Problem Banks

To many economists, bank failures are a “trailing economic indicator,” that is such failures reflect past mistakes and do not necessarily predict a future trend. But if enough banks fail, it would seem reasonably obvious that sheer numbers – making the remaining banks wary and decreasing the number of banks that might serve smaller businesses and consumers – could actually create new problems for the recovery. Problem banks – and according to the Federal Deposit Insurance Corporation, there are 775 of them right now – are simply defined as those federally insurance banks that are in jeopardy of failing. To give you an idea of how bad the numbers are today, note that in 2006, there were only 48 banks on that list.

The actual number of failures is accelerating. While we had 140 such full failures and FDIC takeovers last year, we are currently exceeding that failure rate (at this time last year there were 70 failures) with a whopping 96 failures to date. And right now, we are smack in the middle of the impact of the collapsed of commercial real estate values, which many of these local banks lent against, where the underlying loans are either coming due or where many have been in delinquency for some time.

But there is a bit of bright light buried in the mud-pile: “The FDIC also found some indications of better times ahead. For one thing, the industry logged the highest first-quarter profit since 2008, the FDIC reports. Banks brought in $18 billion in profit for the first quarter, a $12 billion improvement from the first quarter of last year. The gain is a result of banks steadily building capital to improve balance sheets, including attracting outside investors…More good news? The FDIC's Deposit Insurance Fund balance has improved slightly from the last quarter of 2009, sitting at negative $20.7 billion at the end of the first quarter.” DailyFinance.com (July 20^th). On the other hand, maybe the good news banks are actually the real “problem banks.”

For politicians facing the mid-term elections in a few short months, there does appear to be a disconnect between the good news for banks, the notion that somehow the taxpayers bailed out the biggest of the bad boys, and an economy that is mired in decimated home values and staggering real unemployment… that may destroy more than one elected official’s political career. Testifying before a Senate committee on July 21^st, Fed Chairman Ben Bernanke laid on the truth – that high unemployment numbers were going to linger for years: "'This is the worst labor market, the worst episode, since the Great Depression,' Bernanke said of long-term unemployment. 'Not only for the sake of the unemployed and for the short-term strength of the economy but also for a long-term viability in international competitiveness, I think we need to be very seriously concerned.'" The Los Angeles Times (July 21^st).

But that's OK Ben, 'cause the remaining big banks are turning out profits by the billions. There is an obvious growing sense of injustice in the body politic that hardworking Americans were being forced to subsidize an ungrateful financial sector, incur massive deficits in the process, and then watch these “fat cats” line their pockets with silver and gold (huge annual bonuses that often exceed the lifetime earnings of the average voter). For ordinary Americans, the explanation that “we had to do this to save the American economy” falls on deaf ears. The modest growth statistics quoted by Bernanke – 3%-3.5% expected for 2010 – seem to reflect banks and rich folks, not what we on the streets see and feel around us... and a whole lot of experts think the impact of this impaired economy on average Americans is a lot worse than Bernanke's projections: "Many private analysts believe the Fed's near-term forecast is too optimistic, given the weakness in housing and commercial real estate, state and local government budgets and particularly the labor market." The LA Times.

It might have been true that the collapse of the banking system would indeed have brought the United States into a very deep depression, but the explanation of “why” was never properly conveyed by either the Bush or the Obama administrations. Voters never understood the reasoning behind the government’s policies. That Congressmen and women voted for the “bailout” (a horrific choice of words, by the way) amplified their political vulnerability, since the average voter really believes that the rich pushed the legislators that they paid to elect to subsidize saving the big institutions that support the wealthy, an impression that was underscored as compensation packages to financial sector deal-makers broke record numbers even as the Securities and Exchange Commission announced some rather major assessments of wrongdoing along the way.

It isn’t like the banks waited a bit before flaunting their Ferrari wealth to the very taxpayers who saved their posteriors. They couldn’t wait to sip at the hog-slop trough of fiscal arrogance: “With the financial system on the verge of collapse in late 2008, a group of troubled banks doled out more than $2 billion in bonuses and other payments to their highest earners. Now, the federal authority on banker pay says that nearly 80 percent of that sum was unmerited… In a report released on [July 23^rd], Kenneth R. Feinberg, the Obama administration’s special master for executive compensation, is expected to name 17 financial companies that made questionable payouts totaling $1.58 billion immediately after accepting billions of dollars of taxpayer aid, according to two government officials with knowledge of his findings who requested anonymity because of the sensitivity of the report… The group includes Wall Street giants like Goldman Sachs, JPMorgan Chase and the American International Group as well as small lenders like Boston Private Bank. Mr. Feinberg’s report points to companies that he says paid eye-popping amounts or used haphazard criteria for awarding bonuses, the people with knowledge of his findings said, and he has singled out Citigroup as the biggest offender.” New York Times (July 22^nd)

We may have needed to “save the banks,” but frankly, this really wasn’t the right way to do it, and the Wall Streeters seem to be begging for a comeuppance. This failure to understand the fundamental aversion of working Americans to support government programs with little or no visible linkage to the quality of their own lives (not an uncommon view of social welfare programs as well) is perhaps the biggest weakness in the political campaigns of suffering incumbents facing uphill battles in the November elections. It explains the defection of blue collar workers from the Democratic Party, the rise of a Tea Party movement and the vulnerability of Congressional incumbents in general. As Wall Street rails against the new financial regulatory policies that have now become the law of the land, they also fail to appreciate that the political animosity against incumbents is in fact an equal statement of the rejection of Wall Street values by average Americans. Until politicians understand this “disconnect” with the common voter, I suspect will we see a wave of voter dissatisfaction become a tsunami of discontent.

I’m Peter Dekom, and the political warning light is flashing red.