Recently, we experienced yet another bank failure. On Friday, July 11, 2008 at approximately 4:00 PM Pacific time, The Feds seized Pasadena, California-based IndyMac Bank. With a stunning $32 billion in assets, this is by far one of the largest savings and loan failures since Continental Illinois National Bank, which had nearly $40 billion in assets when it failed in 1984. They also have $19.06 billion in total deposits with approximately $1 billion that does not fall within the $100,000 FDIC insured prevue. Also, unsurprisingly, IndyMac is a spin-off of Countrywide Home Loans (1997).

On Monday, July 14, 2008, IndyMac opened as "IndyMac Federal bank, FSB", a conservatorship with the FDIC. Being under this legal restriction, the institution is only operating as a liquidation sale. Given the even larger issues with Fannie Mae and Freddie Mac, I doubt you’ll see any government aid here. IndyMac is the first of many failures this year. During the Great Depression, many small banks failed so we won’t see the sheer size in numbers but keep in mind one IndyMac is the equivalent of 100 small banks.

Currently, the FBI is investigating IndyMac, along with nearly two dozen banks, for mortgage fraud. This is not just a market correction, but a criminal matter, call it the "sub-crime." The FBI has 1,200 investigations underway. The victims of all this can be seen in the mounting foreclosures that are sweeping the nation.

Why do banks fail?

First, understand what a deposit is. For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised. A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults.

FDIC Insured?

The U.S. Government’s Federal Deposit Insurance Corporation guarantees to refund depositors’ losses up to $100,000; anything above $100K becomes $0.50 on the dollar. This guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.

In the case of IndyMac, the FDIC cost of insuring all those accounts is probably equal to about ten percent of the total money in FDIC, which means they’re going to have to charge a much higher premium, or they, themselves, will have to be bailed out by another part of the federal government.

Word of wisdom: NEVER EVER have a total of $100,000.00 in any single bank. Use it to diversify your portfolio.

ALT-A Fiasco:

Also known as "liar loans." Formally, they’re called no-doc, lo-doc, or Alternative A loans, which means you don’t have to provide a lot of credit history or income verification. This loan anomaly was concentrated in California and the Southwest. This is about the worst business to possibly be in on earth. IndyMac really specialized in these loan types.

How many failures so far this year (2008)?

According to the FDIC failed bank list, only five (5) banks have failed so far:

1. Douglas National Bank, Kansas City, MO: $7.3 million in assets (Jan. 25, 2008)

2. Hume Bank, Hume, MO: $11.2 million in assets (Mar. 7, 2008)

3. ANB Financial, Bentonville, AR: $2.1 billion in assets (May 9, 2008)

4. First Integrity Bank, Staples, MN: $35.8 million in assets (May 30, 2008)

5. IndyMac Bank, Pasadena, CA: $32 billion in assets (July 11, 2008)

How many more bank failures?

Kid, youze ain't seen nutin' yet!

The Royal Bank of Scotland is estimating 150 to 300 small to midsize failures in the next eighteen months. Sheila Bair, head of the FDIC, last December stated 76.

Compared to the Great Depression of the 1920s?

Between 1929 and 1933, 9000 banks in the United States closed their doors.

Other bank shutdowns:

* President Roosevelt shut down all banks for a short time after his inauguration.

* September 11, 2001 shutdown all banking in the United States for five full trading days.

* December 2001, the government of Argentina froze virtually all bank deposits, barring customers from withdrawing the money they thought they had.

Safe Banking?:

There are five major conditions in place at many banks that pose a danger:

1. low liquidity levels,

2. dangerous exposure to leveraged derivatives,

3. the optimistic safety ratings of banks’ debt investments,

4. the inflated values of the property that borrowers have put up as collateral on loans, and

5. the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances.

Offshore Banking is increasing due to the dropping dollar, runaway inflation (highest in 26 years), and falling stock market (<11,000). An offshore bank account will allow you to safely and privately explore, with few restrictions, the far reaches of the vast and diverse financial universe.

For example:

1. Asset protection.

2. Financial privacy.

3. Investment diversification.

4. Higher returns.

5. Currency diversification.

6. Safety and security.

7. “Insurance” against closure of U.S. securities markets.

8. Deferred taxes.