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Banking Crisis

Rates got marginally worse because money moved out of bonds and back to a moderately stabilized stock market.

In case anyone wants to understand the nature of our current banking crisis, we highly recommend an episode from the “This American Life” radio series on Public Radio; we found it both fascinating and informative. It explains why the banks are “insolvent” and why our government is so determined to make sure the major banks do not fail. In an overly simplified nutshell, a Bank’s Assets are the loans it makes to borrowers; a Bank’s Liabilities (its debts) are the deposits it holds for depositors; and a Bank’s “Equity or Capital” is the money that the shareholders gave to the bank for its stock. For a bank to be solvent, its assets must equal its liabilities plus its owner’s equity.

So, for Citibank for example, the value of Citi’s outstanding loans must equal all of the deposits in the bank plus the value of its stock. Because so many of the loans owed to Citi (its assets) are in default, the value of Citi’s assets are now below the value of Citi’s deposits and Equity. And, as more and more loans default, Citi’s stock price drops also, just making the problem worse.

Citi is not the only major bank facing this situation. Without the government’s help, these banks would be bankrupt and out of business. Allowing one major bank to go bankrupt would likely cause a domino effect pushing other banks into bankruptcy. This would shut down our banking system and our economy. This is a scary proposition and it is the reason why the markets are so jittery.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167