Dr. Martin Weiss is founder of Weiss Research and someone I listen carefully to on financial matters. (He founded the bank rating company, subsequently sold to Jim Cramer’s company TheStreet.com.)
Monday he wrote a special piece for his subscribers. Here are some highlights:
CITIGROUP COLLAPSES! BANKING SHUTDOWN POSSIBLE
It pains me deeply to announce that, despite the massive government rescue, yesterday’s collapse of Citigroup could ultimately lead to a shutdown of the global banking system.
For many years, I hoped this would never happen, and I thought we might be able to avoid it.
And now, here we are, nearing the end of the road with the largest banks of all endangered and with no larger bank that can swallow them up. It’s a day of reckoning that leaves me no choice but to issue this three-part warning:
* Despite the U.S. government’s massive Citigroup bailout, it is going to be difficult for the global banking system to survive the shock to confidence for very long.
* Even if insured depositors do not pull out their funds, uninsured institutional investors are likely to run with their money, threatening to bring the system down.
* And alas, even if you have your money in a safe bank with full FDIC coverage, you could be adversely impacted.
How will the events unfold?
Banking Meltdown - Is it Possible?
On October 11, 2008, a single statement hit the international wire services that provides more specific clues:
“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.”
This statement was not the random rant of a gloom-and-doomer on the fringe of society. Nor was it excerpted from a twentieth century history book about the Great Depression. It was the serious, objective assessment announced at a Washington, D.C. press conference by the Managing Director of the International Monetary Fund (IMF).
The unmistakable implication: So many of the world’s largest banks were so close to bankruptcy, the entire banking system was vulnerable to a massive collapse.
Is a bank holiday really possible? Most observers think not. “If deposits are insured,” they ask, “why would anyone want to pull them out?” The reason: Most bank runs are not caused by insured depositors. They’re caused by the exodus of large, uninsured institutions who are usually the first to run for cover at the earliest hint of trouble. That’s the main reason Washington Mutual, America’s largest savings and loan, lost over $16 billion in deposits in its final eight days in 2008. That’s also a major reason Wachovia Bank was forced to agree to a shotgun merger soon thereafter.
How Long Would a Global Banking Shutdown Last?
No one can say with certainty. But based on other banking holidays in modern history, it’s safe to conclude that it could last for quite some time and cause severe hardship for hundreds of millions of savers around the world.
The first and most obvious hardship is that you could be denied immediate access to most or all of your money for an indefinite period. What about government agency guarantees like FDIC insurance? A large proportion of those guarantees, unfortunately, would have to be suspended in order to give banking regulators the time they need to sort out the mess.
It is simply not reasonable to expect that governments will have the resources to immediately meet the demands of thousands of institutions and millions of individuals if they all want their money back at roughly the same time.
“Your money is still safely guaranteed,” banking officials will declare. “You just can’t have it now.”
The second and more long-lasting hardship is the possibility that, by the time you do regain access to your money, you will suffer losses. In this scenario, the government would likely create a rehabilitation program for the nation’s weakest banks, giving depositors two choices:
* Opt in to the program by leaving your funds on deposit at your bank for an extended period of time, earning below-market interest rates. The bank is then allowed to use the extra interest to recoup its losses over time — income that, by rights, should have been yours.
* Opt out of the program and withdraw your funds immediately, accepting a loss that approximately corresponds to the actual losses in the bank’s investment and loan portfolio.
Needless to say, neither the opt in nor the opt out choice is a good one:
If you opt in, you take the chance that the government’s rehab program may not work on the first attempt and that it will be replaced by another, even tougher program in the future. Moreover, even if it works out as planned, you will suffer a continuing loss of income and access to your cash over an extended period of time.
If you opt out, instead of lost income, you suffer an immediate loss of principal. Moreover, in order to discourage savers from opting out, the government would typically structure the program so that everyone demanding immediate reimbursement suffers an additional penalty.
To avoid all of these risks, I recommend seriously considering moving (a) nearly all of your bank deposits and accounts, plus (b) a modest portion of the money you currently have invested in securities to the safest and most liquid place for your money in the modern world:
Short-Term U.S. Treasury Securities
True safety has two elements. The first is capital conservation — no losses, no reduction in your principal. But it’s the second element that most people miss: Liquidity — the ability to get a hold of your money and actually use it whenever you want to, without waiting, penalties, bottlenecks, shutdowns or disasters of any kind standing in your way.
You might also ask: “Isn’t the United States government also having its own share of financial difficulties with huge budget deficits? If those difficulties could get a lot worse, why should I trust the government any more than I trust other investments? Why should I loan my money to Uncle Sam?”
The United States is the world’s largest economy, with the most active financial markets and the strongest military in the world. Despite Uncle Sam’s financial difficulties, this has never been in doubt; and even in a financial crisis, that’s unlikely to change because the crisis is global. So its immediate impact on the finances of other governments is likely to be at least as severe.
More importantly, the United States government’s borrowing power — its ability to continue tapping the open market for cash — is, by far, it’s most precious asset, more valuable than the White House and all public properties; even more valuable than all the gold in Fort Knox. Those assets are like Uncle Sam’s home, land and pocket change. His borrowing power, in contrast, is like the air he breathes to stay alive.
Remember: The U.S. Treasury Department is directly responsible for feeding money to the utmost, mission-critical operations of this country, including defense, homeland security, and emergency response. The Treasury will do whatever it takes to continue providing that funding, and that means making sure they never default on their maturing Treasury securities.
Even in the 1930s, when a record number of Americans were unemployed, and when we had a head-spinning wave of bank failures, owners of Treasury bills never lost a penny.
Even in the Civil War, Treasuries were safe. Investors financed 65 percent of the Union’s war costs by buying Treasury securities. But the war was far worse than those investors had anticipated, leaving over half of the entire economy in shambles, raising serious concerns among those investors. However, the U.S. government made the repayment of its maturing Treasuries it’s number one priority over all other wartime obligations. Investors got back every single penny, and more.
My main point is this: The crisis ahead will not be nearly as severe as the war that tore our nation apart. If Treasury securities were safe then, we have no reason to doubt they will be safe today. Unfortunately, however, I cannot say the same for all of the money you’ve entrusted to a bank.
Question: “Suppose there’s a bank holiday and I need to cash in my Treasury bills. Since the Treasury Department and the Treasury-only money market funds use banks for transfers, won’t I be locked out of my money too?”
We actually have a real precedent for a similar situation. In Rhode Island in 1991, when the governor declared a state-wide bank holiday, all the state-chartered savings banks were closed down. Every single citizen with money in one of those banks was locked out.
At the time, one of our Safe Money Report subscribers happened to have a checking account in one of the closed Rhode Island banks. Thankfully, he had almost all of his money at the Treasury Department in Treasury bills, so his money was safe. But he called and asked: “The Treasury is set to wire the money straight into my bank account, which is frozen. Will the money the Treasury wires me get frozen too?”
In response, I told him to check his post office mailbox. Instead of wiring his funds, the Treasury had taken the extraordinary measure of cutting hard checks and mailing them out immediately. They wanted to make absolutely sure he got his money without any delay.
The moral of this story is that, even in a worst-case banking scenario, the Treasury will do whatever is necessary to get your money. We can’t forecast exactly how. But they will probably send you hard Treasury checks. And they’ll probably designate special bank offices in every city in every state where you can cash them in. Ditto for Treasury-only money market funds. [more]
Note from Scott: I disagree with Dr. Weiss on the safety of US Treasuries. I believe that, within as little as two to six months we will see the US government default (go bankrupt). This is unthinkable to virtually everyone with any extensive financial background. Nonetheless, I think it will happen. Will US Treasuries be safe?
I don’t know.
If the US dollar is suddenly replaced by the Amero (as forecast by George Green in Dollar Death Warning) how will Treasuries be affected?
I do know physical gold and silver are stores of real wealth, and have been since Jesus was a toddler. US Treasuries are still just a “promise to pay.”
Please do what you think is in the best interests of you and your family. Please be safe.
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Filed under: Markets & Economy, Mayhem | Tagged: bank holiday, weiss | 4 Comments »