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Russ

Banking Alert

I didn't want to hit you with more banking bad news, but I felt I had to when I learned that 7 more banks were closed Friday, April 23rd by the FDIC. If you would like, you can read the story here.

All 7 just happened to be in Illinois. That makes a total of 57 for the year. On the plus side, it appears that the economy is ever so slowly trying to work its way back on track. This will eventually lead to job creation which will lead to banks getting paid on their mortgages. The problem is that hundreds of banks don't have time for a slow recovery, they need it now. You can expect to see a whole bunch of additional bank failures as the year goes on.


A Little Security

As far as economic news is concerned, good news/bad news was the norm last week. The good news trend is for our leaders to promise us more security. The bad news counterpart is that these promises could come at an unaffordable price. Let's look at some good news/bad news examples in our banking system. There is a proposed change to banking regulations that is going mostly unnoticed in the media. If you peruse the Federal Reserve Board's own website, you'll see that Federal Reserve (Fed) Chief Ben Bernanke wants the Fed to oversee all banks while they eliminate bank reserve requirements altogether. This could be good news/bad news of the highest magnitude.

Currently, the United States operates on a "fractional reserve" banking system. This means that banks are required to keep in reserve a percentage of the money they receive in deposits. Bernanke is actually suggesting we eliminate the requirement that banks maintain those reserves! Why would he do such a thing? The possible answers to that question come under the heading of "good news/bad news." Bernanke says those reserve requirements "impose cost distortions on the banking system," whatever that means.

According to Bernanke, the good news would come in lowering those cost distortions. Now let's look at the bad news. Right now, if you give the bank a dollar, they keep some of that dollar in reserve, and they loan out the remainder. All the while, the banks are praying the loans will be good. The problem is those loans are not looking very good. According to a watchdog committee's recent report to Congress, the current meltdown in commercial real estate mortgages could put 3,000 banks in jeopardy.

We see more than 700 banks on the "endangered species" list today, with the FDIC twenty billion dollars in the red. It is likely that eliminating banking reserve requirements will delay the implosion of many banks. However, that will only delay the inevitable. If the government doesn't have to step in and take control when a bank's reserves fall too low, that's good news for the Fed and the FDIC. The banks may be able to keep operating, but only on borrowed time, and that's bad news for us.

It seems apparent that if we'd had higher bank reserves, we might not be in this economic mess in the first place. What will happen if we completely remove the requirement for banking reserves? Today, Bernanke promises more economic security if the Fed can oversee all U.S. banks, large and small. We must therefore ask ourselves if any advantages and security gained might come at too high a price. As Benjamin Franklin said, "Any society that would give up a little liberty for a little security will deserve neither and lose both."

Here's a few bits that I found reported on Yahoo! Finance over the past week:

• Google reported a 1st quarter profit of $1.96 billion up from $1.42 billion in the same period a year ago.
• Bank of America's 1st quarter net earnings rose 0.7% to $2.83 billion.
• Mattel, the world's largest toymaker, reported their quarterly net income rose to $25 million compared with a loss of $51 million a year ago.
• Citigroup posted a $4.4 billion quarterly profit, its biggest quarterly profit since the 2nd quarter of 2007, versus a loss of $696 million a year ago.
• Hasbro reported that its 1st quarter net profit nearly tripled to
  $59 million.
• Halliburton posted a $206 million 1st quarter net profit and increased its workforce by about 1,200 employees.
• Novartis reported that its 1st quarter profit climbed 49% to $2.93 billion.
• Apple's quarterly net earnings surged to $3.1 billion from $1.6 billion in the same period last year.
• GM will invest $257 million in plants in Kansas and Michigan and said that it has paid back $8 billion in emergency loans to the U.S. and Canada.
• CenturyTel will acquire Qwest Communications for $10.6 billion.
• New York Times posted a net income of $12.8 million, compared with a year earlier loss of $74.5 million.
• PepsiCo's quarterly net income rose 26% to $1.43 billion.

All the headlines above represent good news in the economy. Don't you ever wonder why the media can't spend more time focusing on the good news that happens?

1 Lb of dried Cannellini Beans or any other white Bean - soak overnight in cold water
1/2 Onion, diced small
1 Carrot, diced small
1 Celery Stalk, diced small
2 Garlic Cloves, minced
2 Sage Leaves
Chicken Stock
1 Cup Ditalini, cooked according to package instructions
1 Cup crushed Plum Tomatoes
3 tbsp. Extra Virgin Olive Oil
Salt and Pepper to taste
Parmigiano Cheese, for garnish

In a large pot, sauté onion, carrot, celery, garlic and sage leaves in olive oil. Strain the beans and add to the pot and season with the salt and pepper to taste. Add enough chicken stock to cover ingredients and bring to a boil. Then simmer for 1 1/2 hours, or until the beans are tender. Next add the crushed tomatoes and pasta and simmer for another 20 minutes. Garnish with parmigiano cheese and serve.

If you have any comments or questions, please feel free to e-mail our office at newswire@jalbertfinancial.com.

Russell K. Jalbert, CFP^®, one of the nation's leading financial professionals, has advised successful individuals in the management and distribution of their wealth for more than 35 years. Russ has discovered many alternatives to conventional investment practices. His priority is to educate people to understand they don't have to accept risk in order to grow their money.