The Federal Deposit Insurance Corporation always does their dirty work at closing time on Friday. That way they have all weekend to figure out what is going on, get things in order so Joe and Jane Average can get their bills paid on Monday, and Wall Street has 2 days to sort through the carnage.
Last night, the FDIC shut down four banks in four different states. That brings 2009’s running total to 29 banks, exceeding the entire number of banks to fail in all of 2008. If this trend merely continues through the rest of the year, we could see over 80 bank failures.
Most average people aren’t going to lose anything as the result of these failures. Currently, deposits are Federally insured up to $250,000, and there may be private insurance to cover additional deposits depending on your bank. Average people will only be inconvenienced by the fact that they can’t cash a check today, and that checks with the new bank’s name will arrive in a few weeks.
Businesses on the other hand, may have a problem. It’s not unusual for even a relatively small business to have six figures on hand for bills and payroll (maybe having direct deposit on your paycheck is a good idea).
This may also have an impact on the local housing markets in the communities these banks serve. Not only must any planned mortgages be reviewed, any real estate repossessed by those banks will need to be reviewed before being sold.
The good news is that the FDIC has lots of practical experience with takeovers, and to date has always gotten things open on Monday morning. The bad news is that their resources are starting to run a little thin. Not even the best planning can prepare for four takeover teams working at once. Some people question whether they have collected enough premiums to cover losses.
Some people point out that even with as many bank failures as we have had, it’s not as bad as during the Great Depression. However, there were no multi-state “too big to fail” mega-banks in those days. Banks were smaller, and more dependent on local economic conditions. Could TARP be hiding an even greater economic carnage? Only Tim Geithner knows for sure. And he says everything is fine.