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Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis

September 26th, 2008 8:21 AM by Lehel Szucs

This a bit long but gives an interesting take of what is going on.  You can also click here and be taken directly to the report.

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Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis;

Too Much, Too Soon for the U.S. Bond Market

Submitted by

Martin D. Weiss, Ph.D. and Michael D. Larson

Weiss Research, Inc.

to

United States Congress

Senate Banking Committee

and House Financial Services Committee

September 25, 2008

Weiss Research, Inc. 2

Copyright © 2008 by Weiss Research

15430 Endeavour Drive

Jupiter, FL 33478

Martin D. Weiss, Ph.D., founder and chief executive officer of Weiss Research, Inc., is a

leading advocate for investor safety, helping thousands of investors judge the financial

safety of their investments. He holds a bachelor’s degree from New York University and

a Ph.D. from Columbia University. Dr. Weiss has testified before Congress many times,

providing constructive proposals for reform in the financial industry.

Michael D. Larson, Weiss Research’s interest rate and real estate analyst, was among the

first analysts to forecast the housing and mortgage crisis in 2004, and his July 2007

policy paper, “How Federal Regulators, Lenders and Wall Street Created America’s

Housing Crisis: Nine Proposals for a Long-Term Recovery,” accurately predicted the

deep and broad impact of the mortgage crisis on the broader economy that the nation

faces today. Mr. Larson holds B.S. and B.A. degrees from Boston University.

Weiss Research is an independent investment research firm. Founded in 1971, the firm is

one of the nation’s leading research and analysis firms for investors, providing

information and tools to help them make sound financial decisions. Its flagship

publication, Money and Markets, is a daily investment e-letter offering the latest news

and financial insights for investors.

Weiss Research, Inc. 3

Executive Summary

New data and analysis demonstrate that the proposal before Congress for a $700

billion financial industry bailout is too little, too late to end the massive U.S. debt

crisis; and, at the same time, too much, too soon for the U.S. Government bond

market where most of the funds would have to be raised.

I. Too Little, Too Late to End the Debt Crisis. Congress should

1. Disregard data based on the list of troubled banks maintained by the Federal

Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117

institutions with $78 billion in assets. However, based on a broader analysis of

recent FDIC call report data, we find that institutions at risk of failure include

1,479 FDIC member banks and 158 thrifts with total assets of $3.2 trillion, or

41 times the assets of banks on the FDIC’s list.

2. Think twice before providing a broad bailout for U.S. debts given the wide

diversity of mortgage holders and the great magnitude of the total debts

outstanding in the United States. Just-released Federal Reserve Flow of Funds

data show that, beyond mortgages, there are another $20.4 trillion in privatesector

consumer and corporate debts, plus $2.7 trillion in municipal securities

outstanding.

3. Recognize that, among banks and thrifts with $5 billion or more in assets, there

are 61 banks and 25 thrifts that are heavily exposed to nonperforming

mortgages.

4. Get a better handle on the enormous build-up of derivatives held by U.S.

commercial banks.

5. Base any legislation on (a) realistic estimates of the loan amounts already

delinquent or in default, and (b) reasonable forecasts of how many more are

likely to go bad in a continuing recession.

6. Recognize the inadequacies in already-established safety nets, such as the

FDIC for bank depositors, Securities Investor Protection Corporation (SIPC)

for brokerage customers, and state guarantee associations for insurance

policyholders.

There should be no illusion that the $700 billion estimate proposed by the

Administration will be enough to end the debt crisis. It could very well be just a

drop in the bucket.

Weiss Research, Inc. 4

II. Too Much, Too Soon for the U.S. Bond Market. There should also be no

illusion that the market for U.S. government securities can absorb the additional

burden of a $700 billion bailout without putting dramatic upward pressure on U.S.

interest rates.

The Office of Management and Budget (OMB) projects the 2009 federal deficit

will rise to $482 billion. But adding the cost of announced and proposed bailouts,

now approximately $1 trillion, it is undeniable that the federal deficit could double

or triple in a short period of time, driving interest rates sharply higher and

aggravating the very debt crisis that the bailout plan seeks to alleviate.

III. Policy Recommendations to Congress

1. Congress should limit and reduce the funds allocated to any bailout as much as

possible, focusing primarily on our recommendation #4 below.

2. If Congress is determined to provide substantial sums to a new government

agency to buy up bad private-sector debts, we recommend that the new agency pay

strictly fair market value for those debts, including a substantial discount that

reflects their poor liquidity.

3. Congress should clearly disclose to the public that there are significant risks in

the financial system that the government is not able to address.

4. Rather than protecting imprudent institutions and speculators, Congress should

protect prudent individuals and savers by strengthening existing safety nets,

including the FDIC for bank deposits, SIPC for brokerage accounts and state

guarantee associations that cover insurance policies.

IV. Recommendations to Savers and Investors

Regardless of what Congress decides, savers and investors should continue to

invest and save prudently, seeking the safest havens for their money, such as

banks with a financial strength rating of B+ or better, U.S. Treasury bills, and

money market funds that invest almost exclusively in short-term U.S. Treasury

securities or equivalent.

Weiss Research, Inc. 5

Proposed $700 Billion Bailout Is

Too Little, Too Late for the Debt Crisis;

Too Much, Too Soon for the U.S. Bond Market

Martin D. Weiss, Ph.D. and Michael D. Larson

On September 18, 2008, the President, the Treasury Secretary and the Federal

Reserve Chairman proposed a sweeping plan to bail out financial institutions, get

to the root of the debt crisis afflicting the U.S. economy and put it to an end,

requesting that Congress authorize approximately $700 billion in federal funding.

In addition, Congress is seriously considering expanding the bailout to include a

wide variety of credit sectors beyond mortgages.

In an earlier white paper, How Federal Regulators, Lenders, and Wall Street

Created America’s Housing Crisis — Nine Proposals for a Long-Term Recovery,

we demonstrated that the debt crisis was far larger, more widespread, and more

dangerous than most believed at the time.1 Similarly, in this paper, we demonstrate

that the proposed bailout is

?? too little, too late to repair the massive U.S. debt crisis; and, at the same time,

?? too much, too soon for the U.S. Government securities markets, where most of

the funds would have to be raised.

I. Too Little, Too Late to End the Debt Crisis

To better understand the magnitude of the debt crisis, we urge Congress to

complete a thorough review of the data, as follows:

First and foremost, we believe Congress should disregard data based on the list of

troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC).

The FDIC’s list has 117 institutions with $78 billion in assets. But given the

current proposal for a $700 billion bailout, it is clear that Administration officials

tacitly recognize that the FDIC list understates the problem. There are many more

financial institutions at risk or in need of assistance with their toxic paper.

We believe a more accurate count of problem banks can be derived from our

analysis of: (a) the derivative risks assumed by major banks, (b) the mortgage

holdings of the largest regional banks and (c) all banks and thrifts with

1 How Federal Regulators, Lenders, and Wall Street Created America’s Housing Crisis — Nine Proposals

for a Long-Term Recovery, http://www.weissgroupinc.com/whitepaper1/

Weiss Research, Inc. 6

TheStreet.com’s Financial Strength Rating of D+ (weak) or lower.2 Based on this

analysis, detailed in Appendixes A and C, we find that

?? 1,479 FDIC member banks are at risk of failure with total assets of $2.4 trillion.

?? In addition, 158 savings and loans are at risk with $756 billion in assets.

?? In sum, banks and S&Ls at risk have assets of $3.2 trillion,3 or 41 times the

assets of banks on the FDIC’s watch list.4

These numbers alone indicate that the $700 billion contemplated for the bailout

plan could be severely inadequate.

Second, we believe Congress should look beyond mortgage-backed securities held

by investors and seriously consider the data regarding nonperforming mortgages

themselves.

These data show that among institutions with $5 billion or more in total assets,

there are 61 banks and 25 thrifts that are overexposed, holding $1.50 or more in

nonperforming mortgages per dollar of risk-based capital. Thus, any attempt to

reform these mortgages, or the mortgage pools that are based upon them, is likely

to cause severe additional losses to these overexposed institutions. (See Appendix

B for listings.)

Third, Congress should think twice before providing a broad bailout for U.S. debts

given the wide diversity of mortgage holders and the great magnitude of the total

debts outstanding in the U.S., as detailed in the Federal Reserve’s Second Quarter

Flow of Funds Report.5

In this report, released on September 18, just one day before the President

announced the Administration’s $700 billion bailout proposal, the Fed estimates

that the nation’s mountain of interest-bearing debts has now grown to $51 trillion.6

Plus, it provides critical additional insights regarding the breadth of the debt

problems facing the nation, as follows:

2 TheStreet.com’s Financial Strength Ratings, formerly the Weiss Safety Ratings published by Weiss

Ratings, Inc., reflect each institution’s capital, asset quality, liquidity and other factors.

3 The $3.2 trillion in assets include the assets of Citibank NA, Wachovia Bank NA and SunTrust Bank

cited in Appendix A, plus total assets of FDIC member banks listed in Appendix C.

4 This represents a correction to a figure reported earlier.

5 Federal Reserve’s Second Quarter Flow of Funds Report,

http://www.federalreserve.gov/releases/z1/Current/z1.pdf

6 Ibid., page 60 (pdf page 68), table L4, line 1.

Weiss Research, Inc. 7

1. The ownership of residential mortgages is dispersed among many different

sectors. There are $12.1 trillion in mortgages on single- and multi-family homes

in the United States.7 But these are not held only by banks and S&Ls. They are

spread among a wide variety of institutions and individuals, all of which could

have similar claims to federal assistance, as described in items 2 through 6 below.

2. Fannie, Freddie and GSAs are still at risk. Despite the recent bailouts of

Fannie Mae and Freddie Mac, Congress must not lose sight of the fact that these

two institutions, along with U.S. government agencies (GSAs), currently hold $5.4

trillion in residential mortgages, according to the Federal Reserve.8 The fact that

these assets already enjoy a government guarantee does not prevent them from

continuing to deteriorate and requiring substantially larger funding than currently

contemplated.

3. Private sectors and local governments also own residential mortgages in

substantial quantities. The bailout plan would also have to cover:

?? The issuers of asset-backed securities, now holding $2.1 trillion in mortgages,9

?? Nonbank finance companies ($426 billion),10

?? Credit unions ($332.4 billion),11

?? State and local governments ($159 billion),12

?? Life insurance companies ($61.6 billion),13 plus

?? Private pension funds, government retirement funds and households

themselves.

4. Commercial mortgages are now going bad as well. The current debate tends

to focus exclusively on residential mortgages. But at many regional and superregional

banks, much of the risk is currently in the commercial mortgage sector,

where recent data denotes many of the same difficulties as the residential sector.

To truly get to the root of the problem, the Administration and Congress cannot

exclude these either.

7 Ibid., page 93 (pdf page 101), table L217, sum of line 2 and line 3.

8 Ibid., page 94 (pdf pages 102), tables L218 and L219, sum of line 17 and line 18.

9 Ibid., sum of line 19.

10 Ibid., sum of line 20.

11 Ibid., table L218, line 13.

12 Ibid., tables L218 and L219, sum of line 16.

13 Ibid., tables L218 and L219, sum of line 14.

Weiss Research, Inc. 8

There are $2.6 trillion in commercial mortgages outstanding in the United States.

As with residential mortgages, these are also dispersed widely beyond the banking

sector — $644 billion held by issuers of asset-backed securities, $263 billion held

by life insurers, $65 billion at nonbank finance companies and $37 billion at Real

Estate Investment Trusts (REITs).14

5. Mortgages are less than half the problem. Although it is true that the current

debt crisis in America originated in the mortgage market, it is not accurate to say

that the root of the crisis is strictly in this one sector. Rather, the debt crisis has

multiple and varied roots, with excessive risk-taking in credit cards, auto loans and

virtually every other form of private-sector debt.

There are currently $14.8 trillion in residential and commercial mortgages in

America. But beyond mortgages, there is another $20.4 trillion in consumer and

corporate debt. This means that mortgages represent only 42% of the privatesector

debt problem in America.

6. Local governments could be a higher priority. Overlooking the debt

problems of state and local governments could also be a mistake. Indeed, given the

essential nature of their services, including the pivotal role they play in homeland

security, it could be argued that their credit challenges take priority over those

faced by banks, S&Ls and Wall Street firms.

Currently, the Fed estimates $2.7 trillion in municipal securities outstanding,15

most of which have been reliant on a bond insurance system that remains on the

brink of collapse.16

In short, to truly get to the root of the problem as the President is requesting,

Congress’ new bailout plan would have to cover a lot of ground beyond just the

banking industry.

Fourth, we urge Congress to get a better handle on the enormous build-up of

derivatives in America, beginning with a thorough review of the OCC’s Quarterly

Report on Bank Trading and Derivatives Activities, First Quarter 2008.17

14 Ibid., page 95 (pdf page 104).

15 Ibid., page 60 (pdf page 68), table L4, line 5.

16 Money and Markets, “Ratings Collapse,” December 24, 2007,

http://www.moneyandmarkets.com/issues.aspx?Ratings-Collapse-1301; “World’s Largest Bond Insurers

Collapsing,” January 21, 2008, http://www.moneyandmarkets.com/issues.aspx?Worlds-Largest-Bond-

Insurers-Collapsing-1381; “The Collapse of the Great Ratings Scam,” March 18, 2008,

http://www.moneyandmarkets.com/issues.aspx?The-Collapse-of-the-Great-Ratings-Scam.

17 OCC’s Quarterly Report on Bank Trading and Derivatives Activities, First Quarter 2008,

http://www.occ.treas.gov/ftp/release/2008-74a.pdf

Weiss Research, Inc. 9

Although derivatives were originally designed to help reduce risk, it is widely

acknowledged that their volume and usage have reached such an extreme level

that many have become, instead, speculative bets which greatly increase the

systemic risk to financial global markets.

And although regulators have few details about these derivatives, most officials

now realize they were probably at the root of the panic that began to spread

throughout the global banking system in the wake of the Lehman Brothers

bankruptcy on September 15.

Therefore, it should be understood by all members of Congress that, to ward off

possible renewed waves of global panic, the bailout plan would also have to

address the following threats to the financial system:

?? The notional (face value) amount of derivatives held by U.S. commercial

banks is $180.3 trillion.18

?? One single institution, JPMorgan Chase (JPM), holds $90 trillion, or 49.9% of

all derivatives held by U.S. commercial banks, a concentration of risk that is

unprecedented in modern U.S. history.19 Therefore, any federal bailout of the

derivatives market would necessarily benefit JPMorgan Chase to a far greater

extent than any other financial institution, a pattern we have already witnessed

in the wake of the failures at Bear Stearns and Lehman Brothers.

?? Although it can be argued that notional values overstate the risk, the recent

failures of Bear Stearns and Lehman Brothers, both large players in the

derivatives market, illustrates that the large counterparty default risk

underlying the $180.3 trillion in derivatives cannot be understated. Currently,

the OCC reports that the credit exposure to derivatives (risk of default by

trading partners) is $465 billion, up 159% from one year earlier.20

?? U.S. banks with the greatest credit exposure to derivatives are HSBC (with

$7.21 in risk per dollar of capital), JPMorgan Chase (with $4.11 in risk on the

dollar), Citibank ($2.79), Bank of America ($2.15) and Wachovia ($.77).21 We

believe that exposure exceeding $.25 per dollar of capital is excessive.

18 Ibid., page 1.

19 Ibid., page 22, Table 1.

20 Ibid., page 1.

21 Ibid., page13, Graph 5A table.

Weiss Research, Inc. 10

?? Further, after Bank of America’s merger with Merrill Lynch, which reports $4

trillion in derivatives, and after a possible merger involving Morgan Stanley,

which holds $7.1 trillion, these exposures will likely be intensified.22

Overall, Congress should debate the bailout issues with its eyes open, recognizing

that any bailout plan that does not include these banks and other players in the vast

market for derivatives could leave a gaping hole through which financial panic can

spread again.

Fifth, for all of these debts and derivatives, a bailout plan would, in normal

circumstances, require (a) realistic estimates of the amount that is already

delinquent or in default, and (b) reasonable forecasts of how many more are likely

to go bad in a continuing recession.

However, the only estimates currently available are those reflecting actual writedowns

recognized by large, global financial institutions — over $500 billion.23

That figure does not include the thousands of other institutions among the sectors

cited above. Nor does it include losses incurred but not yet properly booked — let

alone losses not yet incurred.

To date, no government agency is providing such estimates. But without them, any

budgetary planning for this bailout is next to impossible. No one will know, except

in retrospect, if the bailout truly removes the cancerous debts from the economic

body or leaves most of them to fester and spread.

Sixth, Congress should recognize the inadequacies in already-established safety

nets, giving serious consideration to the following facts:

?? FDIC’s safety net for bank depositors is not adequately funded: The FDIC’s

funding, currently at $45 billion, is $32 billion less than the assets of banks on the

FDIC’s list of troubled institutions. Moreover, it represents only 1,9% of the assets of

banks and S&Ls we believe to be at risk, as stated earlier.

?? SIPC’s safety net for brokerage firm customers suffers two flaws:

1. No coverage for market losses due to brokerage firm failure. In a Wall

Street meltdown scenario, it is possible that multiple brokerage firms would be

unable to continue servicing customers due to financial or operational difficulties.

And until the authorities can sort out the mess, customer accounts would be

22 Merrill Lynch and Morgan Stanley financial statements.

23 Bloomberg News, Banks' Subprime Losses Top $500 Billion on Writedowns (Update1), August 12, 2008,

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSKLfqh2qd9o&refer=worldwide.

Weiss Research, Inc. 11

frozen, denying investors the ability to liquidate their securities to prevent

portfolio losses. As SIPC is currently structured, even though the failures would

clearly be a major factor contributing to the portfolio losses, the losses would not

be covered.

2. Member assessments have been laughably small. Member firms are charged only

$150 per member firm, regardless of their size. For large firms, this is less than

the amount typically spent on paper clips.24

?? Safety net of insurance policyholders cannot handle large insurance

company failures: State guarantee associations have inadequate funds to cover

policyholders in the event of the failure of several large insurers, with potentially

severe consequences for millions of savers and investors.

The experience of the early 1990s illustrates this severe weakness: Large life and

health insurers, such as Executive Life of California, First Capital Life, Fidelity

Bankers Life, and Mutual Benefit Life were taken over by state regulators. But state

guarantee associations had insufficient funding and, in many states, surviving insurers

could not afford the large amounts that would be required to cover policyholders. As

a result, the savings of two million policyholders with cash value life and annuity

policies were frozen for many months. And subsequently, those policyholders were

required to accept either (a) as little as 50 cents on the dollar in an immediate payout

or (b) replacement policies with inferior returns and terms.25

To adequately protect individual savers, investors and policyholders, each of these

safety nets will require substantial additional funding.

In sum, after carefully reviewing the above data and facts, there should be no

illusion that the $700 billion estimate proposed by the Administration will be

enough to end the debt crisis. It could very well be just a drop in the bucket.

II. Too Much, Too Soon for the U.S. Bond Market

There should also be no illusion that the market for U.S. government securities can

absorb the additional burden of funding massive government bailouts without

traumatic consequences.

In its Fiscal Year 2009 Mid-Session Review, Budget of the U.S. Government, the

Office of Management and Budget (OMB) projects the 2009 federal deficit will

rise to $482 billion. At the same time, the OMB seeks to minimize this record

24 SIPC Annual Report 2007, http://www.sipc.org/pdf/SIPC_Annual_Report_2007_FINAL.pdf, page 8.

25 See July 1991 testimony by Martin D. Weiss before the House Subcommittee on Commerce, Consumer

Protection, and Competitiveness and February 1992 testimony by Weiss before the Senate Committee on

Banking, Housing, and Urban Affairs regarding the insurance industry failures.

Weiss Research, Inc. 12

deficit by stating it will be only 3.3% of estimated GDP, which is lower than the

recent peak of 3.6% of GDP.26

However, the OMB made this projection before the recently announced or

proposed bailouts. Considering those that have come to light in the last fortnight

alone, the potential bill for the government’s largesse can be calculated as follows:

Fannie Mae and Freddie Mac $200 billion

AIG Insurance Corp. 85 billion

Financial market bailout proposal 700 billion

Total $975 billion

This bill, approaching $1 trillion, is so extreme, it is undeniable that

1. It could double or triple the federal deficit in a very short period of time.27

2. Such a dramatic increase in the deficit would drive up the cost of borrowing

not only for the U.S. Treasury, but also for other bonds and for millions of

Americans seeking a mortgage or other credit, since Treasury yields are the

benchmarks against which most borrowing is based.

3. To the degree that the Federal Reserve purchases U.S. government

securities for its own account to help support bond prices, it would devalue

the U.S. dollar, risking a dollar collapse and the flight of much-needed

foreign capital from the U.S.

4. Ultimately, either of these outcomes — sharply higher U.S. interest rates or

a U.S. dollar collapse — could seriously aggravate the very debt crisis that

the bailout plan seeks to address.

26 Fiscal Year 2009 Mid-Session Review, Budget of the U.S. Government,

http://www.whitehouse.gov/omb/budget/fy2009/pdf/09msr.pdf, page 1.

27 Economists should not seek to make a more precise federal deficit projection at this time, given the many

uncertainties and clouds now hovering over the U.S. economy and financial markets. Among the major

unknowable factors are: The final size and nature of any bailout legislation, unpredictable budget overruns

in any bailout program, the recovery rates of any bad assets purchased, and any further spread or deepening

of the debt crisis caused by a continuing recession, higher interest rates, or a falling dollar.

Weiss Research, Inc. 13

III. Recommendations to Congress

In light of these facts, we have four recommendations:

Recommendation #1. To avoid a sharp rise in interest rates or a collapse in the

U.S. dollar, Congress should limit and reduce the funds allocated to any bailout as

much as possible, focusing primarily on our recommendation #4 below.

Recommendation #2. If Congress is determined to provide substantial sums to a

new government agency to buy up bad private-sector debts, that agency should

pay strictly fair market value for the debts, including a substantial discount that

reflects their poor liquidity. Further, it should be clearly understood that:

?? Due to the recent sharp declines in market values and market liquidity, many of

the bad debts on the books of U.S. financial institutions are currently worth

only a fraction of their face value.

?? When the government buys these debts at fair market value, it will still leave

most of these institutions with severe losses.

?? Many of these institutions do not have the capital to cover their losses and will

fail despite the bailout.

Recommendation #3. Congress should clearly disclose to the public that there are

several significant risks in the financial system that the government is unable to

address with any new legislation, including the possibility of surging defaults on

debts not covered by the bailout plan, a collapse in the derivatives market, and a

chain reaction of corporate failures. It should also disclose that

?? Whether the bailout legislation is adequate or not to stem the debt crisis and

prevent financial panic, the government will need to prioritize the protection of

its own credit and seek to ensure the stability of the U.S. dollar.

?? The private sector, in turn, will need to handle any further spread of the debt

crisis largely without government financial assistance.

Recommendation #4. Rather than provide a safety net for imprudent institutions

and speculators, Congress should devote more effort to bolstering the safety nets

for prudent individuals and savers. These include:

?? The FDIC, which insures bank depositors, but has inadequate funding and

staffing to handle a large wave of bank failures. These should be increased

substantially.

Weiss Research, Inc. 14

?? Securities Investor Protection Corporation (SIPC), which was designed to

cover brokerage firm accounts, but, in practice, would not compensate

investors for losses due to brokerage firm failures in a Wall Street meltdown.

?? State insurance guarantee associations, which promise to cover insurance

policyholders, but which have repeatedly failed to live up to their promise

when large insurers fail.

In conclusion, unless Congress significantly modifies its approach and priorities, it

could produce the worst of both worlds: A failure to resolve the current debt crisis

plus the creation of a new set of crises that merely spread the panic and prolong

the pain.

IV. Recommendations for Savers and Investors

Many investors have unrealistic hopes and expectations regarding what

Washington can accomplish. Even if Congress moves swiftly to enact legislation

allowing the government to buy up bad assets, the government is expected to pay

far less than face value for them. In that case, banks will continue to suffer losses

and fail, uninsured depositors will continue to lose money, and investors will

continue to see their shares lose all, or nearly all, their value.

Therefore, regardless of what Congress decides, savers and investors should

continue to save and invest prudently, seeking the safest havens for their money,

such as banks with a Financial Strength Rating of B+ or better, U.S. Treasury bills,

and money market funds that invest almost exclusively in short-term U.S.

Treasury securities or equivalent.

In order to avoid banks, S&Ls and insurers that may be at risk as well as to find

stronger institutions, Weiss Research recommends that consumers take advantage

of the free financial strength ratings offered by www.TheStreet.com, under

Portfolio Tools. In addition, as a public service, Weiss Research provides an

informational 1-hour video on how to cope with the debt crisis, entitled “The X

List,” at www.moneyandmarkets.com.

Weiss Research, Inc. 15

Appendix A. Large U.S. Banks and Thrifts at Risk

Large U.S. banks and S&Ls at risk of failure may constitute the most immediate

threat to the global financial system. Among institutions with $25 billion or more

in assets, our analysis indicates that the institutions below are currently the most

vulnerable.

Table 1. Largest Banks and Thrifts Believed to Be at Risk of Failure

Bank or Thrift

TheStreet.com

Financial Strength

Rating

Credit

Exposure to

Derivatives

(% of riskbased

capital)

Total

Assets

($ billions)

Citibank NA C- 279% 1,292.5

Wachovia Bk NA C+ 78% 665.8

Washington Mutual Bank D+ 317.8

HSBC Bk USA NA D+ 721% 188.3

SunTrust Bk C- 174.7

National City Bk D 152.5

Sovereign Bk D+ 81.9

Huntington NB D+ 55.6

E*Trade Bank D+ 48.2

First Tennessee Bk NA D+ 37.1

Data: Federal Deposit Insurance Corporation (FDIC), Call Reports, March 31, 2008, and

Office of Thrift Supervision (OTS), Thrift Financial Reports, March 31, 2008.

Analysis: Weiss Research, Inc.

The analysis is based on:

1. TheStreet.com Financial Strength Rating of D+ or lower, reflecting low scores

in capital adequacy, asset quality, liquidity or other factors. In the table above,

three banks with a rating of C- or higher are included due to other weaknesses not

reflected in TheStreet.com Financial Strength Rating, as specified below.

2. Credit exposure to derivatives, as reported in the OCC’s Quarterly Report on

Bank Trading and Derivatives Activities, First Quarter 2008, shown above as a

percentage of risk-based capital.

3. Exposure to mortgages and mortgage-backed securities.

Weiss Research, Inc. 16

Appendix B. Large Banks and Thrifts with the Most Residential Mortgages

and Heavy Exposure to Nonperforming Residential Mortgages

Beyond current concerns regarding mortgage-backed securities held by investors,

there are two urgent questions for Congress that relate to the underlying mortgages

themselves: (1) Which large banks and thrifts have the most residential mortgages

in America? and (2) Which large banks and thrifts have the greatest exposure to

nonperforming mortgages? The answers are provided in the tables below.

Table 2. Large Banks with the Most Residential Mortgages

(FDIC member banks with $10 billion or more in assets)

Bank City State

1-4 Family

Residential

Loans

($ thousands)

Bank of America NA Charlotte NC 311,957,932

Citibank NA Las Vegas NV 197,775,000

Wachovia Bk NA Charlotte NC 170,593,000

JPMorgan Chase Bk NA Columbus OH 156,937,000

Wells Fargo Bk NA Sioux Falls SD 123,021,000

SunTrust Bk Atlanta GA 54,138,579

National City Bk Cleveland OH 47,669,280

RBS Citizens, NA Providence RI 44,427,070

US Bk NA Cincinnati OH 41,681,614

HSBC Bk USA NA Wilmington DE 34,716,831

Bank of America RI Providence RI 33,447,908

Branch Bkg&TC Winston-Salem NC 32,143,712

Regions Bank Birmingham AL 30,310,331

Wells Fargo Bk South Central Faribault MN 26,833,000

PNC Bk NA Pittsburgh PA 22,846,064

GMAC Bank Midvale UT 17,557,666

Bank of America CA NA San Francisco CA 17,372,179

Union Bk of CA NA San Francisco CA 16,773,374

Huntington NB Columbus OH 13,906,057

Capital One, NA McLean VA 13,083,201

Fifth Third Bk Cincinnati OH 13,000,578

Keybank NA Cleveland OH 12,910,665

Bank of the West San Francisco CA 12,513,574

First Tennessee Bk NA Memphis TN 11,932,922

Manufacturers & Traders TC Buffalo NY 11,213,708

Harris NA Chicago IL 10,686,930

LaSalle Bank Midwest NA Troy MI 10,551,417

M&I Marshall & Ilsley Bk Milwaukee WI 10,098,683

Bank of America OR NA Portland OR 10,070,446

Data: Federal Deposit Insurance Corporation (FDIC), Call Reports, March 31, 2008

Analysis: Weiss Research, Inc., TheStreet.com

Weiss Research, Inc. 17

Table 3. Large Thrifts with the Most Residential Mortgages

(OTS member thrifts with $10 billion or more in assets)

Thrift City State

1-4 Family

Residential

Loans

($ thousands)

Washington Mutual Bank Henderson NV 191,621,666

Countrywide Bank, FSB Alexandria VA 91,381,293

Wachovia Mortgage, FSB N Las Vegas NV 57,822,468

ING Bank FSB Wilmington DE 27,678,391

E*Trade Bank Arlington VA 26,298,247

Hudson City Savings Bk Paramus NJ 24,822,785

Sovereign Bk Wyomissing PA 19,571,461

IndyMac Bk FSB Pasadena CA 16,545,208

Citicorp Trust Bank, FSB Wilmington DE 14,787,107

Merrill Lynch B&TC, FSB New York NY 14,477,450

USAA FSB San Antonio TX 13,146,234

Amtrust Bank Cleveland OH 11,825,127

Astoria FS&LA New York NY 11,699,995

BankUnited FSB Coral Gables FL 11,356,571

Downey S&LA FA Newport Beach CA 11,011,485

Data: Office of Thrift Supervision (OTS), Thrift Financial Reports, March 31, 2008

Analysis: Weiss Research, Inc., TheStreet.com

Table 4. 61 Large Banks with Heavy Exposure to

Nonperforming Residential Mortgages

(FDIC member banks with $5 billion or more in assets and with an exposure

to nonperforming 1-4 family mortgages of 1.5 times risk-based capital or more )

Bank City State

Nonperforming

1-4s/ Riskbased

Capital

Total Assets

($ thousands)

Franklin Bk SSB Houston TX 31.60 5,922,659

R-G Premier Bk of PR San Juan PR 29.01 7,165,822

Doral Bank Puerto Rico San Juan PR 22.50 8,835,752

Emigrant Bk New York NY 21.10 12,890,324

Oriental B&TC San Juan PR 18.89 5,802,800

Bank of America OR NA Portland OR 15.98 10,697,284

Firstbank of PR San Juan PR 14.02 17,173,199

National City Bk Cleveland OH 13.14 152,519,145

Wells Fargo Bk S. Central Faribault MN 11.36 27,710,000

Banco Santander PR San Juan PR 10.02 9,103,575

Fremont Invest. & Loan Anaheim CA 9.86 6,047,598

LaSalle Bank Midwest NA Troy MI 8.57 37,008,195

Irwin Union Bk Columbus IN 6.62 5,425,343

SunTrust Bk Atlanta GA 6.60 174,716,429

Weiss Research, Inc. 18

GMAC Bank Midvale UT 6.32 30,329,334

Banco Popular de PR San Juan PR 5.98 26,137,000

Banco Popular N. America New York NY 5.08 12,738,302

TCF NB Wayzata MN 5.07 16,395,643

Wachovia Bk NA Charlotte NC 5.05 665,817,000

Arvest Bk Fayetteville AR 4.94 9,957,014

HSBC Bk USA NA Wilmington DE 4.75 188,284,200

Fifth Third Bk Cincinnati OH 4.62 64,564,486

Bank of America CA NA S. Francisco CA 4.41 18,878,893

Citizens Bk Flint MI 4.41 12,538,893

Banco Bilbao Vizcaya Arg. San Juan PR 4.36 6,644,109

First Bk Creve Coeur MO 4.36 10,782,714

Bank of America NA Charlotte NC 3.97 1,355,154,455

Fulton Bk Lancaster PA 3.95 8,337,152

Bank of North Georgia Alpharetta GA 3.54 5,433,034

Fifth Third Bk Grand Rapids MI 3.52 54,142,779

Branch Bkg&TC Winston-Salem NC 3.46 131,915,915

Bank of America RI Providence RI 3.38 35,790,853

Carolina First Bk Greenville SC 3.21 13,693,866

Amcore Bk NA Rockford IL 3.20 5,135,631

RBC Centura Bk Raleigh NC 3.09 25,548,477

Northwest Svgs Bk Warren PA 3.03 6,911,410

Webster Bk NA Waterbury CT 2.98 17,075,904

Ocean Bk Miami FL 2.96 5,120,611

Wells Fargo Financial Bk Sioux Falls SD 2.79 5,858,375

Regions Bank Birmingham AL 2.76 139,765,596

JPMorgan Chase Bk NA Columbus OH 2.68 1,407,568,000

First Tennessee Bk NA Memphis TN 2.61 37,063,967

Manufacturers & Traders Buffalo NY 2.60 65,263,266

Provident Bk Baltimore MD 2.54 6,130,241

RBS Citizens, NA Providence RI 2.52 130,820,181

Susquehanna Bk PA Lititz PA 2.50 6,516,448

United Community Bank Blairsville GA 2.45 8,379,863

M&L Marshall & Ilsley Bk Milwaukee WI 2.36 57,089,224

Pacific Capital Bk NA Sta. Barbara CA 2.15 7,392,474

Whitney NB New Orleans LA 2.02 10,765,499

Citibank NA Las Vegas NV 1.96 1,292,503,000

First Commonwealth Bk Indiana PA 1.93 6,063,860

Harris NA Chicago IL 1.80 41,430,553

Old NB Evansville IN 1.76 7,574,796

Colonial Bk NA Montgomery AL 1.69 27,302,220

Capital One, NA McLean VA 1.62 104,822,854

Associated Bk NA Green Bay WI 1.58 21,625,399

Trustmark NB Jackson MS 1.56 8,950,552

US Bk NA Cincinnati OH 1.53 237,269,315

First Midwest Bk Itasca IL 1.51 8,264,472

Wells Fargo Bk NA Sioux Falls SD 1.50 486,886,000

Data: Federal Deposit Insurance Corporation (FDIC), Call Reports, March 31, 2008

Analysis: Weiss Research, Inc., TheStreet.com

Weiss Research, Inc. 19

Table 5. 25 Large Thrifts with the Heavy Exposure

to Nonperforming Residential Mortgages

(OTS member thrifts with $5 billion or more in assets and with an exposure

to nonperforming 1-4 family mortgages of 1.5 times risk-based capital or more)

Thrift City State

Nonperforming

1-4s/ Riskbased

Capital

Total Assets

($ thousands)

Sovereign Bk Wyomissing PA 105.58 81,906,412

USAA FSB San Antonio TX 59.83 31,898,576

American Express Bk, FSB Salt Lake City UT 50.73 24,560,329

ING Bank FSB Wilmington DE 44.70 78,064,701

Wachovia Mortgage, FSB N Las Vegas NV 36.71 67,911,515

Capitol Federal Svgs Bk Topeka KS 35.11 8,063,364

Raymond James Bk FSB St Petersburg FL 28.15 8,313,839

EverBank Jacksonville FL 27.20 5,922,591

Chevy Chase Bk FSB McLean VA 24.99 15,130,114

Anchorbank FSB Madison WI 19.83 5,088,062

Flagstar Bk FSB Troy MI 17.40 15,898,386

Washington FS&LA Seattle WA 15.84 11,738,021

Washington Mutual Bk FSB Park City UT 10.16 44,305,153

People's United Bank Bridgeport CT 9.35 20,541,299

Countrywide Bank, FSB Alexandria VA 7.38 121,412,048

IndyMac Bk FSB Pasadena CA 7.13 32,010,816

American Svgs Bk FSB Honolulu HI 5.91 6,844,771

Amtrust Bank Cleveland OH 5.84 17,301,384

Guaranty Bk Austin TX 5.31 16,303,016

GE Money Bank Salt Lake City UT 3.72 16,050,311

Merrill Lynch B&TC, FSB New York NY 3.64 31,036,835

State Farm Bk, FSB Bloomington IL 3.51 15,754,418

Morgan Stanley Trust Jersey City NJ 3.26 5,157,291

BankUnited FSB Coral Gables FL 3.08 14,312,695

Downey S&LA FA Newport Beach CA 2.43 13,130,348

Data: Office of Thrift Supervision (OTS), Thrift Financial Reports, March 31, 2008

Analysis: Weiss Research, Inc., TheStreet.com

Weiss Research, Inc. 20

Appendix C. U.S. Banks and Thrifts Believed to Be at Risk of Failure

As stated in Part I, banks and S&Ls at risk have assets of $3.2 trillion, or 41 times

the assets of banks on the FDIC’s watch list. These include the assets of Citibank

NA, Wachovia Bank NA and SunTrust Bank cited in Appendix A above, plus the

assets of the banks and thrifts listed below.

U.S. Banks and Thrifts Believed to Be at Risk of Failure

(All institutions with a Financial Strength Rating of D+ or lower)

Bank or Thrift City State

TheStreet.

com

Rating

Total Assets

($ thousands)

Washington Mutual Bank Henderson NV D+ 317,823,952

HSBC Bk USA NA Wilmington DE D+ 188,284,200

National City Bk Cleveland OH D 152,519,145

Countrywide Bank, FSB Alexandria VA D 121,412,048

Sovereign Bk Wyomissing PA D+ 81,906,412

Huntington NB Columbus OH D+ 55,566,801

E*Trade Bank Arlington VA D+ 48,184,276

First Tennessee Bk NA Memphis TN D+ 37,063,967

LaSalle Bank Midwest NA Troy MI D 37,008,195

IndyMac Bk FSB Pasadena CA E- 32,010,816

Goldman Sachs Bk USA Salt Lake City UT D 25,573,236

Amtrust Bank Cleveland OH D- 17,301,384

Firstbank of PR San Juan PR D+ 17,173,199

Westernbank Puerto Rico Mayaguez PR D- 15,971,230

Flagstar Bk FSB Troy MI D- 15,898,386

Chevy Chase Bk FSB McLean VA D+ 15,130,114

BankUnited FSB Coral Gables FL D+ 14,312,695

Downey S&LA FA Newport Beach CA D- 13,130,348

Banco Popular North America New York NY D+ 12,738,302

Lehman Brothers Bk FSB Wilmington DE D- 12,246,720

Sterling Savings Bank Spokane WA D+ 12,189,506

Banco Santander PR San Juan PR D 9,103,575

Corus Bk NA Chicago IL D 8,976,744

Doral Bank Puerto Rico San Juan PR D 8,835,752

R-G Premier Bk of PR San Juan PR D+ 7,165,822

Barclays Bank Delaware Wilmington DE D 7,125,125

First Federal Bank of CA FSB Santa Monica CA D+ 7,083,638

BankAtlantic Fort Lauderdale FL D 6,212,631

Fremont Investment & Loan Anaheim CA E 6,047,598

Franklin Bk SSB Houston TX D- 5,922,659

Irwin Union Bk Columbus IN D+ 5,425,343

Amcore Bk NA Rockford IL D+ 5,135,631

Ocean Bk Miami FL D- 5,120,611

Anchorbank FSB Madison WI D+ 5,088,062

PFF B&T Pomona CA E+ 4,103,786

Hanmi Bk Los Angeles CA D+ 3,927,609

Imperial Capital Bk La Jolla CA D+ 3,530,257

Weiss Research, Inc. 21

First Community Bk Taos NM D+ 3,455,652

TierOne Bk Lincoln NE D 3,374,893

First Place Bank Warren OH D+ 3,283,975

Independent Bk Ionia MI D- 3,238,995

BLC Bank, NA Strasburg PA D- 3,178,636

Superior Bank Birmingham AL D 2,943,775

Orion Bk Naples FL D 2,936,394

First NB of AZ Scottsdale AZ E+ 2,836,085

Eurobank San Juan PR D- 2,792,787

Home S&LC Youngstown OH D 2,716,625

Amboy Bank Old Bridge NJ D- 2,695,636

West Coast Bk Lake Oswego OR D 2,607,534

Meridian Bank NA Wickenburg AZ D 2,505,730

Bank of the Cascades Bend OR D+ 2,403,853

Seacoast NB Stuart FL D- 2,391,360

Vineyard Bk, NA Rancho Cucamonga CA D 2,326,862

Macatawa Bk Holland MI D 2,133,420

Americanwest Bk Spokane WA D 2,106,351

Citizens First Svg BK Port Huron MI D+ 2,091,041

County Bk Merced CA D 2,078,298

Intervest NB New York NY D+ 2,046,601

Lydian Private Bank Palm Beach FL D+ 2,008,561

New South FSB Irondale AL D 1,986,425

ANB Financial NA Rogers AR F 1,895,545

Hillcrest Bk Overland Park KS D- 1,882,968

Great FL Bk Miami FL D+ 1,850,387

Guaranty Bank Milwaukee WI D- 1,826,503

Wauwatosa Svgs Bk Wauwatosa WI D+ 1,771,794

Fidelity Bk Norcross GA D+ 1,732,780

First NB of Nevada Reno NV D- 1,634,041

Silver St Bk Henderson NV D 1,624,672

Premier Bk Jefferson City MO D- 1,569,820

Ameriprise Bank, FSB New York NY D 1,551,509

Mutual Bk Harvey IL D- 1,532,589

Scotiabank DE PR Hato Rey PR D- 1,529,267

TIB Bank Naples FL D+ 1,423,951

First Bank of Beverly Hills Calabasas CA D+ 1,410,692

Bridgeview Bk Group Bridgeview IL D+ 1,403,902

Temecula Valley Bk Temecula CA D 1,373,343

Security Bank of Bibb County Macon GA D- 1,315,478

Integrity Bk Alpharetta GA E- 1,203,701

Bank of Granite Granite Falls NC D 1,192,025

Merrick Bank Corp S Jordan UT D+ 1,181,376

First Mariner Bk Baltimore MD D- 1,172,860

Affinity Bk Ventura CA D- 1,172,207

Eastern Svgs Bk FSB Hunt Valley MD D 1,132,481

Alliance Bk Culver City CA D- 1,111,157

OmniAmerican Bank Fort Worth TX D 1,086,199

Baylake Bk Sturgeon Bay WI D 1,078,889

Fidelity Bank Dearborn MI D 1,045,530

Weiss Research, Inc. 22

Midcountry Bank Marion IL D- 1,025,760

Omni NB Atlanta GA D- 992,505

Founders Bk Worth IL D 980,356

LibertyBank Eugene OR D 960,085

Avidia Bank Hudson MA D+ 954,640

Inter Svgs Bk FSB Maple Grove MN D- 951,692

Crescent B&TC Jasper GA D+ 950,001

Buckhead Community Bk Atlanta GA D- 943,151

Florida Community Bk Immokalee FL E+ 935,236

Century Bk FSB Sarasota FL D- 929,123

Vision Bk Panama City FL D- 922,174

Heartland Bk Clayton MO D+ 892,367

First NB of GA Carrollton GA D- 882,993

Security Bk of Kansas City Kansas City KS D+ 880,439

Falcon International Bk Laredo TX D+ 871,386

Peoples Community Bank W Chester OH D- 870,486

Florida Choice Bk Mt Dora FL D 868,805

Park View FSB Cleveland OH D 868,702

Lincoln Bank Plainfield IN D+ 862,451

First NB of the South Spartanburg SC D+ 850,717

Millennium BCP Bank, NA Newark NJ D- 841,322

First Federal Bank Harrison AR D 828,860

Florida Capital Bank, NA Jacksonville FL D- 819,512

Home NB Blackwell OK D 815,543

MidWestOne Bk Oskaloosa IA D- 778,014

CapitalSouth Bank Birmingham AL D- 756,441

Bank of Blue Valley Overland Park KS D- 753,205

Mid-Missouri Bk Springfield MO D+ 752,747

Bank of East Asia USA NA New York NY D 748,859

One United Bk Boston MA D 742,866

First St Bk Eastpointe MI D 738,642

Columbian B&TC Topeka KS D- 735,766

Omni Bk Metairie LA D 727,864

First Niagara Commercial Bk Lockport NY D 717,088

Delaware County B&TC Lewis Center OH D 716,851

First Georgia Banking Co Franklin GA D+ 715,523

1st Centennial Bk Redlands CA D- 715,231

First St Bk Stockbridge GA D- 705,237

Teambank NA Paola KS D+ 704,541

Bank of Florida-Southwest Naples FL D+ 698,891

First Gulf Bank, NA Pensacola FL D+ 698,875

Irwin Union Bk FSB Columbus IN D+ 692,224

American Bk of Commerce Wolfforth TX D+ 690,847

Tower B&TC Fort Wayne IN D+ 687,243

Conestoga Bank Chester Springs PA D- 680,814

Haven SB Hoboken NJ D+ 680,150

Independence Bk Owensboro KY D+ 675,449

Sterling B&T FSB Southfield MI D- 670,627

Federal Trust Bank Sanford FL E- 670,589

Lowell Five Cents SB Lowell MA D+ 663,853

Weiss Research, Inc. 23

Beach Community Bk Fort Walton Bch FL D- 660,975

Alliance Bank Lake City MN D 651,634

Citizens-Union Svgs Bk Fall River MA D 649,190

K Bk Owings Mills MD D- 649,097

Redding Bk of Commerce Redding CA D 646,946

Gainesville Bank & Trust Gainesville GA D 646,373

First Central Svgs Bk Glen Cove NY D- 645,056

Ponce De Leon Federal Bk New York NY D+ 643,478

Bank of Choice Colorado Arvada CO D- 637,106

Vanguard B&TC Valparaiso FL D+ 633,756

Northwest Georgia Bk Ringgold GA D+ 633,733

BPD Bk New York NY D+ 632,610

Sovereign Bk NA Dallas TX D 632,482

Marine Bk-Springfield Springfield IL D 631,946

Community West Bk Goleta CA D+ 628,610

Community Bk Loganville GA E+ 623,764

Baltimore County Svgs Bk FSB Baltimore MD D 615,915

Republic Federal Bank, NA Miami FL D- 613,165

American Bk St Paul MN D 612,162

Peninsula Bk Englewood FL D- 606,312

Vantus Bk Sioux City IA D+ 597,030

Baraboo NB Baraboo WI D+ 596,978

Warren Bk Warren MI D- 587,082

Helm Bk Miami FL D+ 586,280

American River Bk Sacramento CA D 585,958

Security Pacific Bk Los Angeles CA D- 585,184

Northeast Bk Auburn ME D+ 583,816

1st United Bk Boca Raton FL D+ 575,509

Transatlantic Bk Miami FL D+ 573,742

First Bk Fncl Centre Oconomowoc WI D+ 571,327

Central Co-Op Bk Somerville MA D+ 570,835

Community South Bk Parsons TN D- 569,721

American Founders Bk Inc Frankfort KY D- 561,375

Bank of Choice Evans CO D- 560,922

Crescent B&TC New Orleans LA D+ 559,526

Northside Cmnty Bk Gurnee IL D 554,194

Alliance Bk Corp Fairfax VA D 553,450

Premier Bk-Maplewood Maplewood MN D- 552,769

Bradford Bank Baltimore MD D- 551,944

Signature Bk of Arkansas Fayetteville AR D 549,211

Equitable Bk SSB Wauwatosa WI D+ 548,555

Peachtree Bk Duluth GA E 545,076

Community Central BK Mt Clemens MI D- 544,704

FirsTier Bk Louisville CO D+ 542,909

First American Intl Bk Brooklyn NY D+ 542,634

Riverside Bk of Gulf Coast Cape Coral FL D- 535,046

Farmers & Merchants Bk Lakeland GA D- 534,414

Presidential Bk FSB Bethesda MD D+ 534,166

Geauga Svg Bk Newbury OH D+ 530,388

Builders Bk Chicago IL D- 527,387

Weiss Research, Inc. 24

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Posted by Lehel Szucs on September 26th, 2008 8:21 AM

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