I don’t know about you, but I just read something over the weekend (October 24, 2009) that is almost as scary as a good ole’ Halloween trick-or-treat: the 100th bank failure in the US this year. There have not been this many bank failures since 1992 and the Savings and Loan Crisis. This number is nothing compared to the over 8,000 banks that failed during the Great Depression, but it seems like the failures have been coming at us with more force lately. The irony about all of this important information is that no one seems to be talking about it.
President Obama, however, seems to know exactly what is going on without coming out and saying something like, “Dear American people, the banks in the country are in trouble, and that means you’re in trouble, too.” For example, in President Obama’s speech on Saturday, October 24, 2009, he commented on the state of the banks in the US. He talked about how, since tax payers bailed out several banks, it is now the responsibility of the banks to return the favor and to begin lending money again to credit worthy entities, more specifically small businesses. Here are some of the president’s own words taken from a transcript of his speech (source WBZ News Radio 1030):
“Over the past couple of years small businesses have lost hundreds of thousands of jobs. Many struggle to get the loans they need to finance their inventories and make payroll. Many options -- can't get financing to start small business in the first place…
Fortunately it [the financial stability acts provided by the government] worked thanks to the American taxpayers. We've now achieved the stability we need to get our economy moving forward again. Credit may be more available for large businesses [but] too many small business owners are still struggling to get the credit they need. These are the very taxpayers who stood by America's banks in a crisis. And now it's time for banks to stand by credit worthy small businesses and make the loans they need to open their doors grow their operations and create new jobs. It's time for those banks to fulfill their responsibility to help in short a wider recovery a more secure system…
The goal here is to get credit where it's needed most to businesses to support families sustain communities and create the jobs that power economy. That's why we enacted the financial stability plan in the first place back when many of our largest banks were on the verge of collapse. Our credit markets were frozen and it was nearly impossible for ordinary people to get loans to buy a car or home or pay for college. The idea was to jumpstart lending and keep our economy from spiraling into a depression…”
From my perspective and my understanding on how the US economy is “improving,” I thought that banks were lending again. The president made it quite clear that was not going on. It almost seems like the president is begging the banks to open up their wallets. Therefore, if this process continues, as the president identifies as “too many small business owners are still struggling to get the credit they need,” then we are going to be staring into that great financial storm that we saw last year.
The reason why the banks are not lending is probably because they have no money to lend. I think that even more eye-opening than the banks not lending money is that several banks, and this has increased in velocity over the past several weeks, have begun to sell their “best” assets. This is frightening because a bank has several parts it could sell: the best, the mediocre, and the worst part. Banks are selling their “best,” most valuable assets according to experts. Therefore, if a bank is selling its best assets, what is left in the bank? Basically, there is nothing left except the pieces that no one wants. That would make the company worthless, at least in the eyes of whoever would want to buy any other part of the bank. I guess someone could still buy all that bad debt from a bank for fractions of what it was supposed to be worth, in hopes of getting a return on the investment. In a little twist of irony, that someone is you. According to CNBC.com, the largest buyer of failed banks in the US this year is the FDIC (Federal Deposit Insurance Agency)—an agency created by Congress.
Here’s another scary thought about our banking system. The FDIC is running out of money. Because so many banks have failed this year, the FDIC needs to find additional sources of income to insure deposits of banks that have gone under or will go under. Where will the FDIC find extra money? Logically it will borrow money from banks who have borrowed money from the US taxpayers. You will get an extra candy if you can figure out how that will work. After borrowing the borrowed money, only then will the FDIC have enough money to insure deposits. I guess if your bank fails then you are really receiving the money that you lent to the FDIC via the banks that lent it out. Funny that the FDIC would be able to borrow money to insure money from banks that the US taxpayers have already lent money to.
In case you weren’t frightened enough, I’m going to give you a little extra haunting theme of the week…a reminder (since I saw this sign while standing in line at my bank): The FDIC extra protection for the $250,000 limits on bank accounts expires on December 31, 2009. At that time the limits are supposed to reset to the $100,000 limit before the crisis began.
