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The Great Money Panic!

    • In New York, more than 20% of the office space leased by dot-coms since early 1999 has been returned to the market there.

    • In Seattle, the vacancy rate has more than doubled from 1.7% at the end of last September to 4.2%.

    • In parts of Silicon Valley, commercial vacancies have reached a whopping 12%.

      Even the FDIC is worried about specific metropolitan areas it feels are at risk due to excess commercial real estate construction - Atlanta, Phoenix, Portland, Seattle, Salt Lake City, Fort Worth, Dallas, Las Vegas, and Denver.

    This problem is massive: US banks are on the hook for a total of $639 billion in commercial real estate loans. THAT'S 35% MORE THAN THE COMBINED CAPITAL OF ALL US BANKS PUT TOGETHER!

    Five years ago, banks typically loaned up to 80% of a property's market value. Not any more! Convinced that the great economic expansion of 1991-2000 would never end, bankers literally threw money at anyone who asked for it. They didn't stop at lending 80% ... or even 90% ... or even 100% . They sometimes loaned up to 110% of a property's value -- that's right -- ONE HUNDRED AND TEN PERCENT.

    In fact, these ultra-high-risk real estate loans - called "High Loan to Value" loans or "HLTV" - have QUADRUPLED in just the last two years.

    This is one gigantic house of cards -- and its collapse has already begun! With hundreds of thousands of homeowners being laid off ... with thousands of corporations unable to make their loan payments ... with thousands more simply going out of business, and with untold thousands of office buildings empty, defaults on these loans are already skyrocketing and could soon reach epidemic proportions.

  1. DERIVATIVES -- the final nail in the banks' coffin: Most derivatives are highly leveraged private wagers -- "custom futures contracts" on the markets. They're the instrument of choice for mega-corporations who want to bet on -- or hedge their bets on -- movements in stocks, interest rates or currencies, for example.

    But derivatives are dangerous because any major unexpected market swing can strike the players like an atomic bomb. The fall-out: Huge losses plus dozens of banks falling like dominoes.

    How big is this problem?

    Well, back in October of 1998, when currencies from Japan to Russia and Europe were crashing, derivatives cost Union Bank $240 million. Chase Manhattan lost $160 million. Deutsche Bank lost $770 million. And Credit Lyonnais lost a whopping $2 billion.

    And that was without a worldwide economic recession!

    You'd think governments would have stepped in since then - and forced banks to limit their exposure to these highly leveraged derivatives. Well, think again.

    In 1998, US banks held about $27 trillion in derivatives contracts. Today the US General Accounting Office (GAO) tells us US banks are now exposed to more than $37.3 TRILLION in derivatives!

    That's more than four times America's entire gross domestic product ... more than 530 times the banking industry's TOTAL PROFITS ... nearly $141,000 for every man, woman, and child in the country.

    Even if you consider just the credit risk associated with derivatives (not their full face value), the exposure is huge. For every $1.00 of capital (after the Fed's adjustments for other risk factors), Bank One has $1.04 in credit risk related to derivatives.

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