Here's a solid piece from CNBC.com on the surprisingly low number of banking failures that have take place to this point in the economic crisis.
In case you're wondering why, the answer is spelled P-O-L-I-T-I-C-I-A-N-S.
With all the doom and gloom surrounding the
banking industry from the toxic assets to the nasty recession, you?d
think banks would be failing at a furious pace.
Think again. Since the recession began in January 2008, the FDIC has closed just 39 banks?25 in 2008 and 14 thus far in 2009.
contrast, more than 1000 institutions were closed during 1988 and 1989
when the savings and loan crisis was at its peak. Another 850-plus
failed in the ensuing three years when the S&L crisis intersected
with the fairly mild recession of 1990-1991.
In 1933, the government closed all 17,000 of the nation?s banks for a long, bank holiday weekend and some 5,000 never reopened.
If all this doesn?t hold up to logic, then try politics.
worse than the statistics indicate,? says veteran bank analyst Bert
Ely. ?One of the problems is how slowly regulators move in dealing with
there more banks in the 1930s and 20 years ago then than the roughly
8,400 of today, but analysts say that still doesn?t explain the huge
regulators are behind the curve,? adds Gerald O?Driscoll, a former
Federal Reserve official and Citigroup VP, now with the Cato Institute.
?The regulators are kind of where they were in the late 1980s.
Regulators procrastinated, then acted. Regulators become tough when the
politicians decide to bite the bullet.?
experts say there are striking similarities between the current period
and that of the late 1980s and early 1990s when the federal government
went from insufficient stopgap solutions to the savings and loan crisis
to a radical overhaul.
took a new administration to say we're not responsible, to say we have
a bunch of insolvent savings and loans," says Lawrence White, a saving
and loan regulator and former White House economist. ?It made it easy
for the regulators.?
points out that it also took a new law, called Firrea, which created
sweeping regulatory reform as well as a government entity, a bad bank,
the Resolution Trust Corporation, to assume control of the
institution?s assets and then sell them back into the private sector.
those days we weren?t as lenient,? says George Kaufman, a professor of
banking and banking regulation at Loyola University, who consults for
the Federal Reserve Bank of Chicago, ?I think banks have been well
the longer the government waits to close down troubled banks, the
longer it will take to restructure the system, goes the thinking, which
will also wind up costing taxpayers more money.
Crisis At The Crossroads
year and a half into this crisis, analysts say there are signs the
government is still in denial about the magnitude of the problem as
well as the sweeping, draconian actions needed to attack it. At the
same time, they say some officials may be on the verge of a turning
point in dealing with the issue.
restructuring should start with some diagnostic phase, where you triage
the winners and losers, put them in buckets, some are worth saving
others are not,? says Luc Laeven, a World Bank economist who
co-authored a study on banking crises of the last 40 years and the
policy responses to them. ?The government shouldn't be in the business
of trying to save all institutions.?
Treasury Department?s decision to start using stress tests on the top
20 banks may be a key development in that diagnostic phase.
scope of how to do a proper banking resolution is quite well known,?
says Johnson. ?The knowledge base, the data base is there.?
Fed Chairman Ben Bernanke told Congress Tuesday that outcome of the
tests is ?not going to pass or fail?, analysts say if done properly it
will help address the problem of how to price the toxic assets and
reassess bank capital capitalization beyond the somewhat un-useful
existing metrics. In doing so, it will provide the government with more
impeachable results in deciding winners and losers.
going to establish an analytical basis to determine how much capital to
commit to banks and at one point to be able to say, 'enough is enough'
and we?re going to take this bank over,'? says Ely, who adds the stress
test will ?essentially move toward [determining] a liquidation value.?
this kind of pretense of doing scientific analysis and being impersonal
and masking that this is very political," says former Senate Banking
Committee chief economist Robert Johnson of the stress tests. ?Shutting
them [banks] down is hard to do."
government used the equivalent of a stress test during in the Great
Depression. Those that passed were given the necessary capital in the
form of a loan in exchange for preferred stock, which is what the Bush
administration decided to do at the urging of Congress.
you run it properly, you find out how big the hole is,? says Walker
Todd, a former Fed official, lawyer and economic historian.
Chairman Shelia Bair Tuesday the stress tests needed to be done
?before we determine what type of additional capital investments the
government may need to make."
Where There's Smoke...
are signs Congress, if not the President, is running out of patience
with the current approach and is looking for more drastic measures.
of the Senate Banking Committee Tuesday peppered Bernanke with
questions about the government support, suggesting the government was
delaying the inevitable.
it be better to close some of those banks rather than continue propping
them up?? asked Alabama Sen. Richard Shelby, the ranking Republican on
the panel. ?Aren?t you sending a message that we?re going keep propping
Senator Richard Shelby
responded by implicitly referring to the stress tests, saying the
?first step is to get clarity, the transparency, ? what he called ?the
assessment?. The next [step] is the capital.?
The biggest banks
?are never going to get to the point where that [insolvency] occurs
because you keep injecting capital, ? said Sen. Robert Corker (R-Tenn.).
is no commitment by any means to never shut down a big bank, absolutely
not, but I do believe that the major banks we have now can be
stabilized,? Bernanke added.
thinking got the government into trouble with the S&L debacle, say
analysts, when capital injections and regulatory forbearance deepened
believe the quickest and lowest cost solution to the government is to
close down troubled financial institutions, regardless of size, extract
the toxic assets and sell the good parts of these financial
institutions to private investors as quickly as possible,? the bank
analysts team at Friedman Billings & Ramsey?s wrote in a Feb 23
says bad assets could be put into a RTC-like entity and estimates the
process could take six months to a year for the large institutions to
be healthy enough to be sold back to the private sector
argue concerns about nationalization are misguided because bank debt
guarantees, TARP funding and credits wraps, most if not all of which
have been used at the biggest problem big banks, Citigroup and Bank of America, constitute ?soft? nationalization.
Kaufman says Citigroup and Bank of America ?technically have failed? already because they needed ?government assistance.?
Mary Altaffer / AP
to the Citigroup Center exit the building , Tuesday, April, 12, 2005 in
New York. Federal law enforcement officials said Tuesday, April 12,
2005, that three men have been indicted on charges they targeted for
attack the stock exchange, the Citicorp building in New York and
financial institutions in New Jersey and Washington, D.C. (AP
also a growing sense in some quarters of the banking committee that the
problem really turns on a few big banks and is not yet industry wide.
sentiment is Citigroup has failed, so lets tear down the faced and deal
with Citi,? says Robert C. Schwartz, a partner in the law firm of
Smith, Gambrell & Russell, which represents community banks in the
Southeast. ?It just adds angst and uncertainty into the system.?
says the 30-plus community banks his firm represents don?t have a
?toxic assets problem? but are worried about what they call the ?second
wave?, managing a bank through a tough recession.
partly evident in the number of banks classified as problem ones by the
FDIC. Troubled assets on their balance sheets rose from $78.3 billion
to $115.6 billion in the third quarter of 2008. The number of troubled
institutions jumped 38 percent to 117, the most since 1995. Only 14
banks, however, wound up failing in the 1995-1996 period.
(Fourth-quarter data is due out Thursday,)
Analysts say small banks, even regional banks, are not the problem or the threat.
the biggest banks that need the bailout,? says Walker, and those hold
the vast majority of the estimated $4.54 trillion in FDIC insured
wisdom says these banks are too big to fail, but that?s different than
being taken over by the government for a period of time, then sold back
to the private sector in whole or in parts.
say the Obama administration is struggling over how to take more
aggressive steps in dealing with the banking industry problems because
of vast public outrage over both the bailout efforts to date and
excessive executive compensation.
President appeared to take a first step in his speech to Congress
Tuesday night, saying "I know how unpopular it is to be seen as helping
banks right now, especially when everyone is suffering in part from
their bad decisions...But I also know that in a time of crisis, we
cannot afford to govern out of anger, or yield to the politics of the
moment. My job - our job - is to solve the problem."
?They know that the clock is running,? says Johnson. ?He?s [Obama] got to decide what to do. Not deciding can look powerless.?