JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo and More Than 1,800 Other Institutions Believed to Be at Risk of Failure

Press phone conference
by Martin D. Weiss, April 7, 2009:

Press release
by Elizabeth Kelly Grace:

Jupiter, FL, April 8, 2009 — Several of the nation's largest banks, including JPMorgan Chase, Goldman Sachs, Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, plus more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts, according to Martin D. Weiss, Ph.D., president of Weiss Research, Inc., an independent research firm.

Several large institutions received significant ratings downgrades from the prior quarter, including Citibank, downgraded from C- to D; Wells Fargo, downgraded from C- to D+; and SunTrust Bank, downgraded from C- to D+.

Yesterday, Dr. Weiss conducted an audio conference call attended by over 75 members of the press to discuss the findings. (To listen to the conference, turn up your computer speakers and click here.)

Also in the conference, he provided updated commentary on his white paper issued on March 19. Titled "Dangerous Unintended Consequences: How Banking Bailouts, Buyouts and Nationalizations Can Only Prolong America's Second Great Depression and Weaken Any Subsequent Recovery," the white paper names U.S. banks and thrifts believed to be at risk of failure, using that data to demonstrate that the U.S. government greatly underestimates the scope of the debt crisis, while overestimating its ability to effectively save troubled institutions without severe adverse consequences.

The debt crisis is much greater than the government has reported, according to the white paper. The FDIC's "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. The updated review by Weiss Research, however, shows that 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in the prior quarter.

Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular — JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank — taking especially large risks:

Major U.S. Banks ...

At yearend 2008, Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank's was 278 percent; JPMorgan Chase's, 382 percent; and HSBC America's, 550 percent, according to the Comptroller of the Currency (OCC). In addition, in the fourth quarter, Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital. Although the banking authorities have not defined how much exposure is considered excessive, Weiss believes that, as a rule, bank exposure to any single risk category should be limited to 25 percent of capital. Goldman Sachs has exceeded that limit by a factor of 42 to 1.

Next Major Risk Area ...

"Equally alarming," writes Dr. Weiss, "is the fourth quarter OCC data demonstrating that record bank losses are spreading to interest-rate derivatives. Until now, bank derivatives losses have been limited almost exclusively to credit defaults swaps (CDS), which represent only 7.8 percent of the notional value U.S. derivatives held by all U.S. banks. In the fourth quarter, although the CDS losses continued at a near-record pace, we also witnessed record losses in the interest-rate sector, which represents 82 percent of the derivatives market: The nation's banks lost $3.4 billion in interest-rate derivatives, or more than seven times their worst previous quarterly loss in this category.

"In the face of such enormous risks and losses," Dr. Weiss continues, "it's entirely unreasonable to expect the U.S. Government to offset them without unacceptable damage to its own credit, credibility and borrowing power."

Dr. Weiss points to early signs that the credit of the U.S. Treasury may already be suffering some damage in the wake of government bailout programs such as the $700 billion Troubled Asset Relief Program (TARP), the Federal Reserve's recent $1.15 trillion commitment to purchase bonds, and the $1 trillion Private-Public Investment Program (PPIP). For example, the cost of credit default swaps traded by international investors to insure against a future default by the U.S. Treasury recently surged to 14 times its 2007 level; while, more recently, the price of the 30-year Treasury bonds has fallen by 24 points.

"The 'too-big-to-fail' doctrine has failed," concludes Weiss. In its place, he recommends the following steps to build a firmer foundation for a future recovery:

  • Abandon the unrealistic goal of saving all failing financial institutions, focusing instead on the goal of rebuilding the economy's foundation in preparation for an eventual recovery.

  • Pro-actively downsize or shut down the weakest institutions no matter how large they may be; provide opportunities for borderline institutions to rehabilitate themselves under a strict regulatory regime; and give well-capitalized, liquid and prudently-managed institutions better opportunities to gain market share.

  • Seriously consider breaking up the weak megabanks, following the model of the Ma Bell breakup in 1984.

  • Build confidence in the banking system with better disclosure and transparency, including the public release of the confidential official ratings on all banks called CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk).

  • Switch priorities from the battles we can't win to the war we can't afford to lose, such as emergency assistance for the millions most severely victimized by a depression.

Due to the nation's solid infrastructure and knowledge base, Weiss is optimistic the U.S. can survive a broader banking crisis and even a second great depression, with good prospects for an eventual recovery, provided we make the right choices. Toward that goal, immediately following the audio press briefing yesterday, Dr. Weiss launched a national grassroots campaign with an online video webinar for over 50,000 investors that have registered for the event, while also inviting the press to join. (To view the 1-hour video, click here.)

About Martin D. Weiss, Ph.D.

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on banking and insurance company solvency. With more than 35 years of experience, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.
Dr. Weiss, along with Weiss analyst Mike Larson, specifically named nearly all of the major institutions that have suffered a financial failure in this crisis. Weiss predicted the demise of Bear Stearns 102 days prior to its failure, Lehman Brothers (182 days prior), Fannie Mae (eight years prior), and Citigroup (110 days prior). Similarly, the U.S. Government Accountability Office (GAO) reported that, in the 1990s, Weiss greatly outperformed Moody's, Standard & Poor's, A.M. Best and D&P (now Fitch) in warning of future life insurance company failures. (See the Weiss forecast track at http://blogs.moneyandmarkets.com/martin-weiss/the-only-ones-who-warned-ahead-of-time/ and the GAO report at http://archive.gao.gov/t2pbat2/152669.pdf.)

Dr. Weiss is a New York Times best-selling author with a new book, "The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income and Grow Wealthy Even in the Worst of Times."

For a full history of Weiss Research, Inc., please see http://www.moneyandmarkets.com/content/history.html.