Thursday, February 28, 2008

Ben Brings the Pain

Note: Bronchitis is no fun.

So, Ben dropped the news on Congress...we may see a bank fail. This sent shock waves, along with the disappointing news on GDP and unemployment, that sank the market today.

But should we really be shocked by this statement? I don't think so. You saw Northern Rock bank in the UK basically fail and the government stepped in to prop it up. A company as large as Countrywide, which has it's own bank, basically went under if not for B of A stepping in and picking up the pieces.

So news that banks failing should not be big news. Banks are just like any other business out there and sometimes they fail. It is disturbing, no doubt. Nobody wants their money being held by a failing bank. But this is not something anyone should really be worried about.

A) The most likely bank to fail would be a small regional bank that has heavily invested in sub-prime mortgages or other off balance sheet instruments. B) You will probably see a bigger bank come in and buy out the smaller rival that is struggling and will never have to worry about the run on the bank. C) You are insured up to $100,000 by the FDIC or NCUA (credit unions) which covers that fast majority of it. So if your bank fails and a bigger rival doesn't buy it you would get a check cut for your money within 48 hours.

It is big news that the Fed would acknowledge the depth of the problems in the banking industry but it should surpise no one.

No comments: