By Denise McCosh
March 10, 2009
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I have received numerous requests as to which are the safest banks. In addition, I will try to address the issue of safe Insurers and safe Money Markets. This is about your financial safety and what actions to take to protect yourself and your family from financial hardship and waiting in line should there be a run on your bank, insurer (annuity account) or money market.
Safe Banks
Why should you care if your bank is safe or not if the US government will insure your deposits up to $100,000 or temporarily up to $250,000 until Dec 09?
How often you hear the phrase "history repeats"?
In the 1920's there were too many banks (just like today.) An average of 70 banks per year where failing. When the stock market crash hit, over 744 banks disappeared. Though out the depression and stock market crash about 9,000 banks failed.
Yep, I said Nine Thousand banks failed. When Franklin D. Roosevelt took office he shut down all banks for a one-week bank holiday. When this short “holiday” was over, 25% never reopened.
The number of annual bank failures is up significantly in the past two years. Under normal conditions, we might see 0-3 banks failures per year, in 2008 there were 25, this year we already have seen 19. We are already well on our way to surpassing 2008 and at this rate it will 100+ this year! Best-case scenario is we will only see several hundred banks failures. Why is this happening? Banks bought risky assets (such as mortgage debt and other highly leveraged securitized investments) and the ratings agency erroneously rated these risky assets as AAA, AA+ that was BS.
When banks fail, the FDIC has the stronger banks take over the weak banks and charges premiums to all other banks. The overall result is to weaken the surviving banks, and the weakest of these begin to collapse. Only the strongest banks survive as the banks with the lowest liquidity ratios fail.
This is why the FDIC has been on a hiring spree. For the past couple of years they have been trying to hire hundreds of workers to handle bank failures. In addition, they have been contacting retired workers from the S&L bailout who are experienced in liquidations of assets and attempting to hire them back for the liquidations that are expected. This information I obtained from the FDIC website.
Given, this disturbing trend up in the number of bank failures and the unbelievable global financial mess we are in, its important to safe guard your money. You do not want to be sitting at your desk working when you find out there is a run on your bank. You want to be in safe bank, where you can get a hold of your funds. Who knows how long it would take in a disaster to get government funds, in the meantime you have bills to pay (late payments will impact your credit score and future borrowing cost.) There is enough risk here to warrant taking action and moving to a safe bank. TheStreet.com offers ratings of the top two banks in each state.
I also recommend you read the safe bank reports on the Conquer the Crash website (Robert Prechter.) In addition, if none of these banks work for you can go to www.veribanc..com and purchase their Blue Ribbon Safe bank reports for your area of the country. It cost about $35 and is well worth it. They provide detailed financial ratios, including liquidity ratios on the top banks in your particular state or region.
Safe Insurers/Annuities:
Why should you care if your insurance company or annuity is safe if you are have a guarantee from your insurance company to receive your insurance coverage or annuity regardless of what the stock market does?
This guarantee can only make good on its promise if they invest in very safe, low return assets and have low payouts to policyholders. In the highly leveraged, risk taking environment that prevailed over the last decade, I doubt this conservatism prevailed in most cases. More likely, many insurers have taken on toxic assets to increase profitability - just like every financial/investment institution did. If one company does it, the rest followed in order to compete.
This investment in riskier assets could maintain the "guarantee" promised if the economy kept booming and leverage kept growing. But it’s come to a screeching halt. The value of the toxic assets held by insurers has fallen, as a result, so have the insurers profits. Just look at AIG!!!
AIG bought risky assets (such as mortgage debt and other highly leveraged securitized investments) and the ratings agency erroneously rated these risky assets as AAA, AA+ that, as I said above, was BS.
What could happen next?
As the economic downturn continues, more people are likely to pull their money out as they become fearful about their insurer's ability to continue to make good on their promises.
In addition, we are in an environment of increasing high unemployment, retirement accounts that are being decimated, huge consumer debts, and upside down mortgages. This situation will cause people to access money from the insurers simply because they need their cash. If cash is pulled out of the insurers due to fear of failure or just need for cash, then the weak companies will fail. When this happens, all assets will be frozen and you will not be able to get to your annuity.
There is enough risk here to warrant taking action and moving to a safe insurer for annuities and coverage's. TheStreet.com also offers a list of the safest US insurers including amongst others State Farm Life Insurance and Country Life Insurance Company.
Money Markets:
Why should you care if you have funds invested in a Money Market?
Brokers and banks tell you that Money Markets are as safe as cash. Really? Not True. The day after Lehman Brothers failed, Reserve Primary, the oldest money fund in the USA fell to 97 cents (it "broke the buck") and assets were frozen for seven days.
Shortly afterwards another Money Market "broke the buck." The fear of massive run on these Money Market funds pushed the Feds to backstop the difference until Dec 08, but now extended to April 09.
Why did the Money Markets lose money in the first place? Well they did the same thing as banks and insurers, except they invested in risky short term debt, that was erroneously rated as AAA or AA+ , They did this in order to pump up money market yields to attract more investors. Again if one money market does it, the rest followed in order to compete with the returns.
The only safe money markets are "TREASURY ONLY MONEY MARKETS" Many of the money markets today are being artificially supported by the government and that support is only slated to last until April, unless further extended.
Again, enough risk exists to take action and move to a safe "treasury only" money market. Remember all bank "deposits" are legally considered "loans" to the banks and if the banks fail, you risk losing your deposits. TheStreet.com lists American Century Capital Preservation fund, the Dreyfus 100% US treasury MMF and the Vanguard Treasury fund.
Be Safe. Take Action.
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