How to know which banks are in trouble

WaMu failed, but who is next?

In today's economic crisis we all want to know which banks are in trouble and which banks are safe. Banks that we never thought would go bankrupt have indeed gone bankrupt, and the situation is getting worse by the day. Here is an easy, but unscientific way to know which banks could be in trouble next.

Things You'll Need

• Internet
• Computer

Instructions

1. 

   There is no easy way to tell which bank will be the next to fail, so we must use the best methods available to us. I believe the best predictor that we have is the stock market.

2. Using past bank failures as a guide one can see that banks like IndyMac, Washington Mutual, Bear Stearns, and Lehman Brothers were all punished in a huge way on wall street even before their bankruptcy. Why is this? Clearly there are some people in the know on the street that circulate rumors regarding who could be the next big bank to fail, and these stocks are hurt quite badly.

3. How can you use the stock market to know if your bank could be in trouble? Go to Yahoo Finance and lookup your bank's stock ticker symbol. Then view the most recent year of trading in this stock. If the stock has been cut from a price of $50 down to $2 or $3 a share then chances are the market is betting your bank could be the next one to fail. If the bank has done poorly, but is still trading in the $20 or $30 range it is likely not doomed to imminent failure. Indeed there are even a few banks that have gotten stronger through this tough time and their shares are near all-time highs. These are obviously the least likely to fail.

4. Though the market is no exact science, the market does trade on future prospects which allows us to see which banks could be next. Since the FDIC does not release its list of troubled banks to the public I believe studying the price movement of a stock is the best method we currently have to understand the risk of failure for an individual company.

Tips & Warnings

• Watch for quick price swings in your bank's stock. A 50% decline in a day can mean imminent danger.

• Don't read too much into a decline in the price of a stock. Unless the decline is huge and takes the stock down to the $2 or $3 range, it is likely just a normal correction.