Making Your Own “Run on the Bank”

Matt Collins (March 11, 2010)

In 2009, the Federal Deposit Insurance Corporation (FDIC) closed 140 banks because they were insolvent…broke…bankrupt.

Despite government bailouts or other assistance…in the end, THEY ALL FAILED.

It’s even worse right now…

At the end of January in 2010, the FDIC had already seized 15 more banks.

And if that is any sign of things to come – multiply that sobering statistic by 12 months and you’ll see 180 MORE banks go bankrupt in 2010.

Enter our Man Andrew…

But where most people saw only a threat; Andrew Packer – Editor of The Credit Crunch Short Report – saw only opportunity.

At an age when most of us were just learning to write in cursive, Andrew already had a brokerage account and a healthy stockpile of physical silver. Over the years he developed a taste for value investing and a healthy sense of skepticism that served him well in the field of Private Equity and – eventually – in the ranks of The Sovereign Society’s Council of Experts.

Taking a look at the current situation, Andrew figured that since banks were companies, he could apply his Credit Crunch Short Indicator and predict which ones could fail. Loyal A-Letter readers know about Andrew’s indicator; a carefully balanced technical system, backtested to 98% accuracy across a huge sample of data (for more details on his indicator system, just click here)

But it didn’t work.

You see, bank’s financials are different from those of typical companies. It gets a little complicated, but it boils down to this; its balance sheet is basically flipped…

A bank’s loans are actually considered its assets…and its liabilities are the deposits it’s holding. So the cash on hand – which would be an asset at any other company – is actually a liability, since someone’s expecting to get that money back. And as an originator of loans, its lending activities – again, normally on the liability side of the sheet – are its assets…even though the possibility of default means they’re still something of a liability.

Bottom line: Andrew and his team needed a different mathematical equation than the Altman Z-Score.

Re-Engineering the Credit Crunch
Short Indicator to Target Toxic Banks

And after digging through archives of banking research from the last 30 years, he uncovered a mathematical equation developed by RBC Capital Markets analyst Gerard Cassidy and his team in the 1980s.

This equation is called “The Texas Ratio.”

It was used to determine a bank’s solvency and effectively predict which banks would fail throughout the Savings and Loan Crisis of the 1980s and early 1990s. And it’s still used by some large financial rating firms today…

Simply put – to find a bank’s Texas Ratio, you just divide the value of the bank’s non-performing assets (i.e., bad loans) by the total outstanding equity and loss reserves.

When the ratio is 1:1 then the bank is insolvent.

But there was a problem…just like using the Z-Score; an investor can’t rely on Texas Ratios alone.

Many times – even though a bank’s Texas Ratio was 1:1 or greater, the bank still remained in business.

This happened because some banks were able to raise more capital to cover its losses…or they received bailouts from the government.
This inconsistency was unacceptable to Andrew.

He knows that 118 banks are positioned to fail. It’s not a matter of if – but when…

So he combined the Texas Ratio with the other three components of his Credit Crunch Short Indicator (momentum of the ratio, direction of the ratio, and the share price action).

And in doing so, he cracked the banking code…

Click here to read the rest of my FREE report

Yours in Personal Sovereignty,

Matthew Collins,

A-Letter Editor

P.S. Today’s editorial is just a snippet of my full report, released just yesterday. Bank shenanigans, shady executives, top secret systems and the chance to make obscene profits as bank shares slide; it’s all in there. Click here to see what I mean…