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Bernard Madoff, convicted of running an $65 billion Ponzi scheme, was sentenced to 150 years in jail. What’s your take on his punishment?
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Hundreds of regional and community banks will fail in the next year or two. While struggling Wall Street giants make headlines, it's what's happening to Main Street banks that's the key to the financial well-being of most U.S. businesses. There's plenty of trouble there.
So far this year, 11 banks have gone belly-up. By year-end, a few dozen more will follow. And then the pace will pick up, hitting a peak in 2009 before edging back down in 2010. All told, figure that about 3% of the nation's 8,500 federally insured lenders won't survive. That's the greatest shrinkage the country has seen in two decades, though it's still less than the 1,108 of banks that crumbled between 1987 and 1992. The toll then amounted to about 8% of banks; there were considerably more banks to begin with.
The hardest hit areas are likely to be in California, Florida, Arizona and Nevada where property values skyrocketed and then plummeted. Georgia, too, will suffer, where building outpaced demand. And states such as Michigan and Ohio, where laid-off auto and other manufacturing workers haven't been able to maintain mortgage payments, are headed for trouble.
But woes won't be limited to those regions. Smaller banks that rode the housing wave upward, growing quickly and without diversifying their lending, are most likely to bite the dust no matter where they are located. And spooked regulators will sniff out troubles nationwide. Acutely aware of criticism by lawmakers that lending practices were allowed to become too lax, bank field examiners are now determined to prevent further implosions on their turf.
Regulators' overcautiousness is likely to make matters worse in the short run. Lending standards will come under the microscope, and federal regulators will insist that banks boost reserves and call business loans if collateral value has deteriorated. They'll crack down hard on situations that at other times might have been shrugged off as temporary blips. This time, they'll be unwilling to wait out some potential problems. And, in forcing the issue, they may deal a lethal blow to banks that might have otherwise survived.
Bank failures typically rise even after the economy starts to improve. Although faults start to appear not too far into the downturn, it takes a while for regulators to clean house. The Federal Deposit Insurance Corp. (FDIC) now has 117 banks on its so-called problem list. That's up from 76 last year but still lags reality. The fact is, examiners show up at banks only about once a year unless they have a specific reason to be more vigilant. So the number of banks on watch lists issued quarterly by both the FDIC and the Office of Thrift Supervision chronically underestimate the number of weak banks.
Most depositors needn't worry about bank failures. Federal insurance covers up to $100,000 per depositor at each institution. Larger accounts should be spread among banks. One convenient way to do so is to use the Certificate of Deposit Account Registry Service, which we wrote about in the Aug. 8, Kiplinger Letter.
Borrowers at smaller regional and community banks face rougher weather ahead. Even banks that are sitting pretty and in no danger of failing will be stingier. For example, they'll hike collateral requirements, set revenue benchmarks that business borrowers must meet and generally keep a tighter rein on those whom they lend to.
So start improving your creditworthiness now, particularly if you contemplate an expansion requiring borrowing once the economy starts to mend. Buff up your credit score. Get your books in apple-pie order. And cultivate your local banker before you want to borrow.
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POSTED BY: winslow (September 17, 2008 04:44 PM)
The problem goes WAY beyond unqualified individuals that took out mortages. Mortgages and bonds were sliced and diced and sold to other institutions. Derivatives (representing nothing physical) were also sliced and diced and sold. Essentially nothing was traceable to its source. Now suppose, John Doe, with an unqualified mortgage, stops payment. There could be 100's or 1000's of affected institutions.
POSTED BY: Patrick Warner (September 17, 2008 06:15 PM)
When your bank restricts your withdrawal amounts, you know there is a stability problem at your bank.
POSTED BY: dolittle (September 20, 2008 10:27 PM)
The Nation is beset with GREED! Capitalism does not work without some sense of MORALITY, balance, and fairness. Private "deep pockets," in this country will not assist the Government with the bailouts, because they don't trust the financial institutions that are in trouble. No one really knows how "toxic," their investment instruments might be.
How can we expect the Chinese, Arabs, and Europeans to buy our debt when the extremely wealthy in this country are unwilling to do so?
For the most part, the U.S. produces nothing! We are a consuming nation which buys on credit. We are drunk on "stuff," and "things." Woe is us," the "big dog," is about to fall.
Most people that I see in airports during my travels look at the news on TV monitors while waiting for a plane, and just stare as if they are deer caught in the head lights. They think that the financial debacle does not affect them. Kinda like a soap opera; something not real.
The unfunded liability of all national, state, and local government obligations in this Country, ranges from 55 -70 Trillion dollars, depending on whose numbers you rely on. There is absolutely no way this can ever be paid off. And further, most people don't have a clue about this obligation.
This nation will advance to a Socialist's Country more in the next two years than it has in the past 100.
The Government may take control (own), the financial, automotive, airline, and healthcare industries in the not too distant future.
Start the printing presses, and get ready for hyper inflation. We haven't seen anything yet. By all estimates, we are only halfway through this financial mess. Your life is going to be different, and so will mine.
Democratic Capitalism is failing in the United States due to excessive greed and a Congress beholden to Lobbyists, the scourge of our Democracy; and, the wealthy nations that are buying our debt are likely going to withdraw, and by doing so, marginalize our financial influence throughout the world. All great nations throughout history have fallen, and many have sown the seeds of their own destruction.
Neither Political Party understands the depth and complexity of the problem, and neither will be able to solve the problem without great pain and sacrifice.
Better get use to eating rice, beans, mac and cheese, and maybe a little bread; the "D," word is being used more frequently, and the collapse is near. "Say it it so, Joe . . . say it ain't so."
Dr. Dolittle
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