In Crazy New Landscape For Banks, Taxpayers Are The Big Losers

03/18/2010 05:12 am ET | Updated May 25, 2011

This story has been updated

Fifty banks collapsed during the third quarter of 2009, while more than one in 15 are on the verge of failure -- the highest rate since 1992 -- according to a new report from the Federal Deposit Insurance Corporation that depicts a crazy new landscape for banking in which taxpayers are the consistent losers.

Because of all the failure and near failures, the fund that guarantees deposits hit the red for the first time since 1992.

Meanwhile, some banks are making money hand over fist, with the sector as a whole posting $2.8 billion in profits -- up from a $4.3 billion loss in the second quarter.

They're doing so in part by borrowing cheap federal money -- subsidized by the American taxpayer -- even while massively cutting back on lending. The plunge in lending since last quarter is the largest recorded since federal regulators began keeping track in 1984.

The whole point of the taxpayer-funded bailout and the cheap money for banks was to recapitalize them in hopes of stimulating lending, but the banks are holding back -- which is seriously slowing the economic recovery.

"We need to see banks making more loans to their business customers," Federal Deposit Insurance Corporation Chairman Sheila Bair said Tuesday in a statement. "This is especially true for small businesses that rely on FDIC-insured institutions to provide over 60 percent of the credit they use."

In March, the Obama administration announced a $15 billion plan to jump-start government lending to small businesses. But construction and industrial loan balances at banks dropped 6.5 percent in the third quarter; overall loan balances dropped 2.8 percent.

"I will not rest until businesses are investing again and businesses are hiring again and people have work again," President Barack Obama said Monday.

Financial firms -- banks included -- recorded $80 billion in profits, a 36 percent increase from the previous quarter and a 21 percent increase from the same period last year, according to third-quarter numbers released Tuesday by the Commerce Department. The annual rate that represents -- $320 billion -- is the highest it's been since the first quarter of 2008, when the unemployment rate was less than half of what it is now.

But the gulf between the haves and have-nots in the banking industry is widening, imperiling the very institutions whose lending is supposed to fuel the recovery.

• The nation's 7,408 smallest banks overall broke about even during the quarter.
• The 579 mid-sized banks, loosely defined as holding assets between $1 billion and $10 billion, recorded an average loss of about $3 million during the quarter.
• The biggest 112 banks, those with more than $10 billion in assets, recorded an average profit of nearly $42 million, according to the FDIC's latest figures.

Only three new banks were formed in the three-month-period ending in September, the smallest quarterly total since World War II.

Christopher Whalen, a noted bank analyst at Institutional Risk Analytics, told HuffPost
the situation in the banking industry is "pretty gruesome." His firm tracks the overall level of stress in the sector via an index -- and Whalen said U.S. banks haven't seen today's levels of stress since the 1930s. It's "much worse" today than during the savings-and-loan crisis of the early 1990s, he said.

He cautioned that the fourth quarter, which ends Dec. 31, is going to be even worse. While economists and the administration point to economic indicators that suggest the economy is slowly improving, Whalen said that banks always trail behind the rest of the economy.

"We're going to have a bloodbath," he said. Banks were under pressure during the third quarter to cut costs and increase revenue because of the federal government's "stress tests" in the spring -- exams that gauged the health of the country's 19 biggest banks. Federal regulators were trying to determine which banks needed to raise more money. Revenue was a key component of the formula.

So banks tried to outperform in order to avoid being forced to raise more money, Whalen said. Indeed, expenses across the industry fell and profit increased. But next quarter, banks on solid footing will aggressively write off their bad loans -- driving up losses -- and those in a more precarious position will simply continue to "muddle along," Whalen said. Either way, he predicted, lending will continue to fall.

"That's the problem for the economy. We've got probably a third of the industry that's contracting," Whalen said. "They're not making new loans, they're basically in a defensive posture, and that's not going to change."

READ the report below:

Quarterly Banking Profile -

Get HuffPost Business On Facebook and Twitter!

YOU MAY LIKE