One week ago, when I learned of riots in Riga, I thought, “That’s crazy. That’s like saying there are riots in Reykjavik.” Well, now there are riots in Reykjavik. A crowd of more than 2,000 people, or nearly 1 percent of the country’s population, has been occupying a square in the center of the capital of Iceland to prevent its parliament from meeting, and could have been a factor in the prime minister’s call today for early elections. All this is the result of the spectacular collapse of Iceland’s banking system last fall and government’s lack of response to a crisis that has left half of the country’s homes and businesses effectively bankrupt.
Across Europe and in the United States, major banks reported new troubles this week. There were calls from Wall Street for the U.S. government to let struggling banks go under and send future bailout money to other banks that might be willing to make new loans. Another proposal called for banks receiving government assistance to shut down all their offshore operations — this coming after vague reports claiming that billions of dollars in bailout money has been moved to offshore tax havens.
President Barack Obama does not yet have a Treasury Secretary, with a vote on the nomination of Timothy Geithner expected Monday, so it is too soon to add up the new administration’s approach to the banking system. Geithner made waves, though, with his assertion before the Senate that China is manipulating its currency. No one can tell whether Geithner was simply confused or was trying to pressure China to start liquidating its U.S. dollar reserves, and in the latter scenario, no one has suggested what he might hope to accomplish by doing that. If the Obama administration will be pursuing a weak-dollar strategy, as this interpretation of Geithner’s comment suggests, that would add to the pressure on China’s already fragile manufacturing sector and add to the risk of a depression there. It would also add to the pressures on the U.S. banking system, but on the other hand, it would make it easier for foreign investors to acquire and recapitalize the banks. Is Obama’s strategy to salvage the U.S. banking system by turning much of it over to foreign owners? I’m sure the policy directions will become more clear in the coming weeks.
A southern California bank, 1st Centennial Bank, was closed tonight. The FDIC transferred its insured deposits to another southern California bank, First California Bank, which is paying a 5 percent premium for $664 million in deposits and also purchasing almost $300 million of liquid assets from the failed bank. The FDIC expects its cost to dispose of the other assets of the bank to be $227 million. Depositors also lost $13 million in uninsured deposits.
First Centennial Bancorp, the holding company of 1st Centennial Bank, had issued preliminary financial results on Tuesday, including a statement saying it was critically undercapitalized and casting doubt on its ability to continue operations. Like the other banks from the inland part of southern California that closed recently, 1st Centennial Bank had problems tied to real estate development loans. The large numbers of unsold houses, in a region where nearly all home sales now are from foreclosures, left developers unable to make their loan payments.