Global Economic Crisis

It is the third week of January, 2010 and the FDIC has already shut down 9 insolvent banks. True to form, these bank closures are typically announced on Friday nights, with the expectation that the weekend will allow only limited news coverage. Nevertheless, this attempt by the FDIC to manage the news and limit media exposure cannot disguise the fact that the American banking system enters 2010 in a state of acute fragility.

The seventh bank of 2010 to be shuttered was the Charter Bank in Santa Fe, the first bank in New Mexico to be closed in more than 10 years. Other bank closings occurred in Oregon, Washington, Florida, Missouri and Minnesota. All in all, not an auspicious beginning to 2010, the year that the Obama administration predicted would show strong economic growth and the emergence of the U.S. from recession and job losses.

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With TARP, the Federal Reserve discount window and FASB rule changes that allow inflated valuations of toxic assets sitting on bank balance sheets, it takes a real act of heroism for an American bank to post a quarterly loss. However, in the last quarter of 2009 two banks from the U.S. government’s list of “too big to fail” institutions earned that dubious distinction. Bank of America posted a Q4 loss of $5.2 billion, while Citigroup lost $7.6 billion.

Both banks had their own list of excuses and spin to explain the red ink, including in the case of Bank of America the paying back of its TARP funds (a decision which seemed motivated by the primary purpose of removing government restraints on executive compensation and bonuses). Nevertheless, these numbers, glaringly bad despite unprecedented taxpayer assistance and accounting rule modifications designed to manufacture profitability out of thin air, are a clear reminder than in truth, much of the U.S. banking system remains mired in deep crisis, and confronting functional insolvency.

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