This Week in Bank Failures

Banks may have avoided the loss of liquidity that would have accompanied a U.S. government default, but they now have to face the consequences of an austerity budget plan which will mean less income for consumers and businesses to pay to the banks. That is the scenario, of course, that prompted the greater number of bank failures in the last three years, and most banks are in a considerably weaker financial condition than they were in 2005 when the current financial woes struck the banking system. One way or another, the coming weakness in the U.S. economy will have its effect on the banks.

Tonight, the United States was downgraded by Standard & Poors, from AAA to AA-Plus. Downgrades from other ratings agencies are likely to follow. The downgrades will reduce the extent to which banks can own bonds issued by the U.S. government, but only slightly. For example, a bank can no longer responsibly put 100 percent of its short-term investments into Treasury bonds, but few well-managed banks do that anyway. Officially, according to federal banking regulators, there is no change in the status of U.S. government and government-backed securities. However, if the United States is downgraded again next year, that would significantly reduce banks’ holdings of Treasury bonds and force them to look farther afield for liquid assets to hold. A further downgrade is almost certain if the House of Representatives struggles to write a budget, or if tax loopholes that were renewed last December are renewed again.

HSBC may exit the U.S. market substantially intact. In its latest deal, announced Sunday, it is selling 195 branches to First Niagara, including $15 billion in deposits and $3 billion in loans. HSBC in May announced plans to maintain a foothold in the United States for foreign and international customers, while selling the bulk of its U.S. operations, including its $30 billion U.S. credit card unit.

For its part, First Niagara admitted to a touch of unease about the timing of the transaction, the day before a “train wreck” was expected to hit the finances of the U.S. government. But it’s a good deal, the bank believes, and it fits its geographical plans, aside from about 40 of the 195 branches, which it expects to sell. Since 2009, First Niagara has been buying underperforming banks, most notably Harleysville National Bank, and looking for ways to cut costs. First Niagara plans to issue $700 million in stock and $400 million in bonds to cover the full cost of this acquisition and conversion.

Was the U.S. stock market drop on Thursday precipitated by a liquidity crisis in European banking? U.S. stocks fell 5 percent yesterday, with most of the world’s stock exchanges following along today, and some observers believe this decline was related to an emergency liquidation connected to troubled banks in Europe, though there are few specifics to support this theory.

Illinois banking regulators closed a small bank tonight. The bank had two locations operating under the name Bank of Shorewood and one more under the name Bank of Elwood. The failed bank had $104 million in deposits. Heartland Bank and Trust Company is taking over the deposits and purchasing the assets.

A second, larger bank failure took place on the West Coast. Washington state banking regulators closed Bank of Whitman, which had $516 million in deposits at 20 branches across the state. Columbia State Bank is taking over the deposits and purchasing half of the assets. However, it will be operating only 8 of the branches. The other 12 locations will not reopen tomorrow, and there will be long lines at the ATMs at those locations, which will continue to operate only until Sunday.

The failed bank started to record losses in 2007, and lost $25 million in the first half of this year. It also lost two of its top executives, who resigned quietly in January. It had been in business for 34 years.

Smaller Homes, More Careful Design

“A home doesn’t need to be big, just smart.” That’s the headline on the cover of the new 2012 Ikea catalog. The cover picture shows a room that, with careful design, is doing the work of two. The catalog as a whole shows that Ikea is following the trend toward smaller houses with more designs that solve problems in smaller spaces.

It is the opposite of the trend in home furnishings of 55 years ago, when furniture was oversized, overstuffed, and designed to look bigger than it was so that your big new house wouldn’t look so empty. Now the objective in design is to fit things in smaller spaces without making the smaller house or apartment look crowded.

If you can spend the time to figure it out, furnishing a house to maximize the use of the space costs a lot less than you would spend to trade up to a house that is 25 percent larger. Elaborately designed, space-efficient furniture isn’t an extravagance when you compare it to the alternative, and it’s a trend that I’m sure will continue for years to come.

Record Low Arctic Sea Ice for July

The NSIDC reports a record low July Arctic sea ice extent. Ice extent has declined more slowly during the last two weeks, but age, thickness, and concentration continue to decline well below historic norms. One researcher’s map of sea ice age from two weeks ago shows only isolated patches of multiyear ice, but the good news is that this ice seems to be protecting some of the newer ice from melting.

Sea ice extent is declining more slowly in part because so much ice is flowing away from the central Arctic into the Atlantic and the western Canadian islands. This pattern of outflow boosts the extent numbers but does nothing to reduce the rate of ice melting. Any ice that flows south in August will melt within a few weeks. To make the situation worse, it is some of the oldest ice that is flowing south in the Canadian islands and west of Greenland, and it is the most concentrated ice that is flowing out in unusually large volume along the east coast of Greenland.

The Siberian coast shipping route is already passable — a tanker ship tested the route in the first half of July with little difficulty — and it is likely to remain so for the next seven weeks. The Northwest Passage is probably passable too, although cargo ships there can proceed with more confidence if they wait until more of the ice melts.

It is too early in the season to say that ice in some areas of the Arctic Ocean might avoid melting. The satellite pictures continue to show ice moving large distances from one day to the next, at rates faster than the flow of a river. With thin, free-flowing ice, there is plenty of time for any particular block of ice to move into a position to melt, or for the thicker ice to move north and out of danger if the winds blow in that direction.

Debt = Live Electric Wire

At the end of the day, a significant fraction of members of both houses of Congress voted to keep the federal government in bankruptcy, to push it into insolvency, so that it couldn’t pay its bills. After all the problems in recent years with mortgages and credit cards, the recent debt ceiling story is just another example of the destabilizing effect of debt. The U.S. government’s debt derives mainly from the war in Iraq, and the debt used to finance that war was not as harmless as it seemed at the time. Without that debt, the extremists in the House of Representatives wouldn’t have had the leverage to hold the country hostage, or to work out a compromise that pushes the country into an economic decline.

After so many bad experiences with debt, it is no wonder many people are starting to think of it as the equivalent of a live electric wire. It’s something you may need, but also something that must be handled with extreme care.

One of the challenges is that many of us are in so much debt that we are seem destined to die in debt. “Never got out of debt” may be the new equivalent of “never went to college” from a century ago. For many people, the answer to “never went to college” was that their children could go to college. We will need a better answer than that for the millions of people who are perpetually in debt.

Getting Out of Bankruptcy

It has already been widely commented that there were no winners in the debt ceiling standoff — certainly not any political party, or either house of Congress, or the White House, or the American people, or the political process. You might think Wall Street would be the winner, but the extra money they have made from manipulating the markets will vanish several times over in the coming economic downturn — a slowdown that could mostly have been avoided if House Republicans had not latched onto the debt ceiling as the one weapon they had to hold the country hostage.

The important thing about the debt ceiling package currently being considered in Congress is that the United States will be able to emerge from bankruptcy. Yes, the budget cuts included in the package will cause an economic contraction. Actually, from today’s manufacturing survey the uncertainty surrounding the debt ceiling standoff may have done so as early as the end of June. But an economic contraction can be remedied in a period of a few years, and can be used in some small ways to help move the country forward. The consequences of the U.S. government going into insolvency in the next day or two would have been much worse, and could have taken a generation to overcome.

One of the things we have learned from the last week of political theater is that the current House of Representatives can’t write a budget plan to save its life. That’s a problem, of course, because the Constitution requires the House to write the budget. It is hard to imagine how the new budget, due in just eight weeks, will come together, with most of the time available to prepare it already wasted on the debt ceiling fiasco, but for next year, it would make sense for the White House and Senate leaders to get together and design the budget that the House might write if it were able to write. By not forcing the House to work through a complicated series of amendments, that approach would increase the chances of actually getting a budget passed.