Vol. 72/No. 36      September 15, 2008

On August 29, Integrity Bank of Alpharetta, Georgia, became the 10th bank to collapse this year. The Federal Deposit Insurance Corp. (FDIC) stepped in to oversee a takeover by Regions Financial of Alabama of the failed bank’s $1.1 billion in assets.

The FDIC is the government agency that functions to instill confidence in the U.S. financial system by insuring bank deposits, generally for up to $100,000 per deposit account. Insured banks pay premiums, which along with earnings from U.S. Treasury securities, are put into the agency’s deposit insurance fund.

At the end of June, the fund stood at about $45 billion. Since then there have been six bank failures, including the July 11 collapse of IndyMac Bank, which had $32 billion in assets. The FDIC has paid out more than $6 billion from its fund so far to cover losses, according to Bloomberg news service.  
 
117 ‘problem’ banks
The FDIC maintains a list of banks in trouble, which has grown for the last seven consecutive quarters. From a historic low of 47 banks at the end of September 2006, the FDIC “problem list” at the end of June stood at 117 out of a total of about 8,500. While the number of “problem” banks was much higher in the early 1990s, reaching nearly 10 percent, there are many indications that what is happening now is the beginning of a more systemic problem, whose consequences will be devastating for working people.

Between April and June, 27 banks were added to the list. This included some larger institutions and brought the total assets of “problem” banks from $26.3 billion to $78.3 billion. The FDIC list gives only a partial picture, as conditions often change rapidly. IndyMac Bank, for example, was not on the list.

Banks are having a harder time raising capital and are more reluctant to lend as the credit market tightens. Nearly 18 percent of all banks were unprofitable in the second quarter. Net income of all banks at the end of June was the lowest second-quarter total since 1991.

Changes in other indicators over the last year illustrate the deepening problem in the banking system. Charge-offs of uncollectible loans and leases totaled $26.4 billion in the second quarter, nearly triple the amount it was during the same time last year. Much of this is related to the collapse of the U.S. housing market. Residential mortgage loans write-offs increased by 822 percent in one year. Charge-offs for real estate construction and land development loans rose 1,227 percent. One in every 171 households received a foreclosure filing during the second quarter, up by 121 percent from the previous year.

In the same period, the average rate of return on assets of U.S. banks dropped from 1.21 percent to 0.15 percent.

Banks have been shoring up their reserves in anticipation of more defaults. While the amount banks added to these “loan-loss provisions” quadrupled in one year, the reserves continue to slip further behind the rising sum of past-due loans.

In an August 22 column John Mauldin, head of an investment advisory firm, cited Chris Whalen, managing director of Institutional Risk Analytics, whose business is to analyze the “health” of banks and financial institutions. Whalen, he said, expects about 100 banks will fail over the next year with combined assets of $850 billion. If something like this happens, that portion that would be lost and have to be covered by the FDIC would likely exceed its funds by no small margin.  
 
Freddie Mac and Fannie Mae
The deflation of mortgage giants Freddie Mac and Fannie Mae remains a major unsolved problem for the capitalists, and has been a big source of pressure on many banks. The two government-sponsored private companies hold or back $5.3 trillion of the $12 trillion total in outstanding U.S. home mortgages. Both lost more than 90 percent of their stock value within one year, and Moody’s rating agency downgraded their preferred stock to near junk.

The White House moved to shore up the balance sheet of, and confidence in, the two firms by signing a housing bill July 30 that allowed the Treasury Department to extend them an unlimited line of credit and buy their stock.

Freddie and Fannie shares started rising during the last week of August, but then declined again at the end of the month with news that the Bank of China recently sold some 30 percent of its securities in the two companies.

JP Morgan Chase announced in late August it would write down some $600 million of its preferred shares in the companies. Other banks and insurance companies, which hold a total of some $35 billion in the mortgage firms’ shares, are expected to do the same by the end of the third quarter.  
 
 
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