Ironies Yet To Be Bernanke On Time Magazine

Helicopter Bernanke has been chosen as the Person of the Year 2009. That is just ridiculous in my personal opinion.

For someone along with Greenspan created the single biggest housing bubble (in size) in human history so far, bailing out all the guilty parties and mopping up all the mistakes with even greater mistakes through printing of more free money, he is “coined” as the savior of the economy from another great depression. A country does not attain prosperity through devaluing its own currency. Such acts when the confidence game is up will be met with great consequence. I have no doubts that history in the future will not have kind words for Bernanke, nor Greenspan (whose reputation has already been turning thru this financial crisis).

Aren’t you glad that banks are paying back all the TARP money? I guess all of them are hopeful eternally, and wishing that all the option ARM and alt-A borrowers will be paying back more when they start to reset to 25-year amortization schedule, starting now until the end of 2011. I think banks are very likely to negotiate all the option ARM mortgages back to 30 years or longer if possible. However, the biggest problem is that once the mortgages are re-negotiated, the mortgage payment will NO LONGER be less than the prevailing rent. Furthermore, who is going to pay down more principal towards a property that is already 10% to 20% under-water? I expect that the two factors combined will cause significant portion of the borrowers to simply walk away, or become home squatters to take advantage of one year of free rent through foreclosure process.

So when the hands of banks are tight, and they will tighten even more on the new loans. Some will probably go under and join the weekly FDIC’s Friday parade, and some may come back and ask for government money again. Ha, except that for the second time when they want to dip the “honey pot” again, the money will not be available because American and politicians will be so upset and simply shut down the institutions. If they are able to sustain without asking for more money, you can be sure that lending in economy will take a dive, driving USA onto the same Japanese-style deflationary track. But don’t worry, our beloved Helicopter Bernanke will come in his helicopter in a hurry, bombing free money from the sky at the fastest speed. It is likely that in the not-too-distant future, we will see a more volatile stock market, dropping at first due to the resurgence of financial crisis, and then zoom back up and onto new highs (higher than 2007) due to out-right devaluation of US dollar.

By the end of 2010, US fiscal deficit will probably end at 13.5 trillion dollars or more. The speed that it will increase will be exponentially faster until it collapses. Before US goes full speed on this exponential debt curve, there may be still a chance of stopping before the point of no return. But such opportunity does not exist as long as Bernanke is still in office as Federal Reserve chairman. I guess Greenspan will be remembered as the Bubble Man, while Bernanke may be remembered as the Bubble-death Man, who would blow up the final bubble in $US and US bonds, without any further ability for US to attract/wield global capital.

Banks Paying Back Taxpayers Money

Ten large banks are paying back treasury with 68 billion dollars, so that they can be freed from government meddling in paying their executives. Now that all of their accounting book is blessed with marked-to-fantasy, they don’t need the cash anymore. Can we put in a clause in the payback that “please don’t come back again even if you’re insolvent (after squeezing out more bonus for executives)?”

I’ve said many times, and I will repeat it again. Option ARMs and AltA are resetting starting from about now until the end of 2011. The wave of notice of defaults is already coming (Dr. Housing Bubble has got all the charts here). It’s not a question of if, but when (the next wave of financial crisis will hit). Mark-to-fantasy by thinking that you have not sold your stocks (mortgages on the book of these banks) after 60% losses and that they will come back to full value after 10 years will not help at all. The end game will come, when the homeowners stop paying mortgage and/or walk away from properties. When the properties go into foreclosures and get sold, banks have to mark down the losses without a choice. The fact that banks are not in a hurry to foreclose all the properties tell you that the level of losses in a foreclosure will probably destroy the banks. By choosing not to foreclose (and not mark-to-market), insolvency can persist in fantasy land.

And before they go down, CEOs are going to squeeze out more from shareholders, bondholders, and taxpayers. They’re definitely a smart bunch.

Friday Is FDICs Day

With some 100+ banks (if not more) that probably will fail in the next two years, that averages out to be about 1 bank per week. Since FDIC is under-staffed in the first place, and you don’t want things to go too crazy, FDIC should probably be closing at least 1 bank per week, just to make everything and all the processes more smoothly.

The last Friday was First Priority Bank. The week before was First Heritage Bank in California, and First National Bank of Nevada in Nevada. Since it should be always Friday, you don’t need to worry on any other days.

IndyMac’s closure was certainly triggerred by a run on bank. The reason that FDIC wants people to emphasize that your money is “safe” as long as it’s under $100K per depositor is that such run on bank could be fatal for the financial system, since your money really doesn’t exist. For every dollar in your checking account, ten dollars can be lent out, not to mention that the reserve requirement for saving account is zero.

Closing the weak banks simply allows the game of financial systems to continue. I will certainly not wait in line to get my money back when my account balance is less than $100K. All the money “will be there”, and of course, I also know fully well that it’s also not there, since it’s lent out to crazy home buyers from 2004 to 2007.

Bank Reserve Balances Are Terrible

In two weeks of time, the bank reserves continue its swan dive. The whole banking system is now held and patched together by Federal Reserve. Without all the bailouts for the bankers, many banks should have gone under.

Here is the data for the current bank reserve (click to go to Federal Reserve data), at negative 100 billion dollars. Since last November which had been holding at above positive 40 billion dollars, the US bank reserves have gone down by 140 billion dollars, or 350%. The rate of deterioration is very fast also, at about 31 billion every month. What’s holding everything together is the increase in the term auction credit. Instead of having a contracting monetary base, everything is temporarily held together at about constant monetary base (but not M3 which is exploding at about 15 to 20% annual rate).

Again, one more emphasis on making sure your bank money is covered by FDIC insurance. Cash is only valid until the bank doesn’t go belly-up.

Looks like banks are not simply done with writing down their assets.

Why I Would Choose Emigrantdirect Over Others?

Obviously, when opening a bank account, interest yield is very high on my list. The more important thing than having the absolutely highest yield is whether the bank is consistently competitive in offering their bank yield. You don’t want to open a bank account and several years later go through all the hassle of moving money around to another better bank. Consistency for me is more important than absolutely highest yield. Among the online bank of choices from NetBank, ING, EmigrantDirect, CapitalOne, HSBC, IndyMac, both NetBank and ING have fallen behind the curve of competitiveness of the market. While NetBank still have the attractiveness of close to full banking service for writing checks and free online payments, ING has no additional attractiveness other than being the first to market with more credibility. IndyMac bank requires a minimum deposit of $25000 to get their highest quoted APY. For most people to find higher bank yields then, one is left with the choices of EmigrantDirect, CapitalOne, and HSBC. (There are always many other ones, but I’m only limiting my discussion to the more well-known choices.)

To narrow down my choice, I would be using a criterion that not many people pay attention to: financial risk of the bank. Most people overlook the financial risk of the bank when opening a bank account because bank deposits have FDIC insurance for upto $100K. But as with everything else, extra yield almost always come with extra risk. Nothing is riskless, even for bank accounts in my opinion. The financial risk with bank accounts is whether the bank institution will go belly up and force you to go through FDIC to recover all of your money below $100K. It’s a hassle that you would probably never want to go through. The best way to avoid that risk is to have your money split in two different banks, so that the probability of simultaneous belly-up is close to nil. This way, you will be always left with some money to get through the period of recovering your money from FDIC. But if you don’t want to have the hassle of managing two bank accounts, and just want to consolidate into one bank, which one of the above three would you choose?

From my stock investing experiences, I can tell you that I would choose EmigrantDirect over others. In 2002 slowdown, when I was looking for short-selling candidates in the area of consumer credits, I found two companies that had higher deliquency and bad loans on their consumer credit cards among others: Metris (MXT for its symbol, Yahoo’s message board & joked that you definitely don’t want to put your money under this mattress or Metris), and Capital One (COF for its symbol). And guess what? Metris is now under HSBC through acquisition, and Capital One has started offering banking services more actively. Is this a coincidence? I think not. In fact, it may really make a lot of sense. The only reason that banks want to offer higher bank yields than others is to attract more cash money, and nothing else. Why would a bank give you more interest money besides that? It’s a capitalistic society, and they are not charities. Now, the next question that you should ask yourself is that why do they want your cash. And the answer could be that they REALLY need it (for their delinquent real estate or consumer credit card loans). If they are desperate, or close to edge of going belly-up, you definitely don’t want to get into that mess.

While my information from 2002 is quite out-dated but still may be true, I really don’t want to take such chance with my money. Here are my views for each, assuming that not too much has changed since 2002:

  1. Capital One: Based on the risk assessment, this could be the worst choice. Why would they start offering banking services more actively? If you understand banking, you would know that for every dollar of bank deposit, they are allowed to lend out about $10 of loan. It’s called fractional reserve banking. With sufficient bank deposits, they can make both of their book on consumer loan and banking to look sufficiently decent, with this 10X help.
  2. HSBC: Because Metris was acquired by HSBC in Dec. 2005, your risk is averaged with the new merged company. I assume that the averaged risk should definitely be lower than Metris standalone, and therefore, HSBC should have lower risk than Capital One.
  3. EmigrantDirect: I cannot find their stock symbol (if it exists). I believe that they are probably a relative new player. A new player is good in the sense that it will take quite a long time before they screw up themselves totally, with the help of the 10X fractional banking reserve. They could pretty much mess up, and still limping forward. It’s very hard to get a bank to fail in general, and even harder to get a new bank to fail financially. While there are other risks such as internet security, I have no such information to be compared for these three banks. But a newer bank like EmigrantDirect in respect to financial risk of the bank should be on a solid ground.

I still believe that the above three should be quite good choices because it’s simply very hard to get a bank to fail. However, I prefer not to take a higher risk for such a tiny difference in the interest yield. Yes, you would earn $8 more a year on every $10,000 of deposit at Capital One, and receive $25 if you pay $100 Costco executive membership. And yes, you would earn $5 more a year on every $10,000 of deposit at HSBC. But the race of chasing the absolutely highest yield is simply elusive, especially when EmigrantDirect will be raising its 5.00% APY to 5.15% very soon.

Here is a short review for EmigrantDirect in case you want to read it over before opening an account. And if you appreciate for my effrots in offering you good financial information on this site, please open the EmigrantDirect account through the sponsoring ads on my site. It will help me defray the website hosting costs and misc. for the year and the coming years. I would really appreciate it.

P.S. Please do check out the comment sections. I won’t be pretending to “know all”. In fact, I probably looked a little stupid. But in any case, no one can know all, and no one can be perfect, and that’s why in the comment sections, there could always be some people who are kind enough to share their knowledge.

How I Bank: Online Banking

I actually started online banking back in 1998/1999 when I first read an article on online banking in BusinessWeek. The article was comparing two internet banks, and I chose to give NetBank a try. NetBank was one of the highest yielding banks in the nation at that time according to, and has been so until recent last 2 to 3 years. I made sure that NetBank was listed at FDIC database, and then I started my online banking.

In the beginning, I didn’t have a lot of trust. So I started by depositing some small amount of money, and tried to withdraw money from my account by checks & ATMs. After everything seemed to work fine without any problems, I started to move majority of my cash holdings to NetBank.

Because of the inconvenience of online banking, mainly due to very few free ATMs, I keep accounts at two local banks. In one local bank, I only have saving account to reduce the amount of money that I need to keep for minimum balance to avoid fee, since checking account usually has a higher minimum balance. In another local bank, I have both checking and saving accounts, so that I have at least a checking account locally. And my rationale to have two local banks is to simply increase the total number of free ATMs that I could use in a short distance from wherever I was. Of course, if you don’t have enough cash reserve, you probably want to limit the number of banks you have.

This strategy of having an online bank and two local banks have served me well. I can easily access my small cash need, while I can keep the majority of my cash in a higher yielding online account. Depending on your comfort level for accessible cash, you can put that amount in local banks, and put the rest in online accounts. Since I conduct most of my purchases through credit cards, my need for cash is low. I usually only keep about one thousand dollar in local banks, but it could vary from a few hundreds to just less than two thousands. And to avoid all kinds of ATM & bank fees, I define my accessible cash as any amount over the minimum balance that is required to avoid monthly fee. And I always use the ATMs of my banks.

I also take full advantages of (free) online payment offered by NetBank. Every month or quarterly, depending on the bill frequency, I pay my electricity, gas, water, trash, home owner association dues, and two of my credit cards automatically. My phone bill and auto-insurance is paid automatically through credit card instead of NetBank, since I can get the 1% cash rebate on credit card charges. Having all the bill paying arrangements, I spend probably less than 10 minutes for viewing or paying all of my bills, excluding credit card bills. And I make sure that there is sufficient amount of money for payments by setting up an automatic transfer of an upper estimate of the total bill from my major high-yielding money market account to the checking account that allows unlimited withdrawals.

In summary, I try to achieve the followings for my banking needs:

  1. Easily accessible cash by having two local banks.
  2. Higher yields for most cash in accounts at my online banks.
  3. Avoid any bank or ATM fees by using ATMs of my banks.
  4. Take full advantage for online bill payments to save time & stamps.

By the way, I opened accounts at INGdirect a few years ago, and now I’m still debating whether it is worth my time and trouble to move my INGdirect accounts to EmigrantDirect for their exceptionally high yields currently at 4.50% 4.65%.