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Now that Treasury Secretary Henry Paulson has proposed the mother of all bailouts for the financial sector, your bank and mine are fine, right?
Not yet.
Congressional factions are already lining up with add-ons ranging from economic-stimulus measures and additional safeguards for homeowners to limits on pay for bank execs now that Uncle Sam is taking risk off their shoulders.
Those add-ons could delay the Paulson plan to take dodgy debt off the books of banks. It took Washington six months to set up the Resolution Trust Corp. that bailed out savings and loans in the 1980s.
Not even leaders in the banking sector are expecting a quick resolution. Bank of America (BAC, news, msgs) chief Kenneth Lewis said Friday that problems won't stabilize for banks until real-estate values stop falling, and he doesn't see that happening until the second quarter of 2009. "It's not over yet," he told a meeting of the National Black MBA Association.
While we wait, many banks will continue to struggle. Some won't make it.
And that means those in the gloom-and-doom crowd will have more time to try to make you worry. They want you to run scared so that they can earn bigger profits from stock trades or vulture businesses that pick up assets that get really cheap during a panic.
But fear will only make the economy worse, and it ignores one critical reality: Your money is almost certainly safe.
Here's a realistic look at where real trouble remains -- and the three gloom-and-doom myths you can safely ignore:
The big ones won't disappear
Myth No. 1: The demise of Lehman Bros. (LEHMQ, news, msgs) shows that no bank is too big to fail.When the government let Lehman go bankrupt, the gloom-and-doomers declared no bank was safe. The designation of "too big to fail," thought to guarantee some form of rescue, had been rendered meaningless.
The rescue of giant insurer American International Group (AIG, news, msgs) exploded that myth, and the $700 billion Paulson bailout plan should put it to rest.
Two big banks with big exposure to bad mortgage debt -- Washington Mutual (WM, news, msgs) and Wachovia (WB, news, msgs) -- still have serious problems.
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Even if the government bails out them out, they'll have to book big losses on mortgage debt offloaded to Uncle Sam. With the economy weak, they'll be swamped by rising defaults on commercial-real-estate loans, business loans and credit card debt.
The gloom-and-doom line is that they could still fail. "Washington Mutual is insolvent, and so are a third of the 32 regional banks including Wachovia. They will go bust," predicted Nouriel Roubini of New York University's Stern School and a research shop called RGE Monitor.
Washington Mutual has tried to fight back, stating its deposits were unchanged from the end of 2007, at $143 billion. It also said it had $50 billion in borrowing available from "reliable funding sources." And it has put itself up for sale.
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"We expect the regulators and government to assist Washington Mutual as needed. In our view, it is too big to fail," Stifel Nicolaus analyst Chris Brendler says.
Wachovia says its recent dividend cut, cost cutting and potential asset sales will be enough to protect its credit rating without raising capital. It looks increasingly like a survivor. And yes, it's probably too big to fail, too.
That comes down to how much damage a failure would do to the financial system. The demise of AIG, an insurer of credit derivatives held around the globe, was seen as simply too devastating to accept. The failure of a big bank with a lot of insured deposits falls in the same category.
In fact, despite all talk of gloom and doom, most of the country's biggest banks are in pretty good shape. Here's a look at them:
| Rank | Company | Total assets (in billions) | Total deposits (in billions) | Stress level* | Commentary |
|---|---|---|---|---|---|
1 | $2,882.1 | $923.8 | 1.5 | Financially sound, but potentially nasty surprises lurk on the books of Countrywide and Merrill Lynch. | |
2 | $2,100.4 | $803.6 | 2.6 | May need to be split up to survive. | |
3 | $1,775.7 | $722.9 | 1.4 | Relatively unscathed by home mortgage crisis so far; it's a potential buyer in the mayhem. | |
4 | $812.4 | $447.8 | 13.2 | Says cost cutting, a dividend cut and asset sales will be enough to shore up financial strength. | |
5 | $609.1 | $339.1 | 1.2 | Prudent management means it's now one of the stronger banks standing. | |
6 | HSBC North America*** | $461.2 | $163.5 | 2.5 | No signs of fatal financial weakness. |
7 | $309.7 | $181.9 | 21.6 | Financial vulnerability makes it a takeover candidate. | |
8 | $246.5 | $135.1 | 1.0 | No signs of fatal financial weakness. | |
9 | $201.2 | $127.2 | 0.8 | No signs of fatal financial weakness. | |
10 | $177.2 | $119.6 | 1.2 | Big position in Coca-Cola (KO, news, msgs) stock helps save the day. |
*Near industry average of 1.4 is OK (lower is better). This is a measure of financial stress calculated by Institutional Risk Analytics. **Reflects Bank of America's acquisition of Countrywide Financial and pending acquisition of Merrill Lynch. ***Subsidiary of HSBC Holdings. Data source on deposits and assets: SNL Financial. Commentary by Michael Brush.
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