Here's another reason to expect a wave of bank failures soon...
The January 9 cover of American Banker said eight out of 12 Federal Home Loan Banks (FHLBs) would have less than the minimum regulatory capital if losses from mortgage-backed securities were deducted. On Friday, the Pittsburgh FHLB said permanent losses could exceed the bank's retained earnings – which has never happened in the FHLBs' 76-year history.
This is a big deal because, like with Fannie and Freddie, FHLB securities are owned by all FHLB member banks. There are currently more than 8,000 members, all of which own shares in their regional FHLB. When the FHLB fails – which is inevitable – thousands of banks holding FHLB securities will take writedowns. That'll bring many banks already weakened by losses in Fannie and Freddie preferred stock closer to insolvency.
Understanding government's role in the financial crisis is a test. If you don't understand the crisis happened not in spite of government "insurance" schemes and regulation, but rather was aided, abetted, and compounded by government interference in mortgage and banking, you fail the test.
The pound dropped to a record low against the euro and breached $1.40 for the first time since 2001 after Prime Minister Gordon Brown said he will spend an extra $142 billion to support England's banks and increase its stake in Royal Bank of Scotland (RBS). RBS said on Monday it expects a $41 billion loss for 2008, the largest in its history. RBS shares fell 68% this morning. Lloyds TSB Group fell 54%, and Barclays dropped 40%.
In a Bloomberg video interview, Jim Rogers said the U.K. is "finished." According to Rogers, oil sales from the North Sea were the only thing supporting its economy, and the oil is running out. London, a global financial capital, is also a "disaster" because many of the current economic problems originated there. Bankers and money managers left the U.S. to operate with less regulation in London. Rogers has sold all of his pounds sterling.
While everyone else is panicking, hedge-fund wunderkind John Paulson is making yet another billion dollars... His hedge funds held major short positions in British banks.
And with the pound and U.S. dollar under scrutiny, where are currency traders putting their money? In the countries with the largest trade surpluses – Japan, Norway, and Switzerland. European banking giant BNP Paribas forecasts the yen will appreciate about 14% against the dollar by June. Norway's krone is one of Goldman Sachs' top picks for 2009 (it's one of Jim Rogers' top picks, too). And Bank of America says the Swiss franc will gain against every major currency.
Maybe as speculations, these are good ideas. Me? I prefer gold to any paper currency.
Speaking of gold, S&A Short Report editor Jeff Clark just told his readers about "the perfect gold trade."
Jeff has put together a special gold position that will make you money if the price of gold rises, goes nowhere, or even falls a bit. It costs you zero cash to enter the trade (you actually get paid $290 per contract upfront). If gold is stagnant, you'll collect the $290 per contract. If gold hits $1,000 an ounce in the next year – which it already did last March – you'll make an additional $2,000 per contract. It would take a large decline in gold for you to lose a penny on the trade. Again, you'll put up no cash to profit, and you'll immediately add cash to your brokerage account. You can learn how to make this trade with a subscription to the Short Report, which we're currently offering at a deep discount. Click here to learn more.
Important news regarding our investment digest, The Daily Crux...
We have a different look and feel to the Crux we'd like you to look at today. We also have a new round of posts. Make sure to read about a bold, bearish prediction on Australia... a DVD you should buy today... what top value-stock investor Bruce Berkowitz is betting on... and why Jeff Clark is turning bearish. Please let us know your thoughts on the new website design at dailycrux@gmail.com.
We're also accepting applications for our Crux assistant position. We received some great resumes yesterday, but we'd like to see who else is out there. We're looking for a hard worker who loves the markets. You'll be reading and posting stories from hundreds of paid and unpaid sources. If you'd like your name connected to the best financial aggregator in the world, send us an e-mail to dailycrux@gmail.com with the subject line "Crux Assistant."
New highs: none.
In the mailbag... mixed feelings on Obama's inauguration. If you'd like to add to the discussion, send a note here: feedback@stansberryresearch.com.
"I think the 'man' is a total mistake. He and his liberal friends will destroy what Bush hasn't already destroyed in this country. Strong opinions to follow." – Paid-up subscriber Jim
"My husband and I are happy about the inauguration tomorrow. It's a real bright spot after many years of feeling we couldn't trust anyone at the highest level of our government to speak the truth. We have lacked basic decency in our leadership for the past 8 years.
"The overall situation facing America is difficult, but Obama seems to know how to share that in a calm way and with the resolve that we can prevail, reliant on working together and thinking of each other as well as ourselves. It isn't unrealistic or sugar-coated, it's motivational. Obama is respectful, articulate,
and intelligent. I don't agree with every policy idea he has, but he will uphold the Constitution and the laws of our land. This is the kind of leadership I want from our President." – Paid-up subscriber Amy Dennis
Ferris comment: I hope you're right, but I fear greatly you are wrong.
"Lotsa 'smoke & mirrors'! Besides, he still has not proved he was born in Hawaii... and the Supreme court whitewashed it... I wish him well however many in his Cabinet are laughing stock... and Hillary is just one of the many who are not qualified for the job they have... Why in hell would this populace elect a Muslim? Tis beyond me!" – Anonymous
"How do I feel about our new commander in chief? I believe he will only hasten the inevitable. The inevitable being the downfall of the good old U.S. of A. No one else is prepared to do so much damage to the intent and principles of our Constitution, and to the Constitution itself. Four years from now, writing a message such as this on the internet could well be a felony. Hope they don't make the law retroactive." – Paid-up subscriber Andy Collier
Regards,
Dan Ferris
Medford, Oregon
January 20, 2009