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Banks too small to rescue

27 June, 2009

Nearly eleven months ago, Professor Nouriel Roubini of the State University of NY predicted the future.

Now, Roubini told Barron’s, the government is overregulating, bailing out troubled participants and intervening in every market.

The regulators should investigate themselves for bailing out Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities,” he told Barron’s. “It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”

He said that sometimes it is necessary to use public money to rescue institutions, but in a way that does not bail out the people who made the mistakes. “In each one of these episodes, the government bailed out the shareholders, the bondholders, and to some degree, management,” Roubini told Barron’s.

As for the banks that will go bankrupt, they will include community banks that finance homes, stores, downtown areas, commercial real estate and other mainstays of U.S. towns and cities, Roubini said.

“Of three dozen or so medium-sized regional banks, a good third are in distress,” he told Barron’s, saying half of the group could go bankrupt. Some big banks could wind up insolvent, he added, but said they might be deemed too big to fail. here (all bold emphasis mine)

Today we know that the government has found those banks “too big to fail” and rewarded them with a bailout that future generations will still be paying for. The rich have not been hurt by these actions, but the rest of us have. And in the news this morning there is this Federal regulator is blamed in bank failures and this Mirae Bank in L.A.’s Koreatown and MetroPacific Bank in Irvine are shut down in the Los Angeles Times.

Small banks that serve local communities are being assumed by larger banks and the costs are being assumed by taxpayers.

Wilshire, whose parent company is Wilshire Bancorp Inc., also will acquire $449 million of Mirae’s $465 million in assets, the Federal Deposit Insurance Corp. said. The FDIC agreed to share in any losses on those assets.

The failure is expected to cost the deposit insurance fund about $50 million.

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Also Friday, regulators closed two small banks in Georgia. The FDIC said the cost to the deposit-insurance fund would be about $152 million for the two combined. And a bank in Minnesota failed at a cost of about $34 million to the FDIC, state regulators said. (from the Mirae Bank story)

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U.S. Bancorp acquired Downey and PFF in November in a deal brokered by the FDIC, which said Downey’s collapse would cost the deposit insurance fund about $1.4 billion and PFF’s failure an additional $729 million. (from the MetroPacific Bank story)

At this point, the president sized the moment to propose consolidation of his power over banks.

A federal thrift regulator bungled its oversight of Downey Savings & Loan, allowing the Newport Beach thrift to pile on billions of dollars in high-risk mortgages and eventually collapse, according to a government report.

The regulators from the beleaguered Office of Thrift Supervision also botched their oversight of Pomona-based PFF Bank & Trust, which collapsed along with Downey last fall, according to reports issued this week by the U.S. Treasury Department’s inspector general.

The Obama administration proposed Wednesday that the OTS, which has long been criticized as weak and ineffectual, be abolished. As part of his overhaul of financial regulation, Obama recommended that savings and loans, which have been principally mortgage lenders, answer to the same regulators as full-service commercial banks that specialize in a range of loans to businesses as well as consumers.  (from the MetroPacific Bank story)

Maybe Ken Lewis should leave Paulson and Bernanke alone; they might just let him become THE Bank of America.

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One Comment leave one →
  1. 28 June, 2009 21:15

    Hey! You are back, and I for one, am glad of it!

    Thanks for this piece. I like Dr. Doom, and I still think we need to get rid of the Fed.

    Keep up the great work!

    D

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