Tuesday, September 6, 2011

Not a Good Time to Be a Bank

Last night, £49bn was shed from the FTSE 100 in London. Once again, fear has gripped the share market. The Dow will likely follow tonight after the Labor Day holiday in the US.

Recent news about the UK economy and fears about the banking sector seem to have driven money into the safe haven of US dollars (choke) and gold, although gold hasn't likely yet seen the full result of this. Gold will likely climb easily over $1900.

Now is not a good time to be a Bank

But the problem with the Banks are of their own doing of course.

Banks in the US are only allowed to have a small percentage of the loans on their books as bad debts. However most banks have far more than the ratio allowed and have been marking up, what they know to be bad loans, to any value that will produce a result on their balance sheets that will satisfy the regulators.

This means the value of the assets backing the liabilites are inflated. A house used as collateral for a mortgage loan is marked up to whatever the bank thinks is fair value in order to make it's balance sheet, and therefore solvency, look good and legal.

How can this happen you ask? Well, talk to the regulators, they are the ones who allowed this change from 'mark to market' to 'mark to fantasy'. No one wants banks to be transparent. If they were, it would be clear glass; nothing there. This is the reason for the latest bout of fear.

So the threat of regulators delving into US banks, for their part in selling toxic mortgages to the likes of Freddie Mac, could show how healthy the banks really are and significantly hollow out the confidence of investors and depositors.

As they say in another realm of investing; "When the tide goes out, you see who is swimming naked".
Gold in New Zealand dollars: $2284.29 per oz
Previous all time high: $2279.35 per oz (23 Aug, 2011)

Silver in New Zealand dollars: $51.53 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodian
Your reference: an-001
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