Sunday, September 14, 2008
The title is actually the assessment of banking analyst Meredith Whitney, regarding where we are in the banking crisis. In this report, I run through a scenario of what a banking crisis might look and feel like, and examine the reasons why I consider myself in full agreement with this quote.
Executive Summary
- The damage so far: Bear Stearns, Lehman Bros.
- The damage still to come: Washington Mutual, AIG, Merrill Lynch, Citibank, and many others
- The risk of a major systemic banking crisis is very high at this time
- While we wait to see what develops, cash out of the bank is a good idea.
Before I get into the gory details below, I want to begin with the conclusion. What I mean by a “major, systemic banking crisis” is the complete shutdown of the banking system. All banks closed, none operating, no way for you to access your funds. Because of this possibility, you need to get out at least one month’s worth of cash to have on hand (three months is better). Keep it in a safe place.
If the banking system shuts down, your ability to conduct transactions will be severely limited. Cash will be in extremely short supply, as it represents roughly 2% – 3% of total bank account holdings.
When you withdraw actual cash, there are a couple of realities of which you need to be aware. The first is that for any amount over $10,000, a Suspicious Activity Report (SAR) must be filed by the bank with the Treasury Department. No ifs, ands, or buts. Your name will go into the system. Next, even for amounts under $10k, it is at a bank’s discretion as to whether or not they fill one out.
Second, you need to be aware that most bank branches keep very little cash on hand. Large withdrawals of cash represent an operational difficulty for banks, because they are usually on a timed system of deliveries, often just once a week. The way I prefer to handle this is to ask to speak to the bank manager, let them know my intentions, and give them some time to adjust. They always appreciate this courtesy. As a note, in the past I’ve had a couple of people write to me who were very shocked and confused by their reception at the bank when they tried to withdraw more money than was available. Frayed nerves all around.
