Posted on MSNBC.com is an article from AP stating that Bank on it — bank failures will rise next year
- SAN FRANCISCO - Here's a safe bet for uncertain times: A lot of banks won't survive the next year of upheaval despite the U.S. government's $700 billion plan to restore order to the financial industry.
The biggest question is how many will perish and how they will be put out of their misery — in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.
Enfeebled by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.
The government's commitment to spend up to $700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.
"It will help, but it's not going to be the saving grace" because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.
The darkening clouds already have some depositors pondering a question that always seems to crop up in financial panics despite deposit insurance: Could it possibly make more sense to stash cash in a mattress than in a bank account?
"It sounds like a joke," said business owner Mauricoa Quintero as he recently paused outside a Wachovia Bank branch in Miami. "But it sounds safer than the turmoil out there right now."
Not as many banks are likely to fail as in the S&L crisis, largely because there are about 8,000 fewer today than there were in 1988.
But that doesn't necessarily mean the problems won't be as costly or as unnerving; banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.
"I don't see why things will be that much different this time," said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. "We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No."
With more super-sized banks in business, fewer failures could still dump a big bill on the Federal Deposit Insurance Corp., the government agency that insures bank and S&L deposits. The FDIC's potential liability is rising under a provision of the bailout that increases the deposit insurance limit to $250,000 per account, up from $100,000.
Using statistics from the S&L crisis as a guide, Mason estimates total deposits in banks that fail during the current crisis at $1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mason estimates the clean-up this time will cost the FDIC $140 billion to $200 billion.
The FDIC's fund currently has about $45 billion — a five-year low — but the agency can make up for any shortfalls by borrowing from the U.S. Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.
Through the first nine months of the year, 13 banks and S&Ls have been taken over by the FDIC — more than the previous five years combined.
The FDIC may be underestimating, or least not publicly acknowledging, the trouble ahead. As of June 30, the FDIC had 117 insured banks and S&Ls on its problem list. That represented about 1 percent of the nearly 8,500 institutions insured as of June 30. Entering 1991, about 10 percent of the industry — 1,496 institutions — was on the FDIC's endangered list.
Although the FDIC doesn't name the institutions it classifies as problems, this year's June 30 list didn't include two huge headaches — Washington Mutual Bank and Wachovia. Combined, WaMu and Wachovia had more than $1 trillion in assets; the assets of the 117 institutions on the FDIC's watch list totaled $78 billion.
Read rest of article http://www.msnbc.msn.com/id/27036808/
And the problems with banks in Europe isn't too conformting either. Germany Rescues Hypo, Guarantees Savings
- Germany acted to stem turmoil in its financial sector on Sunday, thrashing out a new rescue for imperiled lender Hypo Real Estate and, in a surprise move, pledging to guarantee private savings accounts.
After German banks and insurers shocked the government on Saturday by withdrawing support for a government-led 35 billion euro ($48.50 billion) rescue for HRE, Berlin scrambled to hammer out a new deal before markets opened on Monday.
Under an accord, struck just after 11 p.m. local time, the financial sector agreed to provide an extra 15 billion euros ($20.8 billion) in liquidity for HRE on top of the 35 billion they had already committed together with the Bundesbank, the Finance Ministry said.
"With this commonly forged solution, (Hypo Real Estate) will be stabilized and thereby the German financial marketplace strengthened in difficult times," the ministry said.
Earlier, the government said it had agreed to guarantee private deposits to help restore confidence amid the worst financial crisis since the 1930s.
"We say to savers that their deposits are safe," Chancellor Angela Merkel told a news conference in Berlin.
The move was a surprise because, behind the scenes, German officials had been highly critical of Ireland when it announced a similar move last week.
The change in approach reflected the fast-moving nature of the crisis, which spread across the Atlantic much quicker than many leaders in Europe had anticipated.
The Finance Ministry said the guarantee would cover more than 500 billion euros in deposits.
"This is an important signal so that things calm down and excessive reactions are avoided that would make the current crisis tackling and prevention effort even harder," Finance Minister Peer Steinbrueck said.
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