The U.S. House and Senate have passed quite different versions of financial system reform, and will now look for a way to combine their bills. In addition to the regulatory reforms for banks, the bill will likely include a formal mechanism, aside from bankruptcy court, to resolve major financial institutions that fail. More importantly, the Fed will probably be prohibited from making the kinds of loans it made in 2008 to keep insolvent banks limping along. Will the bill break up the banks? Not likely. It may give regulators the authority to break up oversized financial institutions, but probably only in a theoretical way that would not even prevent a merger of two of the five largest banks.
FDIC-insured banks are still barely breaking even. Their combined profit for the first quarter was $18 billion, which means most banks are not making a significant profit.
The economy as crazy quilt: We saw record high home foreclosure and home mortgage delinquency rates and a 19-year low in mortgage applications. This means that people are not able to put much financial energy into buying a house. At the same time, home builder sentiment is at the highest level in nearly two years, and housing starts are higher than last year’s levels. This means home builders will be borrowing a lot of money and building a lot more houses and condos, but consumers will not be buying them. If this follows the recent pattern, the builders and the banks that lent the money for the construction could find themselves in financial difficulty less than a year from now.
One Chicago bank, ShoreBank, appears to have raised enough new capital to keep going. It may have helped that ShoreBank has had a strong emphasis on residential renovation loans, which aren’t facing quite the same degree of economic stress that other Chicago banks are seeing in their loans for off-kilter commercial real estate development projects.
Some observers are calling ShoreBank’s success in finding capital suspicious, as only about 1 out of 5 banks looking for capital these days have been finding it, and the bank is a community-oriented bank in the President’s hometown of Chicago. One blogger thought the involvement of Goldman Sachs as a lead investor was suspicious, though that is often the role of Goldman Sachs in an investment deal of this scale — that is to say, a small scale that would be handled by a fund manager at Goldman Sachs. Two members of Congress sent a letter to the White House asking it to disclose any involvement it might have. ShoreBank, though, says that it has been conducting its own fund-raising campaign, and that the White House has not had any part in it. The whole ShoreBank conspiracy theory could just be a product of the heightened imagination of a Chicago news media that just spent three months poring over every detail of the failure of a bank owned by relatives of a Senate candidate.
One small bank failed tonight. Pinehurst Bank had $58 million in deposits at a single location in St. Paul, Minnesota. Wisconsin-based Coulee Bank paid a 1.33 percent premium for the deposits and is also purchasing the assets.