UPDATED: Includes the seven banks seized by the FDIC over the holiday weekend. Since the FDIC began publishing the failed bank list in 2000, 74% of the banks on the list were placed there during this recession.
Daily Graphic: FDIC Bank Seizures This Year at 45 Nearly Double Those Seized in Recession’s First Year
Five more banks were seized by the Federal Deposit Insurance Corp. over the weekend in Georgia, Minnesota and California. During the first year of the current recession – 2008 – 25 FDIC insured banks failed. Little more than halfway through 2009 this year’s total is 45.
Text: Geithner Testimony to Senate Appropriations Committee – Treasury’s Priorities & Financial System Update
Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President’s Fiscal Year 2010 Budget request for the Department of the Treasury.
While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges.
President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America’s global competitiveness and produce more balanced, sustainable growth over the long-term.
Treasury’s Key Priorities
To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans.
To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient.
To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business.
A story out on the Associated Press wire today is the best explanation of all of the hullabaloo you hear from bond traders regarding big government programs and bailouts meant to stimulate the economy.
Most days for lunch I retire to the conference room and switch the TV on to CNBC. During those segments when they go octobox and have eight people on at once discussing the generalia of the larger economy it always seems like it’s the bond guys and the commodoties gals who are fretting while the stock traders are pumping out the positives.
AP makes it a bit more clear:
To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.
Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.
“If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity,” said economist Ed Yardeni, who runs his own investment firm. “Even worse, they could abort any necessary recovery in home sales and prices.”
Must Read: Wall Streeters Call for Reform & Say Federal Efforts to Combat Financial Crisis Inch Wide, Mile Deep
America and the world have found out the hard way how Wall Street’s fast and loose ways hurt regular folks more than the fatcats with Gulf Stream jets and golden parachutes. It’s heartening to see at least two creatures of The Street find religion and evangelize the good news of reform.
Sandy B. Lewis and William D. Cohan do just that in an op-ed piece headlined, The Economy is Still at the Brink, in Saturday’s New York Times. It’s a shame that the editors at the Times decided to run their important message in Saturday’s edition rather than Monday morning when it might have attracted more attention from the likes of CNBC or the day’s cable news cycle. Cast against the constant stream of “Everything’s Fine,” from the Obama Administration to the likes of Jim Cramer, Lewis and Cohan’s message is succinct and important to the long run of the U.S. economy.
In short, the pair are telling us that the structural issues with American high finance are still there, Bush and Obama Administration efforts to staunch the bleeding are merely fingers in Wall Street’s dike, the current system is too heavily weighted in favor of ‘insiders’ and a program of real reform is needed to restore full confidence and ensure a system that works for all levels of the economy.
Here are some take aways from their piece:
- If nearly everyone agreed six months ago that our banking system was a sham, why is every government program or action directed at preserving the old order? Lewis and Cohan say to start with compensating executives well for moving the ball, but create a system where their net worth is tied to their failures as well.
- The writers wonder why so many federal resources are going to propping up those at the top of the financial pyramid – the big banks and insurers – when recovery will come only when the bottom of the pyramid gets more confident.
- Rather than talk of the “imminent return” of the “good times” President Barack Obama should be messaging America with “living within our means.”
- For the “long term health of the market” shareholders and other investors in the big banks need to feel the “market’s wrath.” No more rescues for the banks that created the mess.
- More market discipline and fewer government bailouts – where will the federal government draw the line?
- Fewer academics should be advising the president and he should make room for more folks saavy in trading and markets – not to have the fox guard the henhouse, but to design incentives that will work to revive the capital markets.
- More transparency in the entire system – from providing the same real-time market information to citizens that’s available to Goldman Sachs or Morgan Stanley – to replacing the marketing exercise known as financialstability.gov with real information.
- Go after the bigwigs who brought this pox upon us – either through truth commissions or the same way the FBI prosecutes the mafia.
There’s a lot more detail in what Cohan and Lewis wrote – go check it out.
The data below came from the FDIC’s Graph Book. Over thirty banks have failed this year and 25 failed last year. The Deposit Insurance Fund, the fund with which the FDIC essentially eats portions of bank failures is roughly one-fifth of its 2006 value. The chart below represents the percent of FDIC insured deposits currently in the fund. In other words, about one quarter of one percent of the FDIC’s potential total liability is in their reserve. This fund has shrunk drastically during the current recession.
The U.S. government will eventually adopt a “bad bank” plan to purchase toxic assets from struggling lenders, despite avoiding such a solution so far, accountancy firm PricewaterhouseCoopers said Wednesday.
A government “bad bank” should be set up quickly and be focused on the largest institutions, the firm explained, noting that Germany, Switzerland and Ireland have already taken this approach.
“The crisis is about to enter a new phase where efforts to remove troubled assets from bank balance sheets must be accelerated,” PWC said. “U.S. government interventions to date have stabilized individual institutions, but have not created a functioning market and pricing mechanism and therefore have had little impact on reviving the broader markets.”
Some government initiatives have had the opposite effect, the firm added.
The world economy has avoided “utter catastrophe” and industrialized countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.
“I will not be surprised to see world trade stabilize, world industrial production stabilize and start to grow two months from now,” Krugman told a seminar.
“I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.”
The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s.
The Federal Deposit Insurance Corp. seized two banks in Illinois Friday evening.
Thirty six FDIC insured banks have failed this year, five in Illinois.
The deposits of Citizens National Bank are due to be acquired by Morton Community Bank as part of a “loss share” agreement with the FDIC. Over the weekend depositors of Citizens National may access their funds through ATMs and check writing. The FDIC estimates the cost to their Deposit Insurance Fund at $106 million.
The FDIC has entered into a purchase agreement with Midland States Bank for the assets of Strategic Capital Bank. Strategic Capital’s only office will reopen on Tuesday, following the Memorial Day holiday, as a branch of Midland States. Strategic Capital’s customers will be able to write checks and access their funds via ATM over the weekend.
Strategic Capital’s failure is expected to cost the Deposit Insurance Fund some $173 million.
Seventy percent of FDIC insured banks which have failed since 2000 have failed during the current recession.
(Source: U.S. Dept. of the Treasury)
Chairman Dodd, Ranking Member Shelby, members of the Senate Banking Committee, thank you for the opportunity to testify before you today.
On October 3, 2008, during a time of tremendous financial upheaval and economic uncertainty, Congress passed the Emergency Economic Stabilization Act (EESA) with the specific goal of stabilizing the nation’s financial system and preventing catastrophic collapse. Soon after taking office, this Administration rebuilt the EESA programs from the ground up with a new foundation. We also unveiled a financial stability plan to restore the flow of credit to consumers and businesses, tackle the foreclosure crisis in order to help millions of Americans stay in their homes, and comprehensively reform the nation’s financial regulatory system so that a crisis like this one never happens again.
Today, just four months into President Obama’s term of office, there are important indications that our financial system is starting to heal. For example, spreads for investment grade corporate bonds have fallen about 210 basis points and spreads on high yield corporate bonds are down about 770 basis points since the end of November. Spreads on AAA municipal bonds have come down 150 basis points since October. Risk premiums in short-term, inter-bank markets have fallen 280 basis points over roughly the same period and the cost of credit protection for the largest U.S. banks has fallen by about 180 basis points just since early April. Treasury is continuing to look into additional metrics that gauge the markets more broadly, as well as additional economic metrics, to determine the effectiveness of the current strategy and whether additional or different steps are needed.
from the Wall Street Journal:
The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.
At least half of the banks pushed back against the preliminary findings of the tests, the Wall Street Journal said, citing people with direct knowledge of the process.
Citigroup’s capital shortfall was reduced to $5.5 billion from about $35 billion after bank executives persuaded the Fed to include future capital-boosting impacts of pending transactions, the story said.
Wells Fargo’s shortfall was cut to $13.7 billion from $17.3 billion and Fifth Third’s was reduced to $1.1 billion from $2.6 billion.
(Source: U.S. Dept. of the Treasury)
This afternoon, the Federal Reserve and the national banking agencies released the results of the stress tests – the most comprehensive, forward looking review of our nation’s largest banks ever undertaken. These tests will help ensure that banks have a sufficient capital cushion to continue lending in a more adverse economic scenario. They will provide the transparency necessary for individuals and markets to judge the strength of the banking system.
The chart below comes from the St. Louis Fed’s National Economic Trends for May. It appears lenders did tighten their purse strings, but perhaps not enough, nor quickly enough.
The financial crisis has swallowed three more banks in Georgia, Utah and New Jersey bringing this recession’s total bank failures to 56.
Through May 1, 32 banks have failed in the U.S. during 2009. Twenty-five failed nationwide last year. The latest bank failures include:
American West Bank, Layton, UT – Deposits were acquired by Cache Valley Bank, Logan, UT. American West branches will reopen Monday as Cache Bank facilities. The estimated cost to the FDIC’s Deposit Insurance Fund is $119.4 million.
Citizens Community Bank, Ridgewood, NJ – Deposits were acquired by North Jersey Community Bank, Englewood Cliffs, NJ. Citizens Community’s sole office will reopen Monday as a branch of North Jersey Community Bank. The estimated cost to the FDIC’s Deposit Insurance Fund is $18.1 million.
Silverton Bank, N.A., Atlanta, GA – There was no acquiring institution. The FDIC has created a Bridge Bank to handle the wind down of Silverton Banks affairs. Silverton’s bridge bank will open on Monday and operate until July 29. The estimated cost to the FDIC’s Deposit Insurance Fund is $1.3 billion.
While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.
By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.
Yesterday the New York Times ran a story reporting that executive pay at the nation’s largest banks is again approaching pre-financial crisis levels. This is simply a signal that management teams in New York, Charlotte and elsewhere in banking headquarters are pursuing a business as usual approach to what many believe is the beginning of the end to the recession.
Krugman’s column today further adds to the case he’s been making all along during this financial crisis – Wall Street’s emperors have no clothes and taxpayers are footing the bill to rebuild their wardrobe.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Here’s what I think is most disturbing about recent financial history and the Bush and Obama Administrations’ policies:
The graphic below is from the New York Times. It appears that executive pay is not missing a beat, even though most of Wall Street’s top management have failed their firms and the country miserable over the past few years.
Click the graphic for full-size view.