Bank Failures in 2010

More bank failures are expected this year – inevitably involving the greatest bank losses in history and already costing the FDIC ten times more than the great S&L and banking crisis of the 1980s did. In her testimony before the Financial Crisis Inquiry Commission, FDIC Chairman Blair attacked the Fed under Greenspan for causing the housing bubble and subsequent debt crisis with its highly stimulative, low interest rate policy of the 2000s.

And to make things worse, the Fed under Bernanke is now pursuing an even more stimulative, lower interest rate policy than it did under Greenspan, threatening to create even larger bubbles and more devastating busts. It is potentially to see 200 banks to fail this year, easily surpassing last year’s 140 bank failures.

In just the last two years, between bank bailouts and easy money, Washington has done more to encourage the growth of the shadow banking system than in all previous years combined and in the absence of another Wall Street meltdown, the chance of sweeping reforms is virtually nil.

In addition to the 140 banks and S&Ls that failed in 2009, 31 credit unions went under, bringing the total tally to 171. The average bank failing today is six times larger than it was then, producing far greater losses. Each bank failure is costing the FDIC about ten times more than it did in the 1980s crisis, according to the Meridian Group of Seattle.

Until last week, the consensus opinion on Wall Street was that the troubles at the big banks were over that to close this chapter in history, the only task remaining was a mop up operation at smaller regional and community banks around the country. That theory was shattered when JP Morgan Chase revealed it was forced to add $1.5 billion to its consumer loan loss reserves. When it took over Washington Mutual last year, the biggest failed S&L of all time, it inherited a cesspool of mortgages that are now going bad at an accelerating pace. Other big consumer banks like Citigroup and Bank of America are likely to face similar woes.

I also note than the trading profits of big investment banks are a bubble. Without the Fed’s largesse, without the low cost financing and without the big risk appetite it generates, most of the big bank trading profits would have been impossible. More to the point, just as soon as the Fed finally executes an exit plan, the bulk of these profits are likely to turn to losses.