Monday, March 17, 2008

Multiple Runs On Big Banks

Spies First National Bank 00004

Journalists are not supposed to announce that there is a run on a particular financial institution. That is the journalistic equivalent of yelling "FIRE!" in a crowded theatre. Nevertheless, very rich people have lately been taking their money out of many large financial institutions.

Small depositors and investors need to beware. When rich people are starting a run on the banks something really crucial is failing.

Incredible sums of money have moved out of Bear Sterns, Lehman Brothers, and other financial institutions. The Federal government, in the face of Treasury Secretary Paulson, has begun a bailout of financial institutions, but as usual the efforts are too little too late. Paulson was the head of one of the largest financial institutions in the world just a few years back.

George W. Bush just walks around in an unbalanced state, doing the worst stand-up comedy routine while the nation melts into foreclosure. Dubya tells us our mighty nation has become like his presidency, "stuck in a ditch."

Wrong again, Mr. Bush, our nation has been driven off a cliff by a college cheerleader dabbling in preemptive warfare and human torture.

The Federal Reserve Bank, not a part of the U.S. government but rather a private institution, appears to be making the situation worse. The largest bankers intend to consolidate their incredible wealth in a few huge banks. Interest income from banks that massive balloon into chauffeur-driven Bentley's for the top dogs.


A major bank with 1,400 branch offices and over 400 retail mortgage locations, National City Corporation (NYSE:NCC) shares are down 46% today.

Washington Mutual (NYSE:WM) is not far behind.

In the Third World, when ordinary people lose faith in the financial system they take their money out of the banks and keep it with them. There are just too many prior cases of corrupt leaders looting state-run banks. But that would be a more likely scenario for Haiti or Guinea rather than the United States, right?

Are Americans prepared for a major run on the banks or a major recession?

It is almost equally foolish to keep your money in your mattress as it is to keep it in a failing bank. But wait, some brilliant scholar reminds us that the U.S. Federal government insures the first $100,000 of your deposits.

So just let your bank fail and then file a claim for the money with the U.S. Federal Reserve. Ask someone who had their money deposited at Home State Savings Bank in Ohio. In the 1980's that bank went belly-up. It took depositors months to get back some of their money.


Oddly enough there is very little scope for a run on the banks in the United States anyway. People have not been saving money for years. The official savings rate is a negative number, like -.1%. There simply is no money in the accounts people might "run" to take money from. Last week's paycheck is automatically applied to last month's bills anyway. If any group were likely to make a "run" on the bank it would be the electric company or the credit card company.

The credit card company is the same company as the failing banks. We have come full circle. There already is a run on the banks going on every month, but it is only the automatic payment system of the credit card issuers at work.


Lehman Brothers Holdings Inc. (NYSE:LEH) is down 35% today. Expect it to go on the chopping block for $2/share tomorrow.

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