Banking on Failure: FDIC Shutting Down Insolvent Banks at a Record Pace
In the wake of last fall's $700 billion taxpayer-funded bailout of the financial and banking sector, the so-called TARP program, the decision makers in Washington have been engaging in a fiscal masquerade. The objective: convince the public that America's banks, with balance sheets choking on toxic assets, are actually well-capitalized and secure. This, despite clear evidence that at least $2 trillion in additional funding would be needed to clean up the nation's problem banks. To convince U.S. citizens and global investors that all is well with the American banking system, Treasury Secretary Timothy Geithner concocted misnamed "stress tests" to demonstrate the fiscal health of the country's banks. Not surprisingly, the major banks "passed" the Geithner test, for the most part with flying colors. My readers will recall that I labeled the Geithner stress test a fraudulent exercise in deception. Now, it is reality that is casting its impartial verdict.
The Federal Deposit Insurance Corporation (FDIC), over the past few days, closed several banks, including Alabama based Colonial Bank. This institution, with $25 billion in assets, represents the 6th largest bank failure in American history. So far, 2009 has witnessed 77 bank failures in the United States. In all of 2008, the year that the banking crisis exploded, 35 banks were shut down by the FDIC, and only 3 in 2007.
With the number of bank failures accelerating, and running far ahead of last year's pace, it is preposterous to conclude that the U.S. banking sector is well capitalized and strong enough to endure a severe economic recession. Yet, that is exactly the fantasy world the key economic policymakers in the Obama administration are beckoning us to embrace.
This problem of cognitive dissonance is not a uniquely American one, however. In Western Europe there is a numbing resistance to understating how vulnerable that region's banks are to the disastrous and worsening economic situation in Eastern Europe. As with America and the UK, former Soviet bloc countries have suffered a severe contraction in home prices. In addition, many East European home-buyers obtained their mortgages from banks located in Germany, Italy, Austria and other parts of Western Europe. The loans were structured in euros, and now virtually all the national currencies in Eastern Europe have severely declined in value in relation to the euro. The results is a wave of mortgage defaults, which are eroding balance sheets throughout the European banking system.
Action speaks louder than words. Economic realities in the United States, Eurozone and UK, and the multiplication of bank failures in America, point to the futility of trying to pretend a problem does not exist, then converting that ignorance into a solution. Just as the political decision makers lost control over the financial system in 2008, they seem headed down the same path now, having failed to learn from their recent mistakes, which have already inflicted such a fearful cost on the global economy.
Follow Sheldon Filger on Twitter: www.twitter.com/EconomicCrisis
Robert Scheer: Obama's Presidency Isn't Too Big to Fail
A president has only so much capital to expend, both in tax dollars and public tolerance, and Barack Obama is dangerously overdrawn.
Garrett Johnson: Deregulation and the Triumph of Wall Street
One year removed from a catastrophic, global, economic meltdown, and 26 months removed from the start of the credit crisis, our political establishment is either unwilling or unable to reform the system
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
See Anthony Citrano's Profile
Great piece, Sheldon. I was thinking some of the same thoughts at Milken's conference early this year (that's when I wrote this: http://www.huffingtonpost.com/anthony-citrano/stressless-tests-our-trea_b_197999.html )
We'll soon (again) be hearing "let's look forward, not backward..."
Most of the banks in this country are insolvent. They appear not to be because they are permitted to value their toxic home mortgage backed securities and derivatives at what they paid for them, instead of their fair market value, which is ZERO or close to it.
They can't sell them, assuming anyone would buy them, because they would have list the sales prices in their books and that would instantly render the banks insolvent.
This is why they aren't lending and why they won't start lending anytime soon, particularly with the coming collapse of the commercial real estate mortgage backed securities and derivatives that most experts expect to be much worse than the collapse of the home mortgage backed securities and derivatives.
Meanwhile real unemployment is close to 20%, so I don't see a light at the end of the tunnel, unless it's an onrushing train. Jobless recovery is an oxymoron and our economy can't improve until the government solves the toxic assets problem.
ABS/CDOs?etc. are not valued at what they paid for them.
Banks are lending. They just aren't lending to deadbeats.
Do you disagree with that approach?
The economy has shrunk, so lending has shrunk. It could not be otherwise. Credit worthy borrowers are spooked and they are not asking for loans. What is the bank supposed to do? Make them an offer they can't refuse? My credit union just offered me $100,000 for an interest rate that I recently saw on their CDs. I walked away. What spooks me? I'll tell you. Dizzy Lizzy and Barfskoffsky. They're both idiots.
The government has done far more in solving the "toxic" asset problem than the HuffPo masses are being led to believe.
Send me them "toxic" assets. I wants to be a quadrillionaire.
Companies in need do deserve relaxed rules and stimulus. The big lie is that these banking entities have a legitimate need. The truth is that they have completely sunk into insolvency.
Look at what's happening now. Overstressed banks refuse to make loans. They won't be out of the hole for decades, but in the meantime they'll suck profits away from the good banks.
The 1980's saw the trillion dollar savings and loan debacle. And who was presiding over that mess? The same deregulation/non regulation clowns that presided over our latest financial meltdown. We would also be in much better shape to handle these crises if those same bunch of clowns hadn't run up $11 trillion in debt to finance their giveaways to the rich and corporate tax breaks. The republicans like to play the patriotism card and the fiscally responsible card, but their policies have bankrupted the country and have put our national security at risk when you sell all that debt to foreign governments, mainly the Chinese. They could bring our economy down just by dumping their U.S. debt and it would cost them a lot less than our adventure in Iraq. We wouldn't be able to finance the military and interest rates would skyrocket. Thanks all of you supply siders/trickle downers/deficits don't matter repubs.
I thought the market was in recovery? Not true?
Not true because there is no "real" recovery. The market has rebounded because investment Banks and Wall Street are gambling in the market with bailout money supplied by the Federal Reserve. This bull has short legs because the money isn't going to last and the economy is still moribund.
March on Washington September 13 for meaningful healthcare reform. Pass it on.
Fewer banks mean less competition for the survivors so lower interest rates paid on deposits, higher fees on customers. We are seeing a major change in banking that is going to hurt many. Right now the FDIC is trying to manage the banking industry to prevent a fast meltdown. Perhaps they ought to use their powers to pressure banks to massively cut compensation of the executives to bail themselves out before they have to be bailed out.
Remember relaxing "Mark-to-Market" last spring so that financial companies could hide their poor portfolios?
Was that to give the "market" a bump so that favored individual investors could get something out of the worthless stock they held?
No, that was not the reason.
What was the reason?
We knew last year that the FDIC would be taking over a large number of small to mid-sized banks this year, and perhaps next year.
This is not news. Many of them applied for TARP, and they were deemed to be lost causes - absolutely no possibility of ever recovering to a point where they could pay back TARP. So they were left to either find additional private capital, fat chance, or die - extremely likely.
If you want to "fix it," start by calling it SECURITIES FRAUD.
Start by calling it USURY.
Start by calling it a trillion-dollar SWINDLE.
And oh, yeah... stop calling things "campaign contributions." BRIBES.
How does that fix anything?
If this crisis continues to deepen, they will have to start considering nationalization and expanding the public sector in banking and insurance. Perhaps all we can do is let this situation "ripen" and continue to get worse, until more decisive action can be taken. Right now, there seems to be a very familiar political log jam in Washington, with Republicans combining with Blue Dogs and Dixiecrats to water down, limit and block real reform.
I have never thought there would be an easy way out of this crisis.
Bank failures are so common in the USA that the week-end doesn't begin till Friday's FDIC announcement of how many banks have failed. Some enterprising bookies probably take bets on how many banks will fail each week.
It's an outrage to call the respectable business people, performing a vital economic activity, nay a public service even, "bookies".
Shame on you. Next you'd be calling the monies paid to re-elect our erstwhile congress people "bribes".
You got that right, Synoia. Remember that organized crime is a truly unregulated public utility that provides essential services that gov't & enterprisers with scruples can't &/or won't provide for us. What is the UK's term for those who provide the essential public service of taking bets; is it, "turf agent"? There also a vile pejoritave(sp?) who provide employment oppourtunities for sex workers. The USA need more non-pejorative euphemisms at once.
BTW, WTF is a better euphemism for campaign contributions to re-elect persons who are elected officials? Politician is an ugly pejorative that is as ugly as pimp,or whore. or hooker, or street-walker, etc.
You must be logged in to comment. Log in or connect with
