Run-on-the-Banks back in fashion; Trust Shattered

What has been happening with our nation’s financial system is endemic of the free markets gone awry, greed, and too little government oversight. 2008 has proven to be an incredibly terrible year for financial services companies, many of which have seen their stock prices slide to 52-week lows. Trust in these banks—and even in our nation’s financial system as a whole—has been shattered. Our markets have been taking a beating, along with the financial companies. One of the largest government takeovers in our nation’s history just happened last Friday night with Indy Mac being taken over by the FDIC—all $36 billion worth. Indy’s stock plummeted from $29 a year ago to around 29 cents today. What happened? Depositors ran on the bank to the tune of approximately $1.3 billion. (www.thestreet.com ; search for Indy Mac.)

History has proven that Run-On-The-Banks happen when depositors lose all Trust in the bank that holds their deposits. Customers’ faith in deposits is the vital key in a financial institution’s success. When a bank—an investment bank, a retail bank, or otherwise—loses its clients’ trust, financial institutions capitulate, as in the case of Indy Mac last week and Bear Stearns back in March. It should be noted that these were not start-up banks, nor fledgling enterprises with only a few years of existence under their belts. They were once shining institutions with long, proud histories; they were icons of the greatness of our nation’s free enterprise system. They were icons because of their pristine reputations. However, once that reputation is tarnished, even if only in the minds of industry peers, the damning run-on-the-bank boulder starts rolling. It’s nearly impossible to stop it. Ask employees of Indy Mac. Ask former employees of Bear Stearns. Ask former employees of Arthur Andersen, the former Five of the Big Five accounting firms now whittled down to Four due to its lax auditing of Enron’s cooked books.

At the heart of all of these business meltdowns is a breach in trust. As we’ve seen in recent headlines, this trust exists largely in the minds of customers and shareholders. When it is tainted, even slightly, alarms go off in the minds of the stakeholders, and laser-like attention focuses on the company’s foibles. Management is grilled. The firm’s books are poured over and scrutinized. Savvy short sellers circle the company like sharks—bet heavily against it—and make piles of money when the company’s stock goes down. There is little management can do to assuage these stockholder fears; this horse has long left the gate. The run-on-the-bank has too much momentum.

How do we prevent this from happening again? It’s difficult to say. History has proven Boom | Bust cycles happening again and again in our great nation. They date all the way back to the Railroad Boom | Bust in the mid-19th century to the current real estate Boom | Bust we’re experiencing right now. Market participants don’t like to admit that bubbles burst, but they always do. It’s only a matter of when. Often, it begins when a few financially savvy people get the idea that prices are ridiculously high and thus begin the massive sell off. Usually this is at the highest prices where trust really needs to be verified. If it isn’t, market meltdowns ensue.

Remember: World Class Results Demand World Class Trust
www.worldclasstrust.com