Vol. 73/No. 35      September 14, 2009

Since the beginning of the year, 84 banks have collapsed. The number of those at risk of failure has risen from 305 to 416 in the second quarter, a 15-year high, according to the Federal Deposit Insurance Company (FDIC). At the same time FDIC funds to guarantee deposits are at the lowest level since 1993.

Over the past year and a half the government has pumped tens of billions of dollars into bailout packages to avert collapse of the nation’s largest banks. However, the crisis has spread to encompass the entire banking system, with increasing numbers of smaller and medium-size banks collapsing or on the brink of failure.

“Early losses were related to residential loans and complex mortgage-related assets,” stated FDIC chairperson Sheila Bair in an August 27 news release. But “we’re now seeing problems with more conventional types of retail and commercial loans.”

Of the 84 bank closures this year, 39 have occurred over the past two months. “The numbers are climbing every day. The U.S. banking system will lose some 1,000 institutions over the next two years,” John Kanas told CNBC. Kanas’s private equity firm recently took control of collapsed BankUnited of Florida—the largest financial institution in that state.

In all of 2008 bank failures totaled 26. During the years of the post-World War II boom, between 1947 and 1978, the average bank failures each year were three.

Federal regulators closed Guaranty Bank August 21. With 162 branches in Texas and California, the bank was the third largest financial institution to fail in 2009 and the 11th largest in U.S. history. Its collapse depleted $3 billion of the government’s deposit insurance funds. As of the second-quarter this fund, which insures $4.5 trillion in U.S. bank deposits, stood at $10.4 billion, down more than 20 percent from the previous quarter. A year ago it was $45.2 billion.

“Over the next five years, the agency expects roughly $70 billion in losses due to the failure of insured institutions,” stated CNNMoney.com.

The FDIC insures up to $250,000 per depositor in each bank. However the actual funds the agency has on hand aren’t anywhere near the amounts the government promises to guarantee.

Federal government regulations say the FDIC can maintain on hand as little as a 1.15 percent ratio to insured deposits, but even that figure is declining. At the end of June the fund ratio stood at 0.22 percent.

The government’s bailout of the nation’s largest banks along with federally arranged mergers have made the banking giants even bigger. J.P. Morgan Chase, Bank of America, and Wells Fargo each now hold more than $1 of every $10 on deposit in U.S. banks, despite regulations barring this. Those three banks along with Citigroup now issue one of every two mortgages and about two of every three credit cards, reports the Washington Post.

In an article titled “Bernanke Sees a Recovery—How Would He Know?” John Hussman, president of the Hussman Investment Trust, notes that the billions poured into the largest banks have done nothing to resolve the financial crisis.

Federal Reserve chairman Benjamin Bernanke, like Treasury Secretary Timothy Geithner and his predecessor Henry Paulson, “shows no hesitation in diverting the real resources of the American public to defend and compensate the bondholders of mismanaged financial companies who made reckless loans,” Hussman wrote August 24. “The underlying problems are not healed—only band-aided temporarily by a flood of public money.”

Government officials point to increasing home sales in arguing that the economy is recovering. In July they rose for the fourth consecutive month and median prices were down 11.5 percent from a year earlier. However, these sales “are still at one of their lowest levels in the last half century,” J.P. Morgan Chase economist Abiel Reinart told the Journal.
 
 
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