Friday, December 5, 2008

This Week in Bank Failures

How much is it costing to keep the banks afloat? As Steve Randy Waldman pointed out this week, it’s hard to make a direct comparison between the present bailout and past government spending because much of the bailout is in the form of guarantees. No one can say exactly how much the Treasury and Fed will ultimately have to pay on the guarantees they’ve made. Theoretically it could be anywhere between 0 percent and 100 percent. The government’s own estimates are blatantly lowballing, with public statements implying they may end up paying 2 to 5 percent. I would say 40 to 50 percent seems more likely, and the percent could be higher than that if bankers are taking advantage of the government, or in the unlikely event of a depression. One way or another, the government will end up paying most of the money it has committed, so it makes sense to compare on those terms, and that’s what BoingBoing offered, with the suggestion that the 2008 bailout is more than the combined cost of the Louisiana Purchase, the New Deal, the Vietnam War, and 6 other major government projects. VoltageCreative promptly offered this graphic of the comparison:

Click graphic to enlarge

Mass layoffs returned to the news this week, along with grim retail statistics that suggest that more than a few national retailers will go bankrupt and close stores after the holiday season is over. The retail troubles especially are bad news for banks. Store closings can leave real estate developers without the money to pay their mortgages — a problem that has led to almost half of the bank failures this year.

The declining price of gasoline is, in a roundabout way, another concern for the banking system. Banks get about 1 percent of gasoline sales in transaction fees. With gasoline prices falling by half in the last five months, the amount of money coming into the banking system for gasoline transactions has fallen, adding to the other blows to bank revenue.

Tonight, First Georgia Community Bank of Jackson, Georgia, was shut down. First Georgia Community Bank had four offices in Georgia and total deposits a month ago of $200 million. It had been in business for 10 years. Like the other banks that failed in Georgia this year, its failure was linked to a heavy reliance on real estate construction lending. By October of this year, it had stopped receiving payments on a third of its loans. Its deposits and a few of its assets were acquired by United Bank of Zebulon, Georgia. United Bank is a somewhat larger bank, with $550 million in deposits. The FDIC expects this failure to cost it around $72 million.