By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Seeing banks such as Wachovia Corp. (WB) get sold or Washington Mutual Inc. (WM) fail is scary for retail banking customers. But there are simple steps you can take to protect your bank assets.

A Money Morning reader recently wrote to say:

“I’m panicked. After watching the news and several banks fail, how can I know if my bank is safe? I’m retired and can’t afford to ‘lose it all’.”

With about 120 banks on the Federal Deposit Insurance Corp.’s troubled list and rumors swirling that as many as 200 more are in deep kimchee, we don’t blame you for asking – particularly since the FDIC doesn’t publish the names of the banks on its watchlist.

Credit Crisis Safety Plays

Here are three quick and easy steps you can take that may help you determine if your bank is safe or not.

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. If your bank doesn’t make the cut with a higher rating, then switch to one that does.
2. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. But this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.
3. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. (But keep in mind, like most things the government doesn’t make this easy so that means more paperwork.) If you’ve got the big bucks, visit the Certificate of Deposit Account Registry Service, or CDARS, and learn how you can obtain full FDIC insurance on deposits up to $50 million – with a single interest rate on a single statement at a single bank. Ironically, a former U.S. Federal Reserve employee – someone who must have gotten “fed” up with the complicated FDIC insurance requirements and ownership restrictions – started this innovative service.

But what ever you do, do it quickly.

That way you won’t be one of hundreds who will probably be camped out at the front doors of the next IndyMac Bancorp Inc. (OTC: IDMC) when it hits.

[Editor’s Note: “Credit Crisis Safety Plays” is a new Money Morning series that will detail strategies that investors can use to insulate themselves and their finances from the ongoing credit crisis. The first installment explained how to make sure your bank deposits are FDIC insured. These personal finance missives will draw upon the experiences of such experts as Money Morning Investment Director Keith Fitz-Gerald.]

News and Related Story Links:

• Money Morning:
  Credit Crisis Safety Plays: How to Make Sure That Your Bank Deposits are FDIC Insured

• Money Morning:
  Banking Bailout Becomes Law With House Vote, Bush Signing

• Bankrate.com:
  Safe & Sound rating

• FDIC:
  Electronic deposit insurance estimator

• Website:
  Certificate of Deposit Account Registry Service

Citigroup Inc. (C) will acquire Wachovia Corp.’s  (WB) banking operations for $2.l6 billion, a deal that will restore Citi’s title as the biggest U.S. bank by assets while transforming the once-highly regarded Wachovia into an investment-management operation.

In becoming the latest big U.S. bank to bolster its assets by rummaging through the remains of a nearly defunct financial institution, Citi agreed to buy Wachovia’s banking operations for $1 per share. The deal gives Citi a strong retail-banking network – adding 3,300 branches and offices in 21 states – as well as $2.2 billion in deposits; but the bargain also brings City $42 billion in prospective losses from Wachovia’s $312 billion loan portfolio.  The Federal Deposit Insurance Corp. (FDIC), in exchange for $12 billion in preferred stock and warrants, will cover any losses over that $42 billion ceiling.

With the deal’s completion, Citi will have 4,300 U.S. bank offices and more than $600 billion in deposits, giving it a hefty 9.8% share of the U.S. banking market. With total assets of $2.91 trillion once the takeover is concluded, Citi will have regained its position as the No. 1 U.S. bank by assets. However, in terms of how shareholders value each bank’s stock, Citi will remain the third-largest U.S. bank, behind leader Bank of America Corp. (BAC) and second-largest bank, JP Morgan Chase & Co. Inc. (JPM), Forbes.com reported.

Wachovia will retain its brokerage and wealth-management, which include such properties as A.G. Edwards Inc. and the Evergreen Investment Management Co. LLC mutual fund family.

Wachovia’s Woes

In little more than two decades Charlotte-based Wachovia grew into the United States’ fifth-largest bank, but quickly found itself hamstrung by a series of poor decisions that cost the company three-quarters of its value in the past nine months.

The most costly decision for Wachovia was the 2006 buyout of Golden West Financial Corp. – a California-based lender that specialized in adjustable-rate mortgages (ARMs). The acquisition of Golden West made Wachovia the largest holder of option ARMs, ahead of even Washington Mutual Inc. (WM)  – the lender that was snapped up by JPMorgan Chase & Co. last week. Wachovia was confronted with more than $30 billion in losses stemming from Golden West’s option ARM portfolio, BusinessWeek reported.

Wachovia’s collapse was hastened by JPMorgan’s purchase of Washington Mutual, which raised doubts about whether or not Wachovia had adequate reserves to cover mortgage-related losses.

“The J.P. Morgan/Washington Mutual transaction raised the bar in terms of potential marks/reserves against consumer real estate for other commercial banks,” said analysts at Credit Suisse Group AG (ADR: CS), led by Todd L. Hagerman.  “Our aggressive capital-sensitivity analysis for both Bank of America Corp. and Wachovia, incorporating J.P. Morgan’s $31 billion of marks, or 20% cumulative-loss assumption, suggests a blended potential capital shortfall of $40 billion to $50 billion for Bank of America and $15 billion to $20 billion for Wachovia, under a recession-type scenario.”

The result, many believe, was a run on Wachovia that resulted in a massive outflow of deposits, and ultimately, the bank’s collapse.

“The problem must have occurred last week with their ability to continue to attract and hold deposits after the failure of Washington Mutual,” Gary Townsend of Hill- Townsend Capital in Chevy Chase, Maryland told Bloomberg. “On Thursday and Friday they must have had a large run on the bank.”

Citigroup, JPMorgan On the Hunt

Collapses, like those experienced by the likes of Wachovia and WaMu, have paved the way for greater industry consolidation, with the remaining firms salvaging what usable assets can be found amid all the carnage, in a desperate bid to bolster their own positions.

Citi broadened its base with the addition of Wachovia’s 3,300 retail-banking branches and the $2.2 billion in deposits that come along with them. Those deposits will provide Citi with a cheap, stable source of funding at a time when credit is scarce.   

Citi, already the largest U.S. bank by assets, will have $1.3 trillion in total deposits worldwide, roughly $350 billion more than JPMorgan Chase & Co.

However, JPMorgan, under the stewardship of Chief Executive Officer Jamie Dimon, has made several strong acquisitions of its own – leaving the firm well positioned to compete.

After taking over The Bear Stearns Cos. Inc. in March, Dimon moved swiftly to acquire failed Washington Mutual from the federal government. JPMorgan paid $1.9 billion to the FDIC to acquire WaMu’s $188 billion in deposits, 2,200 retail branches and a loan portfolio valued at $176 billion.

While JP Morgan immediately wrote down roughly $30 billion in mortgages and home-equity loans, the acquisition left a total of $900 billion in deposits and 5,400 branches Bloomberg reported.

“JPMorgan is putting together quite an interesting empire of assets,” Douglas Ciocca, managing director of Renaissance Financial Corp. told Bloomberg. “Jamie Dimon has the right pedigree to be able to pull something like this off, as did J.P. Morgan himself.”

JPMorgan took $18.8 billion in write-downs and credit-related losses since the beginning of 2007 – a fraction of the $55 billion taken by Citigroup.

The Evolution of Goldman Sachs and Morgan Stanley

Competition will also come from the likes of Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), which have abandoned their roles as investment banks and converted to holding companies.

Goldman Sachs, the largest and most profitable U.S. securities firm, immediately took its place behind Bank of America, JPMorgan, and Citigroup, as the fourth-largest U.S. holding company last week, and is already moving forward with plans to revamp its business model.

The Financial Times reported yesterday that Goldman was looking to spend up to $50 billion on assets from ailing U.S. banks. That’s in addition to the $150 billion of its own assets it is moving to its Utah industrial loan corporation, CIT Bank, which currently has about $20 billion in deposits and $25.7 billion in assets.

Goldman has just $8 billion in securities backed by commercial mortgages, and if it sold all of those securities today, the company would record a gain, officials told the FT. Goldman has also reduced its exposure to private equity deals from $52 billion to $8 billion.

Morgan Stanley, formerly the second-biggest U.S. securities firm, had $36 billion of deposits and three million retail accounts at the end of August. The company will also convert its Morgan Stanley Investment Bank, an industrial bank based in Utah, into a national bank.

News and Related Story Links:

• Bloomberg:
  Citigroup Agrees to Buy Wachovia’s Banking Business

• Barron’s:
  WaMu Deal May Mean More Sector Markdowns

• Money Morning:
  JPMorgan Chase Biggest U.S. Bank With Its Purchase of Failed WaMu

• Bloomberg:
  Dimon Gets Morgan’s Mantle as Buyer of Final Resort

• Money Morning:
  Goldman Sachs, Morgan Stanley Seek Fresh Start as Holding Companies

• Financial Times:
  Goldman seeks to buy up to $50bn in assets.

• Forbes.com:
  
  Citicorp to Buy Wachovia Banking Operations.

Did U.S. taxpayers dodge a bailout bullet?

Maybe not completely.

To be sure, under the $700 billion credit-crisis bailout plan proposed by U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., there were some decidedly scary codicils.

For one thing, there was a near complete lack of taxpayer protection. To see what I mean, just take a look at the part of the plan that reads: “Decisions by the [U.S. Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

No courts?

No administrative agency?

No kidding …

As Jason Linkins writes in The Huffington Post, Section 8 of the Paulson plan allows for a “consolidation of power and an abdication of oversight authority that’s so flat-out astounding that it ought to set one’s hair on fire.”

Section 8 (an ironically appropriate term for the plan, as I’m sure anyone familiar with military jargon – or the TV series M*A*S*H – would agree) would have established Paulson as the de facto financial dictator-at-large, included no oversight as to financial operations, and consolidated power in an unprecedented fashion.

Thankfully, some lawmakers balked. If they hadn’t, and the plan passed into law unaltered, I realized that we soon would be welcoming U.S. taxpayers to the new “Democratic Socialist Republic of the United States.” Maybe, I thought to myself, we’d even get to address Treasury Secretary Paulson as “His Lordship.”

Although Congressional lawmakers yesterday (Thursday) reached an agreement on the principles of a new bailout deal – an accord that addresses some of my concerns about a lack of accountability – they reacted a bit too slowly and in too self-aggrandizing a fashion. When they should have been hammering out a deal, congressional leaders were, instead, literally tripping over one another as they elbowed their way to the TV cameras, after which they wrung their hands and looked worried on cue, posturing in their thousand-dollar suits in front of a fawning Washington press corps.

What our elected leaders failed to grasp, unfortunately, and still don’t apparently understand, was that this wasn’t about politics. It was – and is – all about global finance. And now more than ever, global economic issues reach from Wall Street to Main Street, meaning those issues will affect you and me.

So, even though the now-adulterated version of the deal apparently now includes a modicum of accountability, it still is going to add billions of dollars in new debt to the U.S. federal balance sheet. And particularly with the already-brittle U.S. economy, we’re hard-pressed to see how Americans will be able to afford a $700 billion taxpayer-funded bailout in any form.

That’s $700,000,000,000.00, with a capital “B” and – count ‘em – 13 zeros.

Even in its revised form, the consequences will hang over us for years, and that means this is no time for investors to be speculating, nor is it time to put the proverbial “pedal to the metal.”

However, it is time to think about the following:

• Virtually any bailout plan – regardless of its format – will ultimately saddle the incoming president and the American people with trillions of dollars in debt that will actually dwarf the U.S. economy’s actual output as measured by gross domestic product (GDP). This means that investors must plan for much-higher interest rates – rates that are so high, in fact, that they could easily choke off U.S. growth well into next year.

• The dilutive effect of $700 billion – not to mention the additional trillions of dollars that still are not recognized as “problem assets” – will be extreme. U.S. inflation could spike overnight. And the U.S. dollar has a higher-probability than not of cratering from here. (We hope we’re wrong on this point, incidentally, but we’re not optimistic). This reinforces the investment case for commodities, in general, to begin moving far higher as we have suggested for some time, now.

• At the same time, global growth will continue. In fact, in the years to come, the world’s healthiest overseas markets could more than make up for the unmitigated disaster that America has become lately.

The bottom line is this: For the foreseeable future, global investing is the way to go.

We can make the case that things will improve in the United States one day and we’ll welcome the market’s return to normal.

In the meantime, however, more than 78% of the world’s economic activity is taking place outside U.S. borders. And that’s worth noting. According to International Monetary Fund (IMF) reports, China’s on track for 9.8% growth this year, and at least 9% in 2009. Taiwan and Brazil are projected to advance at rates of 4.3% and 4.8%, respectively.

So, it only makes sense to “follow the money,” even if we can’t pronounce where that money is going. Not only are the companies in many often-overlooked regions stable, many still are growing at double-digit rates.

For those of us who are north of 50 or closing in on retirement, it’s important to note that many of these stocks pay dividends that dwarf the anemic 2.5% average payout of a U.S. Standard & Poor’s 500 company. For instance, companies in New Zealand routinely pay dividends averaging more than 8%. Taiwanese stocks commonly feature dividend yields of 5% or more. Many pay even higher amounts.

We’ve repeatedly talked about how much of a difference dividends can make in your portfolio. But for you speed readers out there, here’s an investing fast fact: If you invest $50,000 in a U.S. stock paying 2.5% a year, you’d accumulate $64,000 in 10 years (excluding capital gains).

That’s a 28% increase based on dividends alone.

But that same $50,000 invested in a New Zealand exporter (with an 8.6% dividend yield) would leave you with $114,000 – a return of 128%, from the income alone. In short, by picking a stock with a superior dividend payout, you ended up with 78% more money over that decade-long stretch.

And that’s worth something these days – even if our own dollar might not be.

[Editor’s Note: In an open letter to U.S. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and the U.S. taxpayers this week, Money Morning Contributing Editor R. Shah Gilani proposed an alternative to the Paulson Bailout Plan, and to the other credit-crisis plans being cobbled together in Washington. And for readers who support this approach – which is designed to cost taxpayers little or nothing – we’ve created ways to send Gilani’s credit crisis plan along to lawmakers and the state governors from all 50 states. We urge you to check this story out.]

News and Related Story Links:

• Money Morning Investigative Research Report:
  
  Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers.

• Money Morning Investing Strategies Story:
  
  How Dividend-Paying Stocks Can Help You Tame the Bear.

• The Huffington Post:
  
  Dirty Secret Of The Bailout: Thirty-Two Words That None Dare Utter.

• MarketWatch:
  
  Lawmakers reach deal on rescue-plan principles.

• Wikipedia:
  
  Henry M. “Hank” Paulson Jr.

• The New York Times:
  
  Follow the Money.

• Wikipedia:
  
  Section 8 (Military).

• Money Morning Investment Strategy Story:
  
  Five Ways to “Follow the Money” to Global Profits, In Good Markets and Bad.

• Wikipedia:
  
  Gross Domestic Product.

• Web Site:
  International Monetary Fund (IMF).