GRIM RUMBLINGS: Is Wachovia Next?


ASSOCIATED PRESS: The situation is increasingly bleak for Wachovia Corp. and the bank’s mortgage portfolio will continue to lose value, “seriously jeopardizing” the company’s ability to generate earnings, an influential analyst warned on Tuesday. The latest note of caution came as the government moved to reassure people their money is safe in the nation’s banks. Yet fears about the system persisted and financial shares were broadly lower Tuesday, signaling another tough day for the stock market.

Federal Reserve Chairman Ben Bernanke is scheduled to brief Congress Tuesday on the economy, which has been walloped by high energy prices and fallout from the housing slump and credit crunch. The testimony also comes amid a backdrop of rising oil prices and a slumping dollar, and as stock markets overseas tumble amid worries about the U.S. financial system. Bernanke will also specifically address a rescue plan crafted over the weekend forwachoviaupsidedown_1.jpg mortgage financiers Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages — almost half of the nation’s total.

On Monday, shares of U.S. banks and financial companies swooned on concern that the government plan to shore up Fannie and Freddie would not be enough to keep them from failing, which could undermine the U.S. and global financial system. MORE

WIKIPEDIA: A bank run (also known as a run on the bank) is a type of financial crisis. It is a panic which occurs when a large number of customers of a bank withdraw their deposits because they fear it is, or might become, insolvent. This action can destabilize the bank to the point where it becomes insolvent. Banks retain only a fraction of their deposits as cash (see fractional-reserve banking): the remainder is invested in securities and loans. No bank has enough reserves on hand to cope with more than the fraction of deposits being taken out at once. As a result, the bank faces bankruptcy, and will ‘call in’ the loans it has offered. This can cause the bank’s debtors to face bankruptcy themselves, if the loan is invested in a plant or other items that cannot easily be sold. A banking panic or bank panic occurs if many banks suffer runs at the same time. The resulting chain of bankruptcies can cause a long economic recession.[1] As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy.

Leave a Reply

Your email address will not be published. Required fields are marked *