In this case, the FDIC (ie, look in the mirror) backed bubble – from Megan McArdle:
We’ve seen fewer bank failures than we had during the S&L crisis. But as this piece from the Wall Street Journal notes, the failures are worse. Three of the five banks that failed on Friday had to tap the FDIC fund to cover more than 50% of their assets.
This highlights the depth of the market crisis. But it also raises questions about what was going on at the Fed. How did it let things get this bad?
Regulators also have been blamed for not taking quick enough action and for allowing zombie banks to limp along. Inspectors general at the Treasury Department and FDIC, which serve as watchdogs, have issued more than a dozen reports that conclude regulators dithered while banks they oversaw plowed ahead with rapid and unsteady growth.
“When you get these failing banks, they are much more like a fresh-caught fish than a fine wine. They don’t get better with age and the losses keep piling up.” said Bert Ely, a longtime banking-industry consultant.
Integrity Bank, of Alpharetta, Ga., was permitted to keep luring deposits paying unusually high interest rates for more than two years after examiners noted deficiencies in its loan underwriting, according to the FDIC’s inspector general. Integrity failed last year, costing the FDIC $295 million.
It’s easy to lay blame in hindsight. But a bank doesn’t just suddenly and for no apparent reason lose half its assets. Clearly, these banks have been trading while insolvent for quite some time, hoping against hope that everything would somehow turn around. Meanwhile, they poured more of their investor and depositor’s assets into pursuing a Hail Mary pass…
The FDIC, by the way, seems to be out of money – used up the last of it with last Friday’s bank failures. The FDIC mantra is “no one has ever lost a penny on an FDIC-insured deposit” – which is true, but never since the FDIC came in to being have this many banks – and this many large banks – failed in such a short time.
As McArdle puts it, the banks were “hoping against hope” for some miracle turn around to hide the bad loans on the books – as it is, the entirety of the global financial system is currently hoping against hope. Hoping that something, anything, will turn up and allow them to survive – with bankruptcies rising, loan impairments shooting through the roof and no area of the global economy healthy enough to absorb the blow and lead the way out, we’re facing a complete financial collapse akin to – but probably far worse – than that which followed upon the collapse of Creditanstalt in 1931.
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