAC) for a fraction of is peak value. It blew itself up by aggressively expanding its mortgage loan book at the peak of the credit cycle – which happened to coincide with the biggest housing bubble in history.

Source: A New Short Idea in the Banking Sector

So far this year, eight banks have collapsed. At first blush, eight banks failing doesn’t sound quite as bad if you consider 834 banks went under during the S&L crisis from 1990 to 1992.

But if you want to know the real extent of this crisis, you need to look at the bottom line. Worldwide, the credit crisis has already cost US$476 billion in losses, write-downs, etc.

Seventeen years ago, the Savings and Loan Crisis cost the global economy US$190 billion (or US$350 billion in inflation-adjusted dollars).

The Federal government already bailed out Bear Stearns Cos (NYSE:BSC), Fannie Mae (NYSE:FNM), and Freddie Mac (NYSE:FRE) this year to stop a systemic risk, but at a massive cost to taxpayers.

On top of that, the government’s actions did nothing to fix the credit crisis, which is still the big looming threat to all the other smaller banks and mortgage lenders that aren’t getting bailed out.

The Federal Reserve won’t dirty its hands or spend the money to bailout smaller lenders.

That means it’s going to be a long, painful recovery for the banks going forward. And a few banks won’t make it.

Take IndyMac (OTC:IDMC) for example…

When IndyMac’s clients got word that the bank was in trouble in early July, thousands of concerned depositors pulled their cash out of the bank to salvage as much as they could.

All totaled, depositors walked away with US$1.3 billion in 11 days.

That’s when the FDIC stepped in and shut IndyMac’s doors for good.

And the remaining IndyMac clients had to depend on the FDIC to recover their deposits – assuming their accounts were fully insured.

What Good Is FDIC Insurance in the 21st Century?

As I said, when a bank fails, the FDIC accountants swoop in to tally the books.

The FDIC agents officially close the bank. They freeze the accounts at the bank. Then they begin the long painful process to determine exactly which funds are insured or not.

In the meantime, if the FDIC is dismantling your bank, you’re stuck waiting to recoup what you lost. You can’t write checks. You can’t pay bills. You can’t use your debit card. You can’t even go to the grocery store to buy food unless you have cash lying around.

Technically the FDIC insures every account up to US$100,000, and every retirement account up to US$250,000. But the devil is in the details. It’s generally US$100,000 per holder of account.

So for example, if you and your spouse have a joint savings account, you could hold up to US$200,000 in a single account. Then in theory, if your bank failed, you would recoup your entire account.

But these limits get dicey when you’re talking about trusts, annuities and other accounts – depending on how the account is titled. (Get the full rules here.)

In IndyMac’s case, a whopping US$1 billion of the US$19 billion deposits was uninsured. According to FDIC, US$2.6 TRILLION is currently uninsured in the United States.

So the question is: What do you do if your accounts are simply too big for the FDIC to insure?

A Masterful Solution to This FDIC Insurance Problem

For years, we’ve recommended you seek refuge from possible bank failures by diversifying your holdings.

For example, you can hold up to US$100,000 at several U.S. banks, or invest your long-term safe funds in a bank account overseas where liquidity is much higher. And in our recommended jurisdictions, there hasn’t been a bank failure in over 125 years.

But now, we’ve discovered another unique solution.

Our friends at EverBank have devised a new “Insured Advantage Certificate of Deposit,” that protects your capital up to US$50 MILLION. You can literally park your funds in this CD and the FDIC will insure you up to US$50 million no matter what happens.

You can open this CD for yourself, your business, your non-for-profit organization, etc.

Also, you don’t have to hold this CD for years (unless you want to) for it to mature. You can hold this CD for as little as three months.

Plus, your funds receive high yields at the same time. EverBank is able to do this by spreading the risk out among many banks, to ensure your money is fully protected.

Please take a moment to review the balances and the title on your U.S. bank accounts. Make sure that you don’t exceed the FDIC limits in a climate like this. And, if you discover you do, find the time to find the right solution for you and your family.

The best time to do it is now before the next bank goes bust and takes your savings along with it.

Source: How to Protect Your Life Savings When You’re Over the $100,000 FDIC Limit

But there won’t be much to report.

Although the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) meets Wednesday, the group doesn’t have much room to maneuver: If the Fed cuts rates to stimulate growth, already troublesome inflation could escalate out of control. But if the FOMC raises rates to reign in inflation, the entire economy could drop into a deep-and-lingering recession.

To be sure, Fed policymakers are sure to engage in some spirited debate: The debates will include such topics as pricing pressures vs. slow growth and strong energy prices vs. the weak housing market. There will even be talk about extending the emergency-borrowing program, or about expanding oversight over financial-services firms.

But if Federal Reserve policymakers do much of anything more than just debate the issue – and try and take some kind of action, using interest rates as their weapon of choice – there’s almost certain to be a negative impact on the U.S. economy.

The data coming out this week will focus on the consumer as personal income/spending and consumer credit reveal just how active folks have been during these uncertain times. As the summer (of discontent) winds down, travelers may be able to get in a last minute trip or two as gas prices have declined over the past few weeks. And retailers are hoping to benefit from the “back to school” shopping crowd. And second-quarter earnings reports continue as consumer giant, The Procter & Gamble Co. (PG), and insurer American Insurance Group Inc. (AIG) headline the reporting companies.

The final question: Will there be any new surprises as the season comes to a close?

Market Matters

As earnings season plugs along, just as many questions and concerns about the strength of Corporate America remain unanswered as when Alcoa Inc. (AA) was first on the clock a few weeks back.

At mid-week last week, just over half of the Standard & Poor’s 500 Index companies had reported and the results actually looked halfway decent (relatively speaking, that is). About two-thirds of those companies announced earnings that exceeded expectations, while only 20% or so missed on analysts’ targets.

Financials dominated the “good” news companies, as four of the five leading banks bested Street estimates (though, that often meant lower losses instead of better profits). However, when the dust finally settles, the second quarter will represent the fourth-straight period of declining earnings as S&P companies are headed for a double-digit drop from last year.

Of course, the massive plunge among financials greatly contributed to the negative results. Looking forward, the eternal optimists remain confident that positive earnings will return for the second half of the year. These optimists even believe that the financials may lead the way as commercial banks and investment banks finally move beyond the period of “never-ending” write-downs. However, if such optimism does not come to fruition and annual earnings decline for the second full year in a row, Corporate America will have accomplished something not experienced in quite a while – not even during the bear market (and recession) of the early 2000s.

So, let’s review last week’s numbers. Energy companies benefited from the surge in oil and gas prices as Exxon-Mobil Corp. (XOM) posted the best quarter ever by a domestic company (though it still managed to fall short of Street expectations). Royal Dutch Shell PLC (RDS.A, RDS.B) and Chevron Corp. (CVX) reaped some strong results as well [For a related story on Exxon and Shell, please click here. For Money Morning‘s recent “Buy, Sell or Hold” feature on Chevron, please click here].

United States Steel Corp. (S) took advantage of the rise in commodity prices, while Verizon Communications Inc. (VZ) and Motorola Inc. (MOT) both recognized better-than-expected profits. On the downside, General Motors Corp. (GM) experienced its third-worst quarter ever. Tyson Foods Inc. (TSN) struggled as increased grain prices hindered chicken sales. Sony Corp. (ADR: SNE) was victimized by a decline in consumer spending. And one-time telecom-sector darling Alcatel-Lucent (ADR: ALU) reported another terrible quarter and said goodbye to both its chairman and its chief executive officers at the same time.

Shifting to the financial world (where there’s no rest for the weary), Merrill Lynch & Co. Inc. (MER) plans to write-down another $5.7 billion as it sells off much of its underwater mortgage portfolio and looks to raise another $8.5 billion through a common stock issuance. (Some analysts believe Citigroup Inc. (C) has another $8 billion in write-downs in it, as well). First National Bank of Nevada and First Heritage Bank joined IndyMac Bancorp Inc. (OTC: IDMC) as they were taken over by the Federal Deposit Insurance Corp. (FDIC).

Volatility emerged in the energy market as oil prices fell to their lowest level in two months and even declined in July by almost $16 a barrel from previous record highs. A late-week rally pushed prices higher, though the general trend may have shifted. Some untimely comments from the Organization of the Petroleum Exporting Countries (OPEC), and turmoil in Nigeria (not to mention Iran) threaten to shift that newly upbeat mood back into a negative one.

Gasoline fell below $3.90 a gallon after hitting a high of $4.11 at mid-month. Stocks experienced quite a bit of volatility as daily triple-digit price movements (up or down) seem to have become the norm. Weaker economic data (see below) helped end last week on a sour note, while bonds benefited from a flight-to-quality that sent the yield on the 10-year below 4% again. All in all, another ho-hum summer week (if +/- 200 daily price moves can be considered ho-hum).

A good proxy for the group is KBW Bank ETF (AMEX: KBE), an exchange-traded fund that holds all of the nation’s major banks. The fund has lost nearly half of its value over the past 13 months.

The index of smaller, regional banks – Regional Bank HOLDRS (AMEX: RKH) – has fallen even more.

And some banks – even the large ones – are going down for the count. Two weeks ago, for instance, we saw the federal takeover of IndyMac (OTC:IDMC), the second largest U.S. bank failure.

To some analysts, this marked the nadir for the sector. Over the past two weeks, many bank stocks shot higher, although we saw some profit taking on Thursday and Friday.

Many are asking whether this is the long-awaited turnaround that value investors have been waiting for. Or is it just a bigger-than-average dead cat bounce?

Buying Bank Stocks – 2 Schools of Thought

There are two schools of thought on whether or not now is a good time to begin buying bank stocks:

• Analysts like James B. Stewart at Dow Jones think that bank stocks are a raging buy. In a recent article in The Wall Street Journal, he opined that “The current indiscriminate selloff in the financial sector makes no sense… This simply isn’t rational.”
• And, indeed, shares of lenders have fallen so far that these stocks look attractive on an earnings, book value and yield basis.

But hold on. The first three questions any serious investor must ask are “will the earnings hold up, is the book value still valid, and will the dividend be maintained?” Three very big “ifs.”

Furthermore, we should be slow to dispute the collective wisdom of the market. It’s tough for any analyst to claim he knows more than the thousands of investors who are voting each day to buy or sell – and risking hundreds of millions in the process.

Stewart was right about one thing, however. He correctly predicted that, “the Treasury and the Federal Reserve aren’t going to stand idly by and let the big mortgage investors, with their implicit government guarantees, become insolvent.”

Bailing Out Freddie Mac & Fannie Mae

Uncle Sam’s bailout of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), the wisdom of which we can debate, is in full swing. And the SEC has made it much tougher to short beaten down financial stocks, something akin to changing the rules in the middle of the game.

However, the federal government’s helping hand isn’t going to fix the problems at your local bank. Or at the big money center banks, either.

Banks made mountains of loans to borrowers with poor credit ratings, hoping that the higher mortgage rates they charged would offset the higher defaults that go hand-in-hand with subprime lending.

This turned out to be a very bad bet. Soaring loan defaults have forced banks to write down the value of their loan portfolios and slash or eliminate dividends.

As analyst John Waggoner wrote recently, “If you’ve been around long enough, you know that things go terribly wrong in the banking industry with depressing regularity.”

• In the 1980s, many banks took enormous losses on ill-advised loans in the Texas and Oklahoma oil patch. They lost billions more lending to governments in Latin America.
• In the 1990s, the federal government spent more than $1 trillion bailing out banks and the Savings & Loan industry due to ill-advised real estate loans.
• And now the banks have done it again.

As a result, banking stock’s share prices have been severely punished. Is now the time to step up to the plate and take a big swing?

Not in my estimation.

Buying Bank Stocks in a Bear Market

Despite the sharp rally in bank stocks lately, this is not how bear markets in financial shares generally ends. History shows that bank stocks tend to make a long, shallow bottom. Their suffering extends for months.

This time isn’t likely to be any different and for one key reason: The housing decline isn’t over. In the hardest hit areas in places like Florida and California, it’s not just the subprime borrowers that are mailing the keys back to the bank; thousands of higher-quality borrowers are, too. Even if they can afford their payments…

What happens is this:

• A homeowner who took out a 100% mortgage on a $500,000 property that is now worth, say, $325,000 begins asking himself why he is making payments on something that is worth a whole lot less than he paid for it.
• Many are choosing to ruin their credit rating or declare bankruptcy rather than continuing paying on a big, depreciating asset. We can argue about the ethics of this, but the bottom line is it’s happening. And the banks are baring the brunt of it.
• The question now is what happens to banks if the housing decline continues, as it clearly is, or even accelerates? This is the $6 million-question every buyer of U.S. bank stocks has to ask himself.

In my view, banks are NOT a screaming buy at the moment, perhaps especially after the big rally we’ve seen over the past two weeks.

At some point, bank stocks will be an outstanding buy. But not until the housing decline begins to ebb.

In the meantime, caveat emptor.

Good Investing,

Alex

P.S. In my last column, I said I would say a little bit about how to give money away intelligently. However, if you would like to read these thoughts, I decided that they might make a better column for my side project, Spiritual Wealth.

Source: Bank Stocks: Good Bet or Big Gamble?