Another Bank Failure… More to Come, U.K. Lender Slams Markets, Oil and Gold Forecasts, and More!

by Addison Wiggin & Ian Mathias

  • FDIC kicks into action with fourth bank failure of 2008… why this could be just the beginning
  • Meanwhile, banks cash up to cover future losses — only to fall further behind
  • How one U.K. earnings report this morning has the world on edge 
  • Oil pulls back, pundits declare oil bull dead… Kevin Kerr’s dose of reality
  • Ed Bugos also "parts with the consensus" on gold
  • Plus… Greenspan’s grand plan for American renaissance?  A reader’s take, in free verse

  Another FDIC-insured bank has failed — the fourth this year.

First Integrity Bank — an ironically named Minnesota institution — was shut down by the FDIC over the weekend. A series of bad bets and “unsound practices,” according to the FDIC, put the bank’s core capital ratio at negative 0.2%.

We write a lot about banks here in The 5… and not just because that’s where the money is. Back in the 1930s, during the last serious credit crisis facing the global economy, some 10,000 banks failed in the U.S. alone. Failed banks were the harbinger of bad things to come in the economy, on the political landscape and beyond. That period also gave us the FDIC.

When he became seriously ill, Dr. Kurt Richebacher was in the process of documenting a “balance sheet” recession among banks in the U.S., one he feared could lead to an all-out depression if not handled correctly by regulators. History, he believed, was repeating itself right before our eyes, despite oversight by the Feds.

The number of banks on the FDIC’s “problem list” — like First Integrity — rose nearly 20% in the first quarter, to 90 banks. That’s up 70% year over year.

  The combined profits of all FDIC-insured banks plunged 46% in the first quarter. Banks in the U.S. made $14 billion less last quarter than they did the year before.

Here’s what makes that stat remarkable. FDIC banks had “voluntarily” set aside $37 billion by the end of the first quarter to cover losses they expect in the near future — a 20-year high. But even in spite of these cash cushions, the banking industry’s “coverage ratio” — the percentage of troubled loans that could be rescued by such reserves — is at a 15-year low.

“This is a worrisome trend,” admitted FDIC chairwoman Sheila Bair. “It’s the kind of thing that gives regulators heartburn.”

Yeah… your editors, too.

  Wachovia axed its CEO, Ken Thompson, this morning. If you haven’t been keeping track, there’s hardly a CEO on Wall Street who has kept his job during the mortgage meltdown. Citi, Merrill Lynch, Bear Stearns, UBS and now Wachovia have all put their CEOs out to pasture in the past year.

Like those before him, however, Thompson walks away unscathed toting a severance package worth nearly $9 million.

  Banks in the U.K. are giving investors around the world a rash this morning too.

Bradford & Bingley, the U.K.’s biggest buy-to-let lender, announced its profits fell 48% and its mortgage-related write-downs quadrupled. The bank also announced it had sold 23% of its assets to Texas-based private equity group TPG.

A “tougher economic environment will continue to push arrears beyond the current level,” added B&B spokespeople encouragingly.

European investors reacted to the news by hitting the panic button. B&B stock plunged 30%. Banks all across the U.K. got punished: Barclays, HBOS, Royal Bank of Scotland and Lloyd’s all fell.

When the dust settled, nearly every major euro-zone stock index fell at least 1%.

  In response to the global angst over mortgage-related banking crises, the federal government has also started handing out “stimulus” checks, hoping to keep consumers from freezing up the way banks are.

This morning, half of U.S. citizens have been stimulated. The program has passed the $50 billion mark… the unofficial halfway point in this stimulating program of $600 handouts.
When the stimulus plan was finalized in February, gas was less than $3 a gallon. At the time, the National Retail Federation estimated 12 million rebate recipients would spend their check on gasoline.

Today, with gas a balding man’s wispy comb over away from $4 a gallon, approximately 17 million Americans say they’ll spend all their stimulus on gas — up 40% in three months.

Similarly, surveys by the International Council of Shopping Centers say 51% of respondents will use their checks to pay down debt — up 10% from February.

  The U.S. consumer hasn’t been this worried about inflation in 26 years. But according to Friday’s Reuters/U. of Michigan consumer sentiment index, the average consumer expects prices to rise more than 5% over the next year.

Long-term inflation expectations are at a 13-year high, too. Consumers expect the dollar to lose value at an annual rate 3.4% annually for the next 10 years… the highest inflation forecasts since 1995.

That’s up 17% just from March, when the same group of polled consumers expected the money in their pockets to lose value at the much slower rate of 2.9% per year.

  And no wonder, U.S. drivers can expect to pay record-high gasoline prices for the 25th consecutive day today. The national average crept up to $3.97 this morning. Twelve states now feature statewide averages over $4 a gallon.

  The U.S. manufacturing industry remains in contraction, reports the Institute for Supply Management today. The ISM’s measure actually improved from April to May, up 1 point. But at a score of 49, the index is still below the 50/50 line that marks the difference between growth and contraction.

  If you listen to the media, you’d think oil was getting cheap again. Light sweet crude did trend down after Friday’s U.S. close, but it still rings in around $125 this morning.

“Let’s be serious,” writes Kevin Kerr. “Oil has pulled back to $125, not $60.

“Think about the parabolic rise in oil we have seen in just the last six months. It’s incredible, and it’s overdue for a correction. But that doesn’t mean that this is the end of the longer-term bull market or global demand — not by a long shot. The idea that this was some kind of a bubble — with oil really worth $40 — is a pipe dream.

“The simple reason is that we are using more and more fuel and finding much less. Peak Oil is here, and it doesn’t feel good.

“Still, Congress can’t let it go. There is no ‘evildoer’ in the oil market, no cartel of traders that manipulated the oil markets to get us to this price. The Commodity Futures Trading Commission is even getting a new mandate and a lot of power.

“If they continue on their latest witch hunt to find the traders responsible, it won’t matter. Those funds will simply flee into new oil markets springing up in Dubai and elsewhere.”

  There is "no quick fix" for high oil prices, Treasury Secretary Hank Paulson today admitted today. “I don’t think this is about financial investors,” Paulson said while entertaining a band of reporters following him around the Middle East, “I think this is about long-term supply and demand.”

“I don’t see a lot of short-term answers,” he added, slightly less glum than our Maniac Trader.

  The dollar index held onto 73 over the weekend.

The Bradford & Bingley crisis did wonders for the pound this morning, kicking a cent and a half off the top in overseas trading today, to $1.96. The euro’s holding steady after last week’s profit-taking… $1.55 this morning. The yen’s at 104.

  Gold managed a decent gain over the weekend and this morning … the precious metal’s up $20 from Friday’s low to $890 as we write. Still, the growing consensus among financial commentators is that gold’s run might be running out of steam.

“That news is so old I’m feeling young again,” says our own gold adviser Ed Bugos. “Given the still largely overlooked inflationary fundamentals, I have to part with the consensus. One insight we could draw from the oil experience is that it has gone beyond the wildest predictions anyone could muster a few years ago. If you had called oil at $200, or even $130, back in 2000, you would have been fired. You would have been so far out on the fringe they’d have to make a new club for you.
“With the Nasdaq tech bubble, the real estate bubble that followed and now the oil bubble (relative to gold), bull markets have a way of going higher than anybody expects.
“The commodity bull market is not about economic growth or the finiteness of commodity stocks. It is about money and inflation. It is about gold. It is about the viability of a fiat currency monetary and fractional reserve banking system.
“When the market realizes this, the gold market will no longer obey the consensus. That is, it won’t trade so rationally, if you will. You won’t see the healthy corrections that you are seeing now.”

  “By what I’ve gathered from the posts from readers,” writes a reader, “Alan Greenspan is considered the sole cause of our current economic malaise. While his poor choices and deliberate manipulations did enable our current financial drama, Alan Greenspan and is just a symptom of an underlying illness in our society — corruption.

“The only purpose of the Federal Reserve Bank is to serve as a control mechanism for the political classes to extract unearned wealth from the working classes. It is one of many such mechanisms.

“We can’t say we weren’t warned. Our Founders, through the U.S. Constitution, clearly spelled out the need to use ONLY gold and silver as legal tender and outlawed a private central bank. Once the nation and our elected officials began accepting violations of our founding laws, a collapse of order is the inevitable result. Don’t put all the blame on Mr. Greenspan.

“The problem started back in 1913.”

  “Why all the Greenspan bashing?” asks our last reader. We must admit, this is the first reader response we’ve received scripted as a freestyle poem:

“After reading Ayn Rand’s works twice
And Alan Greenspan’s early writings,
It is obvious to the most casual observer
That what Alan did to the dollar
Was well thought out and done on purpose
So he could see Ayn’s prediction of the collapse
Of the dollar as well the demise of the U.S.
Happen in his lifetime… he has probably done us
All a favor (in the long run) to expedite the collapse
Of our fiat currency. I will bet you $100 to a donut
That he is sitting on gold and laughing his ass off!
If you have been taking Agora Financial’s advice over the years,
You’ll be just fine.
Will there be blood in the streets? You bet!
Will it hurt? You bet!
In the long run, will we be better off? You bet!

“A favorite quote of mine from Bucky Fuller:
‘You never change anything by fighting the existing reality.
To change something, build a new model
and make the existing model obsolete.’
“Greenspan should go in the history books as a hero
That shaved decades off the collapse of the dollar!”


Addison Wiggin
The 5 Min. Forecast

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