Friday, October 4, 2013

This Week in Bank Failures

As the day started, the betting money on Wall Street was saying that the government shutdown would end this weekend with a Saturday evening House vote on a funding bill with the poison pills removed. Twelve hours later this scenario seems unlikely. Instead, it now seems most likely that the House inaction will continue for at least a few more weeks. The government will remain shut down and around mid-month, the debt ceiling will be breached. The Treasury would then be unable to borrow money to make payments on bonds, a substantially more serious problem than the government shutdown. But this is what it looks like tonight. By tomorrow everything could change again. Government contractors, though, cannot afford to take chances, and there will be thousands of layoffs every week for the duration of a shutdown. Layoffs will occur in the millions if a debt ceiling crisis causes much of the government to be suspended.

If the United States is the picture of a government in crisis, it is little better in Italy, where convicted tax cheat Berlusconi almost managed to bring down the government to avoid being expelled from the Senate for his crimes. That attempt failed, however, and a committee recommended expulsion for Berlusconi today. The criminal mastermind and former prime minister is a step closer to being expelled from politics, at which point, he would presumably be sent off to jail to serve his sentence.

In both countries, the fragile political environment makes any new bank bailout impossible. This could end up mattering for banks in either country. Italy’s third largest bank is technically insolvent at this point and does not know what to do, and in the United States, several banking giants are just a handful of legal setbacks away from a similar fate.

A debt default by the United States would not count against banks’ financial positions — at least not in the United States itself. In U.S. law, U.S. government debt is unable to be questioned, so it counts at its nominal value on a bank balance sheet even if payment is delinquent and regardless of debt rating agencies’ opinions.