The US election is decided. Now risk and treasury professionals may turn back to fixating on the outlook for the economy and the US banking system, particularly in the wake of the massive public bank rescue by the industrial nations and the looming global economic slump. Even with the financial rescue and the enormous extension of public liquidity support to banks, however, large depositors do remain at risk in specific institutions.

Consider a case in point, the closure of Alpha Bank & Trust of Alpharetta, GA. Not all of the deposits of Alpha were assumed and assets purchased by the acquirer, Stearns Bank of Minnesota, leaving both the FDIC and large depositors facing the prospect of a loss. An FDIC official confirmed that not all of the deposits of Alpha were assumed by Stearns in the resolution.

Fortune, it seems, rewards the proactive. As of June 30, 2008, Alpha had an overall rating of 21 vs 1.4 for the industry under IRA's Bank Stress Index. Alpha's ROE sub-index score was maxed out at 100 or two orders of magnitude above the industry mean. But the bank had been performing badly for some time. Any depositor following this institution could have and should have known to reduce exposure below the FDIC insured limit or get out entirely. To us, better safe than sorry.

The Alpha saga leads us to an optimistic tale, one involving Mark, a CSUITE financial professional at a NASDAQ-listed financial services company. Mark has been a reader of The IRA for some time and takes an active role in his firm's risk management and market surveillance effort.

More than a year ago, Mark started to get concerned about where his employer was keeping their funds, particularly the auction rate notes that his firm was using to manage their sizeable cash balances. Over a three month period last summer, Mark got proactive. He pushed his colleagues to get out of structured products like auction rate notes and moved entirely into money market funds.

By the end of 2007, Mark's firm was in half a dozen MM funds and Treasury paper only, but the yields were abysmal, so he began to place funds with a group of banks, primarily Wells Fargo (NYSE:WFC) and Key Corp (NASDAQ:KEY). But because of reports in the media about bank safety and some of the things Mark read in The IRA, his firm took a deliberate decision to take control of their risk situation.

A couple of weeks ago, Mark asked IRA to help him screen some banks using our IRA Bank Cart tool, which allows subscribers to view individual bank profiles from The IRA Bank Monitor. The inquiry from Mark and several other users led us to add a number of new screens to the IRA Bank Cart, which provides users a powerful way to select banks based upon specific risk factors. Annual subscriptions to the Advanced Search Tool are $500 and allow you to search for banks based upon criteria such as ZIP codes, size, state and a variety of screens.

Click here to see a demo of the IRA Bank Cart's Advanced Search Tool

Mark's firm decided upon a three-pronged strategy for cash management, mixing direct deposits made with safer banks, Treasury debt and the CDARS system operated by Promontory Interfinancial Network. Using a custom screen created for Mark, IRA provided him with a list of banks with an Bank Stress Index value of 1 or less and little or no OBS derivatives exposure In the IRA Bank Stress Index, 1 = the level of stress experienced by the entire industry in 1995, a relatively flat year compared with the real estate boom and bust seen in the late 1980s and early 1990s.  As of Q2 2008, the entire US banking industry had a stress index level of 1.4, a relatively high level of stress and comparable to the actual index value we calculate for the early 1990s period.

As Mark told The IRA: "Right now, it's about return of capital rather than return on capital. By using IRA's stress index value and our rule regarding derivatives exposure as the constraints, we feel comfortable enhancing returns via bank deposits in $100,000 increments." Based on the stress index scores, Mark ended his relationship with KEY but continues to work with WFC.

Of interest, Mark and the folks at Promontory already look forward to when the temporary extension of deposit insurance to $250,000 ends. Mark's firm is thus only placing funds in $100,000 increments via CDARS. The open-ended FDIC guarantee on non-interest bearing deposits will also eventually expire.

Starting the deposit placement process with an objective test screen, Mark is able to direct CDARS or another broker to place funds only with banks that meet his firm's specific investment criteria. And for all of the users of the IRA Bank Cart, we have now incorporated this same screen and a couple of other permutations into the Advanced Search Tool for all users of the IRA Bank Cart.

By setting some simple rules to guide the investment process and using consistent, transparent tests to select his banks, Mark and his firm benefit by taking control over the quality of the institutions which they use for cash management purposes. They also created an important new protocol for risk management within their enterprise by actively monitoring the safety and soundness of the banks which they use as depositories.

Not only is such a deliberate approach to managing bank counterparty risk arguably required under COSO and Sarbanes-Oxley, but it provides Mark with documentary evidence of the methodology used in the risk assessment process. More important, by only placing funds with strong banks, Mark is sending an important message to the marketplace - a message that we at IRA entirely endorse.

As more and more risk professionals and corporate treasurers learn that they can use fundamental benchmarks to steer their money to safer institutions, we can all help to improve the condition of the financial system by making good banks stronger and forcing the mediocre institutions to merge or be resolved. That, at the end of the day, is how we make the US financial system truly stable. We'll be talking about that further in future editions of The IRA.

Halloween in Washington: Being Effective and Winning

On the eve of Halloween in Washington, the 31st annual meeting of the Pumpkin Papers Irregulars was held at the University Club to remember the redemption of Whittaker Chambers, a veteran Soviet spy who became, in the late William F. Buckley Jr.'s words, "the most important American defector from Communism."

Overseen by Master of Ceremonies Al Regnery, the event featured the Lighting of the Pumpkin by Admiral John Poindexter and invocation by the Rev Vincent Rigdon. Angelo Codevilla provided an update on the Hiss-Chambers Case and on the continuing investigation.

The pumpkin, for those not aware, is where Chambers hid the microfilm of the documents that he and Hiss had been delivering to the Soviet military intelligence agency the GRU, Russia's largest intelligence agency. Chambers eventually rejected his Soviet masters and embraced the West, this even though he believed that the communists would prevail in the Cold War.

Daniel Oliver presented the Victor Navasky Award to Rep. Barney Frank (D-MA) and Senator Christopher Dodd (D-CT) for doing more to damage the national interest over the past year than any other Americans. We could have suggested some other nominees - for example, Federal Reserve Board Chairman Ben Bernanke and NY Fed President Tim Geithner, both for missing the financial crisis for almost a year -- but the award was greeted with effusive applause. See the interview last week with Roger Kubarych on how the Fed in NY and Washington dropped the ball on recognizing and dealing with the subprime collapse ('Fed Chairmen and Presidents: Roundtable with Roger Kubarych and Richard Whalen', October 30, 2008).

The first was his description of his initial meeting with Reagan, where as Allen tells it, Reagan challenged him to change US doctrine regarding the Cold War and to switch to a policy of "we win and they lose." Allen attributes to Reagan the basic decision to abandon the Nixon-era policy of détente and instead focus on competition with Moscow, ultimately leading to the collapse of the Soviet Union.

The second remembrance involved the first Gulf of Sidra incident in August 19, 1981, when two US Navy F-14 Tomcat fighters downed two Libyan Sukhoi Su-22 Fitters. When Allen called CA to inform President Reagan of the incident, at first he was told that the President was asleep. The next morning, when finally informed of the incident, Reagan reportedly replied, referring to the US pilots: "Well, boys will be boys."

Ronald Reagan surrounded himself with capable people and let them do their jobs, thus he did not need to be awoken in the middle of the night to hear that the US Navy was doing its job very well. But Reagan also demanded that the people who did serve the US were effective and accountable - qualities that have been badly absent during eight indifferent years of George Bush. Many positions at Tresury went unfilled for years under Bush, a reckless policy for which we all now pay dearly.

As President-elect Barack Obama selects his Cabinet and reaches out to various people to help address the global economic crisis, we hope he will ask hard questions about the role played by officials like Bernanke, Geithner, as well as former Democratic Treasury Secretaries Larry Summers and Robert Rubin, in creating this crisis in the first instance. It is high time to publicly unmask some of the culprits in this epic financial mess.

And where is former CFTC Chair Brooksley Born? Her testimony regarding the actions of Summers, Rubin and former Fed Chairman Alan Greenspan to block regulation of OTC derivatives is essential!

Don't believe us, Mr. President-elect; you can read it in the coverage by Bloomberg News and The New York Times of this issue over the past several months. See also our past comments where we discuss the Times coverage:

'The Subprime Three -- Rubin, Summers & Greenspan', April 28, 2008

'The Vigorish of OTC: Interview with Martin Mayer', June 12, 2008

Spread the Wealth: Bigger Is Not Better in Banking

Finally, regards Treasury Secretary Hank Paulson, Geithner et al., we encourage readers to peruse the report in the Columbia Journalism Review, "Goldman's Backdoor Bailout A call for transparency in the taxpayer rescue of Wall Street." Note the citations for Mark Pittman at Bloomberg News, another excellent source on the allegations against Paulson that the Treasury Secretary favored his former employer in the bailout negotiations and in the bailout of AIG (NYSE:AIG).

If and when the Congress does its job and looks into allegations of favoritism and worse to the benefit of Goldman Sachs (NYSE:GS) and the Paulson Treasury's conduct of the bailout, we may start to see the US recover some of its lost credibility in the financial markets. More than anything else, the new President needs to pick people whose credibility is unsailable and who have no connection to the past errors and omissions that got us into this mess.

That means, Mr. President-elect, we need to see some fresh faces and new names, people who do not have conflicts and face other possible liability due to past actions, otherwise we can stick a fork in this bird. We like what we've heard so far from Barack Obama about dealing with the financial crisis and, for example, not rewarding the Fed's failures with greater regulatory responsibility, but can the President-elect put aside the baggage of the past and really effect change?

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