Archive for November, 2009
The FDIC: This Time It’s Real
Posted by Jody Eisenman | Filed under Uncategorized
Readers of this blog already know that the FDIC has been running out of reserves due to the high number of bank failures. As I wrote back in September, the FDIC was down its’ last 10 billion in reserves. With the failure of fifty more banks in the third quarter (the most in 17 years) and 552 banks on the FDIC watch list, that cash has now disappeared.
According to bank accounting, one must reserve funds in the event of loan losses, or in the case of the books of the FDIC, bank failure. When you more the money to the reserve for bad debts (in this case future bank failures), you actually decrease your cash levels from an accounting standpoint. Thus, even though the FDIC still has cash, their actual financial statements now show a balance of negative $8.2 billion. This is a drop of over $18 billion since the second quarter. With 7% of all US banks on the governments’ problem list, it is incredibly likely that these writeoffs will continue for the immediate future. Therefore, the problem of how to replenish the reserves at the FDIC still exist. I refer my readers to the blog post above for possible solutions.
Dubai World
Posted by Jody Eisenman | Filed under Uncategorized
The market took a breather on Black Friday, with the Dow Jones falling 154 points on a slow trading day. The chief culprit was Dubai. Dubai is situated on the Persian Gulf, and has the largest population of the United Arab Emirates. The building boom in Dubai has been extraordinary, and it includes the most luxurious hotel in the world, the Burj Al-Arab. As the real estate recession took hold, many projects were put on hold, and prices have fallen dramatically. Under Dubai’s legal code, a debt default could lead to jail, so you have the curious phenomenon of hundreds of luxury cars being abandoned with the foreign born owners fleeing the country.
More importantly, Dubai World, the investment arm of Dubai, has announced that it needs at least a six month delay on repayment of their $60 billion debt. This has sent shudders through the financial markets, as many investors view Dubai as the jewel of the Persian Gulf. If Dubai is in trouble, the reasoning goes, can other Arab countries be far behind? In addition, this shows that the recession is far from over.
While any event could trigger a sell off ( and we have not had a significant one since March), I do not believe that this will be a major event. The reason is that Dubai’s neighbor, oil rich Abu Dhabi, will probably wind up bailing them out eventually. I also think that the abbreviated trading session on Friday probably exacerbated the situation. It should be an interesting trading session coming up.
Where Are We Heading?
Posted by Jody Eisenman | Filed under Uncategorized
Once again, the stock market and the economy seem to be heading in opposite directions. While the Dow Jones briefly hit another new yearly high yesterday, the overall economy continues to be weak. Today, the WSJ stated that almost one out of every four home owners are “under water”, meaning that they owe more on their homes than their homes are actually worth. While this does not they will all default tomorrow, it certainly isn’t a very good sign for the housing industry.
In addition, our nations’ debt is soaring. In an article from yesterdays’ New York Times (http://www.nytimes.com/2009/11/23/business/23rates.html?_r=1&th=&emc=th&pagewanted=print), they are focusing on the following:
- The deficit is now over $12 trillion.
- The interest alone on this debt is currently $200 billion; By 2019, it is projected to be over $700 billion.
- As the “baby boomers” begin to retire, the benefits due from Social Security and Medicare are due to explode.
What makes this situation potentially dangerous is that interest rates are still incredibly low. Right now, three month treasuries effectively have no yield at all, and even 6 month maturities have the splendid yield of 0.12. What that means is, if you put one million dollars in six month treasuries, you would earn $600 in interest for the six months. Hardly seems worth it, does it? Should interest rates rise, the debt service would clearly increase as well. As short term treasury rates really can’t go lower from here, there is really no chance for the debt service number to shrink unless the government either cuts services or raises taxes. On the other hand, a jump in rates could dramatically change the amount the government must pay every year.
Meanwhile, the stock market continues to soar…..
