Miscellany of a Cheshire Cat

The markets closed up today… by a lot. A lot of investors appear to have really liked the various government plans for saving the financial world. Plus, the banks were closed today in the U.S. That probably helped too.

I’m traveling for work Tuesday through Thursday this week. Monster Cat will be very upset that I am gone. He would already be suspicious except that I haven’t started packing yet. Just in case you’re curious, the photo here is the current wallpaper on my iPhone, lest I forget my dear little cat during my travels. He will not forget me either. I’m sure he will regale me with long, howling stories of his adventures wen I return. After he finishes whining that I was gone, of course.

This will be my token trip to New England while Fall colors are blazing. *sigh*

Sometime this week I need to write an essay for class Thursday night. The topics provided are thus far uninspiring. Hopefully something will happen when I start writing. (Yes, I’m getting off the plane and going directly to class. Won’t this be fun?) So far the class has been fairly useful. We did workshops for a bunch of our first essays last week and I got some excellent feedback and ideas from my classmates.

So lots to do this week… lots accomplished today (except I haven’t packed yet). I’d be okay with skipping it all and calling tomorrow Friday. Are you with me?

tags: finance, monster cat, random, travel, writing

This American Life did an excellent episode this weekend that lays out some of the intricacies of the current crisis, which dominoes are falling and what pushed them over. You can download the whole episode as a podcast from iTunes or listen to it online at the This American Life Archive. It’s an hour long and goes into details about the commercial paper market, breaking the buck and credit default swaps and other financial concepts in the forefront these days.

What’s remarkable (to me at least) is just how much bad debt and ridiculous credit were and still are flying around out there in our financial system. Credit card companies will give us tons of credit on little shiny pieces of plastic, assuming our credit is decent. With a little creativity, a person could get a credit line well over their ability to cover simply by spreading themselves across several credit card companies. The greater financial system has a similar exuberance for extending credit it would seem…

Companies were making money by “insuring” bonds without having the capital to pay out in the event of a failure. An institution can hide so much debt that in our (legitimately) paranoid times, no one wants to lend to anyone else leading to the commercial paper market almost freezing up for lack of lenders and available loans. The commercial paper market directly effects businesses’ ability to cover expenses (such as payroll) while waiting to get paid by their customers, expand, and compensate for losses or slow periods. I’m not sure if the above episode of TAL will reassure you, scare you or just make you angrier… but it’s great information to have given that, despite the bailout being signed into law, the stock market is still tanking and credit is still more than a little tight. It’s going to take a while to get out of this crisis.

NPR has also started the Planet Money podcast to try to keep up listeners up to date on the ever-changing news of what’s going on with the markets. I just started listening to it but it’s a little like listening in on a conversation among friends who have more time to keep up with these things - informative, informal and terribly useful.

tags: commercial paper market, credit default swaps, credit markets, financial, financial crisis, podcasts, this american life

Since this is new to a lot of us, I thought I’d share what I’ve learned about bank failures reading around… and writing it out will help me remember it too. Yes, I’m a geek.

First, the important bits about FDIC insured accounts:

• Your regular deposits are insured up to $100,000 per person, per institution/bank.
• Your retirement accounts are insured up to $250,000 per person, per institution.
• Money Market accounts are not covered under FDIC except for the special program announced last week. This program insures funds in accounts as of September 19, 2008. So if you already had cash in your money market last Friday, that cash is covered. Any additional cash added after Friday is not covered. (My understanding is that they will be covered as part of the $100,000 per institution for regular deposits but I’m not certain.)

Who’s the FDIC?
The Federal Deposit Insurance Corporation.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

In short, they’re here to help.

What exactly causes a bank to fail?
A bank fails when it doesn’t have enough assets to sufficiently cover its deposits (more accurately, regulators step in when the capital ratio falling below 5% of a bank’s assets). This might because they’ve made risky loans (can you say mortgage crisis?) or have made loans in excess of what they can cover with their assets.

As with Washington Mutual, when a bank qualifies for failure, the FDIC steps in to seize the bank to solicit bids from potential bank-buyers to purchase the failed bank. Customers don’t see much change and usually only experience a day or two of service interruption. Their accounts are transferred to the purchasing institution and FDIC insurance kicks in to cover the difference between the original bank’s assets and the deposits.

What banks have failed lately?
Handily, the FDIC keeps a list. Six banks have failed since August 1, 2008 and 13 have failed total this year… so far. Washington Mutual is the biggest on the list (in fact it’s the largest US bank to fail ever). What’s somewhat comforting is that, up until WaMu’s failure, most of the failed banks appear to be small, local banks which would be particularly susceptible in the current economic environment. (i.e. they don’t have the volume of available assets to withstand the kind of wild “adjustments” we’ve seen in the market not to mention getting easily battered by the housing market.)

If your bank fails…
Don’t panic.
Keep paying your car loan, mortgage, etc. as you usually would.
Usually the “news” will go up on their web site fairly quickly but not necessarily how you’d expect - WaMu already has “JPMorgan Chase” across their front page but you have to dig for any hint of the failure in their News section.
Contact the bank directly if you have any questions. (Bank failures attract scams, so be careful!)

tags: bank failure, banking, banks, fdic, washington mutual