Banking Industry Teetering On The Precipice

by Joel Hendon⁽¹⁷⁰⁾ Red Star

The news from the banking industry continues to deteriorate. Eventhough some say the the national economy is improving, it isn’t. As long as each month brings additional thousands entering the ranks of the unemployed, it isn’t getting better. The present figures showing that the number drawing unemployment compensation dropped slightly, gives a distorted picture. Many of these have used up their allotted compensation and have no choice but to drop out. Others find menial day work which removes their eligibility or such pay.

The banks themselves are the ones to watch. The FDIC (Federal Deposit Insurance Corporation) has announced the addition of 111 more banks which are referred to as “problem banks” in that they do not meet the asset quality, liquidity and earnings standards set by the FDIC. This brings the current total of such banks to 416 with a combined total assets of $299.8 billion.

The extreme problem here is that the reserve funds held by the FDIC shrank by 40% due to the takeover of 81 banks so far this year. The corporation levied an additional fee to banks to raise an emergency fund of $5.6 billion. But unless these “problem banks” can be stabilized, many more takeovers may yet come. Here is a comment from an article which shows why I contend the economy is not improving.

FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The quarterly loss, the second the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said. (FDIC List of Problem Banks Surges, Putting Reserve Fund at Risk: Alison Vekshin, [Bloomberg.com] Aug 27)

You can see this situation simply by looking at any daily newspaper. Check the legal ads and see the number of foreclosure notices. Follow them daily and you will see new additions regularly. Lending companies can weather only a limited number of these losses and remain solvent.

A Federal Judge, Lorreta Preska, issued a court order that The Federal Reserve must reveal the names of the banks which have participated in their emergency lending programs and the amounts of funds they received, in a favorable ruling for Bloomberg News request for information under the Freedom of Information Act. However, the Federal Reserve has requested that she not enforce the order while they appeal it, stating that disclosing that information would threaten the companies and also the economy itself.

The Clearing House Association, which represents many banks also agrees with the Federal Reserve that disclosure of the names and funds received by the banks could do irreparable harm to the banks and the economy. Here is a remark by their general counsel Norman Nelson: “Survival can depend on the ephemeral nature of public confidence. Experience in the banking industry has shown that when customers and market participants hear negative rumors about a bank, negative consequences inevitably flow.”

Although no one wishes to see those banking institutions harmed and especially do not wish to see additional harm done to the economy, it seems a shame that such things as the above fracas should have to be private. Taxpayers have a right to know where, and how much of, their tax monies go.

An article in Zachstocks.com says that the FDIC fears that some private equity firms such as The Blackstone Group, might buy some of those banks which are in trouble for a very small amount and then resell them even though they might still be unhealthy. And there are no regulations prohibiting that. The article also makes the following statement:

The current US administration appears hell bent on solving the financial crisis through instituting new piecemeal regulations. These regulations more often than not end up creating new problems as markets are not allowed to operate freely. Unintended consequences can ultimately become worse than the original issue which was intended to be solved through the regulations. (FDIC Crisis Mode Pressures Blackstone-Zackstock.com-July 11,2009)

Article submitted Friday, August 28, 2009 & read 636 times.

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