Friday, May 13, 2011

This Week in Bank Failures

Every weekend, it seems, new problems are found with the European bailouts, and there are new revelations about the interdependencies between national governments and banks. This is a problem that the United States shares, in perhaps nearly the same degree.

The term of FDIC chief Sheila Bair will be ending in a few weeks, and she’s making sure we remember her for her warnings about the “too big to fail” system. This is a line from a recent speech:

. . . there is genuine alarm about the immense scale and seemingly indiscriminate nature of the government assistance provided to large banks and nonbank financial companies during the crisis . . .

There was talk this week of a slap on the wrist for the largest U.S. banks for their involvement in foreclosure fraud — a payment of $10 billion, or perhaps just $5 billion, that would exonerate the banks for potentially millions of forged and otherwise improper documents filed in foreclosure proceedings. It tells you something that this kind of token settlement is being discussed. It tells you that regulators realize that if a fair and proportionate penalty were exacted from the banks, some of them would surely be insolvent afterward. Like the shadowy tax breaks awarded to some of the U.K. banks last year, it is a sign of the bizarre extralegal status that a bank attains when the government begins to treat it as too big to fail. If a bank is too big to fail, then it may also be too big to tax and too big to penalize. No longer subject to quite the same legal process as its smaller competitors, it is free to do essentially whatever it wants.

The giant banks, for the most part, have not paid income taxes for the past three years or more, and this is part of the reason for the dire financial condition of the United States government, which is projected to become insolvent on Monday unless Congress intervenes. The Treasury has said it can stay out of the federal government’s equivalent of bankruptcy until August 2 through a series of increasingly creative accounting maneuvers, but this is uncharted territory and the exact sequence of events is unknown. At some point along the way, if Congress fails to act, U.S. government securities would no longer be considered investment-grade, and this would affect the solvency of essentially all banks in the United States, and probably hundreds in other countries as well. It is important to note that this federal budget predicament is, in part, another consequence of the government decision to protect the largest banks, when they became unprofitable, against their smaller competitors, who otherwise would mostly have been profitable over the past two years.