On Wednesday, April 20, I revisited one of my original “crash prophets,” Warren Buffett, to see what the “Oracle of Omaha” thought might be in store for the U.S. economy down the road. In the latest Berkshire Hathaway Inc. Shareholder Letter that was released on February 26, Buffett, its chairman and CEO, stated that, “America’s best days lie ahead.” However, the third richest person in the world (2011 Forbes list) didn’t share that bullish outlook for the U.S. dollar. From that April post:
The Motley Fool’s Rich Smith wrote on the MSNBC website on March 28:
Let the word go forth: On Friday, March 25, 2011, Warren Buffett predicted the decline of the U.S. dollar.
In a speech given in New Delhi (where he’s hunting up some cheap Indian stocks), the chairman of Berkshire Hathaway warned investors to avoid “long-term fixed-dollar investments” such as 10-year U.S. Treasury bonds. Buffett worries that the $2.3 trillion in new money our government has pumped into the economy, when combined with interest rates so low they’re practically giving money away, are combining to dilute the value of the dollar.
As a result, Buffett warns: “If you ask me if the U.S. Dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”
What’s more, he’s matching actions to words. Over the last couple of years, Buffett has been selling off longer-dated bond holdings, shifting assets into cash and shorter-dated paper. Berkshire’s holdings of debt dated longer than 10 years dropped 31% over the past 18 months, while Berkshire’s cash holdings leapt 56%.
This weekend, the annual Berkshire Hathaway shareholders meeting took place in Omaha, and Warren Buffett shared his forecasts for the United States and its currency with attendees. Reuters’ Ben Berkowitz wrote yesterday:
Tens of thousands of Berkshire Hathaway shareholders who descended on Omaha this weekend for the conglomerate’s annual meeting got one unmistakable message from Buffett — no matter how bad the economy, or the deficit, or the political divide, the United States is as good a place to live and work as ever.
“I don’t see how anybody can be other than enthused about this country,” Buffett told Berkshire (BRKa.N) shareholders on Saturday…
The comments echo those Buffett made in February in his annual shareholder letter, but the words still may encourage investors looking sideways at the country, particularly after Standard & Poor’s put the U.S. government’s critical “AAA” credit rating on a negative credit watch.
Buffett told Reuters Insider that S&P’s move was premature, given the U.S. government issues debt only in dollars and can simply print more money to pay debt if absolutely needed.
“The United States is not going to default on any obligation,” Buffett told Insider in an interview after the annual meeting. “We are not a credit risk, believe me.”
Furthermore, “The World’s Greatest Investor” isn’t worried about another banking crisis anytime soon. Berkowitz added:
Buffett also affirmed his support for the banking sector, where he has big bets on Wells Fargo (WFC.N) and U.S. Bancorp (USB.N), calling the odds of another banking crisis “very very low.”
However, Buffett is still wary of the greenback. From the piece:
Where Buffett’s enthusiasm wanes to any degree, it is mostly in conversation on the dollar, which he said is sure to weaken over time, like most other currencies.
Buffett, as usual, said he was shying away from fixed-income investments for Berkshire’s part, even as he keeps some of his personal wealth in Treasuries for safety’s sake.
Berkowitz, Ben. “UPDATE 1-Buffett remains solid on the American economy.” Reuters. 1 May. 2011. (http://www.reuters.com/article/2011/05/01/buffett-economy-idUSN0113337320110501). 2 May. 2011.
I used to keep track of writedowns and credit losses by banks in the United States and Europe since the early days of the financial crisis. Curious as to where they stood today, I stumbled on the following tally while composing that last post on the U.S. banking crisis. From Reuters this morning:
Top European and U.S. banks have lost over $1.3 trillion on toxic assets and bad loans since the start of 2007.
Europe’s banks were seen losing $1.3 trillion in the 2007-10 period with U.S. banks forecast to lose about $885 billion, according to International Monetary Fund forecasts last May. Roughly two thirds of the losses were expected to come from loans and the rest from securities.
You can view their list of estimated losses on the Reuters site here.
“More Quickly Than It Began, The Banking Crisis Is Over”
-TIME website, April 10, 2009
The U.S. banking crisis continues. MarketWatch’s Ronald D. Orol reported yesterday:
The number of problem banks in the U.S. grew in the fourth quarter, with total failures reaching an 18-year high in all of 2010, the Federal Deposit Insurance Corp. said Wednesday, even as the agency reported another quarter of healthy profits overall for the banking industry…
But the number of banks on the FDIC’s “problem list” grew to 884 in the fourth quarter of 2010, up from 860 in the third quarter, and 829 in the second quarter. The institutions on the FDIC’s troubled list have low capital levels, and their names are not disclosed by the agency.
In 2010, 157 insured institutions failed, which was the highest number since 1992 when 181 institutions failed.
Orol added that the FDIC’s deposit insurance fund remained in deficit at negative $7.4 billion at the end of last year.
Not only are the number of banks shrinking, but so are the levels of lending. Last night Reuters reported:
On the face of it, the industry looks in good shape. The FDIC reported that banks had combined earnings of $21.7 billion, marking their fourth profitable quarter in a row.
But statistics showed that lending contracted for the 10th straight quarter to $7.38 trillion, down 0.2 percent or $13.6 billion.
Orol, Ronald D. “Problem banks grow in fourth quarter, FDIC says.” MarketWatch. 23 Feb. 2011. (http://www.marketwatch.com/story/problem-banks-grow-in-fourth-quarter-fdic-says-2011-02-23). 24 Feb. 2011.
“UPDATE 3-U.S. banks told they need to start lending again.” Reuters. 23 Feb. 2011. (http://www.reuters.com/article/2011/02/23/financial-regulation-fdic-idUSN2317925320110223). 24 Feb. 2011.
The International Monetary Fund has told some of the world’s largest economies to implement deficit cutting plans or risk a repeat of the sovereign debt crisis that has engulfed Greece and Ireland.
The warning by the Washington-based body today came as ratings agency Standard & Poor’s cut Japan’s long-term sovereign debt rating for the first time since 2002, saying Tokyo lacked a plan to deal with its debt.
The IMF said Japan, America, Brazil and many other indebted countries should agree targets for bringing borrowing under control. In an updated analysis on global debt and deficits, it said the pace of deficit reduction across the advanced economies was likely to slow this year, mainly because the US and Japan are preparing to increase their borrowing.
-The Guardian (UK), January 27
Despite all the efforts of governments and central banks around the world, the debt crisis is alive and well. As is the banking crisis. While going through my e-mails this morning I happened to come across the following from Martin Weiss, chairman of The Weiss Group (which includes Weiss Research and Weiss Ratings) and author of The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times. In yesterday’s issue of his Money and Markets letter Dr. Weiss wrote:
Indeed, just when Wall Street and Washington seemed to have most investors convinced that “the debt crisis is history,” a whole new series of shocks have rocked the world:
Egypt and Tunisia — supposedly models of economic stability and growth — are now prime candidates for financial defaults.
In response, Moody’s, Fitch, and S&P have hastily issued sovereign debt downgrades on both countries.
But no one — either in the U.S. or in the region — has a clue regarding the end game in the Arab world. Nearly all analysts have continually underestimated how far the upheaval can spread … how quickly governments can fall … how directly oil supplies can be crimped … and how broadly the crisis can impact the global economy.
Greece and Ireland — thought to be “saved” by the European Union and the International Monetary Fund (IMF) — are likely to ultimately default on their debts anyhow, according to a majority of economists surveyed by Bloomberg last week. Meanwhile, Portugal, Spain, Belgium, Italy, and other weak links in Europe are still reeling toward disasters of their own.
Several U.S. states are on the brink of financial ruin, facing $175 billion in deficits … $2.5 trillion in obligations to underfunded pension funds … and overall conditions so severe that Congress is quietly preparing new legislation to let them go bankrupt — possibly the only way out of their mess, according to the New York Times.
Hundreds of cities and towns are in worse shape, with one already- bankrupt city proposing that creditors get paid a meager five cents on the dollar.
And perhaps most ominous of all …
The IMF has just warned that the governments of the United States and Japan — the two single largest debtors on Earth — are risking a repeat of the sovereign debt crisis which engulfed Greece and Ireland.
Its reasoning: Despite endless budget debates, deficit commissions, and empty promises of “firm action,” neither country has lifted a finger to stop their debt explosions. This year …
• The U.S. is running its largest deficit of all time — nearly $1.5 trillion, according to the U.S. Congressional Budget Office, while …
• Japan has let its government debt burden soar past 200 percent of GDP, permanently crippling its economy.
Clearly, the debt crisis is not over. And obviously, we are not facing just one or two isolated brushfires. There are simply too many explosions in too many different regions and sectors to ignore.
What About the Banking Crisis?
Banking troubles may not be the lead headlines right now, but that doesn’t mean U.S. banks are out of the woods.
Quite the contrary, Weiss Ratings bank analyst Gene Kirsch tells us that:
• A total of 2,667 U.S. banks and thrifts now merit a Weiss rating of D+ (weak) or lower. And according to an evaluation of our rating scale by the Government Accountability Office (GAO), any Weiss rating in that category implies the institutions could be “vulnerable” to future financial difficulties or failures — not the best place for your money, despite FDIC insurance.
• In contrast, only 899 banks and thrifts merit a Weiss rating of B+ or better, which we consider strong.
Worse, on a state-by-state basis, the vulnerabilities in the banking industry are even more apparent! Gene scrutinized the banking environment in each of the 50 states plus the District of Columbia, and he found that:
1. Seven states are suffering a shockingly high rate of bank failures — 4 percent in California; 5 to 6 percent in Washington, Oregon, Georgia and Florida; over 8 percent in Arizona; and a whopping 11 percent in Nevada!
2. In 12 states, more than HALF of the banks domiciled there have a Weiss rating of D+ or lower, as follows:
3. As you can see in the table above, the banking environment in Florida and Arizona is the worst of all: If you walk into a bank or thrift domiciled in either state, the chances are better than 7 out of 10 that you’ll be dealing with an institution that’s vulnerable.
How do we know?
Our Weiss ratings are based on the data the banks themselves submit to the authorities every quarter. We weigh each bank’s capital, earnings, asset quality, and liquidity. We check their vulnerability to mortgage defaults, rising interest rates, and any major crisis we believe could impact your safety.
Since 1990, we have issued grades on a total of 1,533 banks that subsequently failed and …
• For 90 percent of those banks, we issued a clear warning to the public ONE FULL YEAR ahead of time (defined by the GAO in its study of our ratings as a Weiss rating of D+ or lower).
• On nearly all of the rest, we issued a warning or a caution flag at least a few months before the failure.
Now, in more recent times, the problems in the banking industry have gotten a lot worse. Not only have we seen more bank failures, but we also have had more BIG bank failures.
In fact, just in the last two years, 49 relatively big banks and thrifts (with $1 billion or more in assets) have failed — and Weiss Ratings has issued an advance warning on every single one.
So when we say that at least seven out of 10 banks domiciled in Florida and Arizona are vulnerable, we’re not exaggerating.
It doesn’t mean all of them will fail; many should be able to avoid failure. What it does mean is that nearly all of these banks are probably at risk.
You Ask: “If My Bank Fails, Won’t the FDIC Cover My Account up to $250,000?”
Yes. But never forget:
• The FDIC does not cover investments you may have in bank-holding companies — such as common or preferred shares, bonds, or debentures.
• The FDIC does not guarantee continuation of your interest rate, lines of credit, or other business you may have with your bank.
• And ultimately, given the state of the nation’s finances overall, don’t be surprised if future FDIC’s coverage of failed banks involves serious delays and inconveniences.
Most important, never forget that you DO have choices. As Gene points out, there ARE 899 U.S. banks and thrifts that are financially strong — with or without the FDIC.
Plus, there are also states in which vulnerable banks are rare and bank failures even rarer — such as Iowa, Nebraska, South Dakota, West Virginia, and even Texas…
Good luck and God bless!
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Couldn’t have said it any better myself.
Weiss, Martin. “Shocking New Failures Possible in the U.S. and Overseas.” Money and Markets. 31 Jan. 2011. (http://www.moneyandmarkets.com/shocking-new-failures-possible-in-the-u-s-and-overseas-2-42535). 1 Feb. 2011.
The banking crisis is alive and well in the United States. MarketWatch’s Robert Schroeder wrote on November 23:
The number of problem banks in the U.S. grew in the third quarter to the highest level in over 17 years, the Federal Deposit Insurance Corp. said Tuesday, even as the banking industry reported another quarter of healthy profits…
The number of troubled banks rose to 860 from 552 a year ago, the highest since the 928 institutions in March 1993. In the second quarter of 2010 there were 829 problematic banks…
The agency’s deposit insurance fund, meanwhile, remained in deficit at negative $8 billion.
So far this year, 149 banks have failed. From the UPI on November 20:
U.S. bank failures totaled 149 for 2010 by the end of the week, federal bank regulators said.
With failures of the First Banking Center in Wisconsin, the Gulf State Community Bank in Florida and the Allegiance Bank of North America in Pennsylvania, the Federal Deposit Insurance Corp. said bank failures for the year were now nine ahead of the total number of failures posted in 2009, The Wall Street Journal reported Saturday.
In comparison to the Great Depression era, during the 1920s an average of 70 banks failed annually across the country. After the October 1929 stock market crash throughout the first 10 months of 1930, 744 banks failed- 10 times as many. In one year alone- 1933- it’s estimated that 4,000 banks closed their doors. In total, 9,000 banks failed during that entire decade.
The U.S. banking crisis doesn’t appear to be going away any time soon either. Bloomberg’s Phil Mattingly wrote back in June:
U.S. bank failures through 2014 will drain $60 billion from the Federal Deposit Insurance Corp. fund that protects customer accounts in the event of a collapse, the agency said today.
“We expect bank failures to peak this year and start tapering off next year as the banking industry continues to heal and recover, but there are some uncertainties that lie ahead,” FDIC Chairman Sheila Bair said today at a meeting in Washington.
In light of all this information, how can one find out if their bank is safe?
Thankfully, a number of bank rating systems exist to help with this task. Three popular ones, Bank Star Ratings by BauerFinancial, Safe & Sound® by Bankrate.com, and Weiss Ratings on TheStreet.com, can be accessed on the Internet and are free of charge (BauerFinancial charges for more in-depth info about the institution being analyzed). Here’s a breakdown of the three free bank rating systems:
BauerFinancial, Inc. has been analyzing and reporting on the financial condition of the nation’s banking industry since 1983. According to their website, they have earned the reputation of “the nation’s bank rating service,” as hundreds of newspapers utilize their ratings for their readers. Ratings are derived from each bank and credit union being required to file a detailed financial report with federal regulators four times a year. BauerFinancial obtains this data in its raw form from the government. The quarterly data is subjected to a thorough analysis and is compared with historical data for consistency. Upon completion of the analysis, a star-rating is assigned based on a scale of zero to five stars with five stars being the strongest.
Bank Star Ratings by BauerFinancial
Bankrate.com’s Safe & Sound® service is a proprietary system designed to provide ratings information on the relative financial strength and stability of U.S. commercial banks, savings institutions, and credit unions. The system applies more than 20 tests to each institution to measure that institution’s capital adequacy, asset quality, profitability, and liquidity. Individual performance levels are determined from publicly-available regulatory filings and are compared to asset-size peer norms, industry standards, and key absolute benchmarks. Combined results form the basis of the Safe & Sound® ratings. When possible, the system also produces a report that provides a detailed explanation of the findings for each rated financial institution.
Safe & Sound® ratings provide a star rating system to evaluate the current financial status of financial institutions. The most desirable rating is five stars; the least desirable is one. Performing institutions will generally receive a rating of three or more stars with the majority of financial institutions falling into the three- to four-star range. The top retail banks, thrifts and best credit unions will have a star rating of three or higher.
Safe & Sound® by Bankrate.com
Every quarter, Weiss Ratings on TheStreet.com monitors the financial strength of 9,000 commercial banks, savings banks, and savings and loans across the nation. Ratings are derived, for the most part, from quarterly financial statements filed with federal regulators. Companies being rated are not granted the right to influence the ratings or stop their publication. Ratings are assigned by analysts based on a complex analysis of hundreds of factors that are synthesized into five indexes: capitalization, asset quality, profitability, liquidity and stability. These indexes are then used to arrive at a letter grade rating. A good rating requires consistency across all indexes. A weak score on any one index can result in a low rating, as insolvency can be caused by any one of a number of factors, such as inadequate capital, poor underwriting practices, operating losses, or the failure of an affiliated company.
Weiss Ratings on TheStreet.com
I decided to test the three bank rating tools out myself. Navigation-wise, all three are similar in that they are very simple to use. Information-wise, it’s a different story. Weiss Ratings on TheStreet.com only provides a letter grade rating for a particular bank. No other information is made available from what I could tell. BauerFinancial’s Bank Star Ratings also takes a minimalist approach, offering only a star rating for an institution when using the free search. However, as I mentioned previously, there are a variety of reports available for those desiring more information, starting at $10. Finally, there’s Safe & Sound® by Bankrate.com. Data-junkies like me will appreciate this rating system. Like BauerFinancial, Bankrate uses a star grade for each bank. However, Bankrate also provides a “Memorandum on findings” and “Financial statement” when possible as well. And the info provided is pretty substantial.
One more thing, perhaps a person is looking for a new bank and wants to find one that is “safe.” Weiss Ratings and Safe & Sound® is set up to do that as well.
All in all, when looking at a bank’s safety rating, if one wants to keep things simple (star rating or letter grade rating), Bank Star Ratings by BauerFinancial and Weiss Ratings on TheStreet.com accomplish this. If one wants to investigate further, Safe & Sound® by Bankrate.com is the best tool for the job. As for me, I’d use all three in looking at how safe my bank is. Obviously, there are no guarantees in life, and these ratings should not be relied upon exclusively in making banking decisions. However, they do offer valuable insights into a bank’s financial health.
(Editor’s note: Links to all three free bank rating systems have been added to the “Resources” page)
Schroeder, Robert. “Problem banks grow in third quarter, says FDIC.” MarketWatch. 23 Nov. 2010. (http://www.marketwatch.com/story/us-problem-banks-grow-to-860-in-third-quarter-2010-11-23). 10 Dec. 2010.
“U.S. bank failures reach 149 for the year.” UPI. 20 Nov. 2010. (http://www.upi.com/Business_News/2010/11/20/US-bank-failures-reach-149-for-the-year/UPI-89981290270591/). 10 Dec. 2010.
Mattingly, Phil. “Bank Failures Through 2014 Will Drain $60 Billion From FDIC, Agency Says.” Bloomberg. 22 June 2010. (http://www.bloomberg.com/news/2010-06-22/bank-failures-through-2014-will-drain-60-billion-from-fdic-agency-says.html). 10 Dec. 2010.
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