Shocking New Failures Possible in the U.S. and Overseas

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!

Martin