Don't Bank On It

Is it time to worry yet?  Investors, who have a habit of whistling past the graveyard, may finally find it impossible to pucker up.  Many crossed their fingers as sub-prime mortgages collapsed; prayed quietly as brokerage firms tumbled; even watched passively as portfolios shrunk and home prices collapsed.  Is it resignation, capitulation, or simply realization that the financial picture will continue to deteriorate? 

Investors have been unusually quiet.  Do they feel impotent?  Brokerage firms, banks, investment advisors and hedge firm managers certainly must hope so.

That could be changing.  The fall of Indy Mac Bancorp could be the wake-up call that all of those financial institutions fear.  Are other banks in similarly dire straits?  The FDIC concedes it that 90 other banks are on shaky financial footing?  Which banks made the list?  Should you be concerned that you are banking at one of these troubled institutions?  The FDIC is not naming names – and rightfully so.  If a list were to become available, depositors would start pulling their accounts faster than you can say 1929.  Run on the banks?  This one would be a sprint.

Like American Idol contestants, bank customers can just sweat it out and hope they make the final cut.   Investors, however, may have a more immediate recourse.  Many banks are public companies – just like Indy Mac, which traded on the OTC Bulletin Board.  Are bank stocks sound investments?  Perhaps – but not all banks are created equal.  Some, like Citigroup, whose shares have dipped by as much as 60% over the past year, are closely allied to beleaguered brokerages.  Others are vulnerable because of their high concentration of mortgage loans.  

Investors need to start asking questions?  Should they have purchased bank stocks and were they properly informed?  Did their broker explain the nature of the bank’s business?  Did the bank specialize in offering sub-prime mortgages?  Has the bank been placed on any public watch list?  Bank stocks are no different than other securities investments; a stockbroker is obligated to reveal and discuss the risks.  Not all bank stocks were suitable for every investor. 

Fortunately, investors have recourse.  If they believe they have not been given all material information about a stock – bank or otherwise – or that they have not been advised of potential risks, they have the right to hold their stock broker and his or her firm accountable. As portfolios contract, that may afford little solace, but it is better than trying to make a withdrawal from a teller with an empty drawer.

About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.