Brace for More Bank Failures

America’s banking system is in collapse.

If you are uneasy about the failure of IndyMac Bancorp in July, the second-largest financial institution to close in U.S. history, prepare yourself. The crisis is about to get a whole lot uglier. Government-sponsored Fannie Mae and Freddie Mac, holders of half the nation’s mortgages, just went down too. It is becoming clear that before all is said and done, the financial wipeout will be bigger than anything America has ever experienced.

A Run at the Bank

It didn’t take much to set off a run on Pasadena-headquartered IndyMac. In a scene resembling the storied collapse of British bank Northern Rock last year, customers lined up by the hundreds and stood in line for hours to try and pull out what money was available before the doors closed. The corporate motto of America’s seventh-largest savings and loan—“Raise Your Expectations”—didn’t do much to comfort depositors, who withdrew $1.3 billion over 11 days.

As a result, the Federal Deposit Insurance Corporation has its hands full. On July 11, the fdic seized IndyMac and began covering the insured accounts. However, as some hapless savers found out, if anyone had more than $100,000 in an account, the rest is frozen and it may take years before it is recovered—if ever.

The most alarming thing about the IndyMac collapse wasn’t how fast it occurred or even how big it was. The real shocker was that the fdic didn’t see the failure coming. As of March 31, the fdic had identified and placed 90 institutions, with assets totaling $26.3 billion, on its “problem list,” but IndyMac was not one of them. When IndyMac failed, it had assets supposedly valued at $32 billion—more than the grand total of all the companies on fdic watch. To say it caught regulators off guard is an understatement.

Another reason this is so alarming is that by the time the fdic is done cleaning up IndyMac, analysts suggest it may cost up to $8 billion—and that’s if the housing market doesn’t keep deteriorating, which it will. Since the fdic has just over $52 billion in assets, IndyMac burned approximately 15 percent of its cash. Beyond the 90 already identified, how many more banks that regulators have no clue about are ready to go down?

Who Will Be Next?

The Royal Bank of Canada estimated that over 300 U.S. banks will not survive the next few years. But even this estimate may be on the light side. And some of the financial institutions in question absolutely dwarf IndyMac.

Nobody knows which will be the next, but there are a lot of candidates. Rumors, backed up by cascading share prices, abound. Will it be investment giant Lehman Brothers? As of July 11, share prices had dropped 83.3 percent from their peak. Will it be Washington Mutual, the nation’s largest savings and loan? By early July, its stock was worth less than 10 percent of its former value. How about Newport Beach, California-based Downy Financial Corp., or Los Angeles’ FirstFed Financial?

For that matter, what is the solvency outlook for the fdic? How many more banks can it afford to cover? Who will be insuring people’s bank deposits when the fdic is overwhelmed?

But it is not only the fdic whose solvency is being questioned. It is also the federal government’s.

The weekend after IndyMac bank fell apart, the U.S. government, in conjunction with the Federal Reserve, announced that it would be bailing out mortgage giants Fannie Mae and Freddie Mac. The twin government-sponsored lenders got in way over their heads, and now their bloated debt loads are threatening to take not only the whole U.S. housing market, but other banks and the economy in general down with them.

Fannie and Freddie own or guarantee a mind-boggling $5.2 trillion worth of U.S. home mortgages. That is approaching half of all the mortgages in the United States. Backing up that $5.2 trillion in loans is a paltry $95 billion in capital; the rest is borrowed money! With home prices falling and mortgage delinquencies rising, the companies were balancing on the edge of insolvency; thus the government stepped in.

That $5.2 trillion is greater than the gross domestic product of both Germany and Japan, and is almost 40 percent of America’s gdp. How two government-backed lenders were able to borrow so much money defies reason.

And now that the government has decided to bail them out, it means those liabilities are now the government’s—and that means yours, and mine too. $5.2 trillion will double the federal government’s public debt burden.

With conditions deteriorating—and at least 2.5 million more homes in danger of going into foreclosure across the country—the bill from Fannie and Freddie’s largesse is sure to end up in Taxpayer Eddie and Taxpayer Suzie’s mailbox.

A Nightmare Scenario

The July 12 Wall Street Journal called the bailout a “nightmare scenario.” For probably the first time in at least 40 years, America’s aaa credit rating is being questioned. And because America is so dependent on borrowing, a downward revision could be a deathblow for the whole economy.

If America’s good credit rating goes, it will set off a chain reaction. Interest rates will jump; the bond market will get massacred; the government debt burden will soar; the dollar will plummet; and foreign capital flight will decimate the U.S. But with all the debt swamping America, a ratings downgrade is probably inevitable. America’s foreign creditors are realizing that America will never be able to pay its huge debts.

And as bad as all that sounds, it could get worse. If the U.S. resorts to printing money to pay the bills (and that is the only option short of massive service and welfare cuts and tax increases), then all bets are off. The end result: a currency value headed south as quickly as that of Zimbabwe.

America’s wealth is about to disappear.

Although the severity of the current banking crisis might come as a shock to some, it comes as no surprise to long-term readers of the Trumpet and its predecessor, the Plain Truth. Plain Truth founder and editor in chief Herbert Armstrong warned that Bible prophecy indicates a massive crisis in America’s economy will thrust the international economy into chaos and disorder. The havoc this event would cause, he said, would mark the beginning of the Great Tribulation discussed by Jesus Christ in Matthew 24.

In June, investment bank Morgan Stanley warned that a “catastrophic event” in world currency markets is imminent. The same month, the Royal Bank of Scotland warned investors to prepare for a full-fledged crash in global stock and credit markets over the following three months, and banking group Barclays advised clients to batten down the hatches for a worldwide financial storm. The list of those issuing warnings is now growing: the International Monetary Fund, the Bank for International Settlements, global analysts leap/2020, etc.

What is truly remarkable, however, is that Herbert Armstrong discussed—regularly and fervently—this precise scenario for years prior to his death in 1986.

The banking sector is the heart and core of America’s economy. It contains the pillars supporting the entire Anglo-Saxon economic model. Its smaller pillars are already snapping like twigs, and the big pillars are cracking under the strain. The whole thing is about to go, and repairs at this point can only be temporary quick fixes.

The good news, as Mr. Armstrong always pointed to, is that this was all prophesied to occur. And just as sure as the Bible forecasted this imminent economic trouble, so also has it forecasted a future time of financial abundance for all nations, thriving businesses, healthy industries, responsible government, fair business practices—even lower taxes. Today’s economic problems are the result of decades of compounding unsound business practices, dishonesty and greed. Jesus Christ is about to return to rule and will, among other things, establish a healthy, prosperous, fair, thriving financial system. And that is something we can all look forward to!