Sign of a Troubled Economy

After the events of recent years, many people probably feel we'd be much better off if we shut down most, if not all, of the banks and forced their employees to seek a more productive line of work. But the truth is that every community depends to some extent on financial intermediaries, and even if the anti-bankster crowd got their wish, the void would eventually be filled by similar enterprises. With that in mind, it's no stretch to assume that a troubled banking system is also a sign of a troubled economy, as Barron's Jim McTague suggests in "Main Street Needs a Doctor":

Small banks' delinquencies cast doubt on Main Street's recover

MAIN STREET NEEDS A DOCTOR. Its pulse, unlike Wall Street's, isn't quickening. The Great Recession drags on there like some drug-resistant bacteria. This is disturbing, because Main Street's small businesses generate substantial job growth, which is what the anemic economy sorely needs. All bull runs in the market are suspect until Main Street conquers its malaise.

The latest evidence of Main Street's funk comes from a Treasury report listing banks that are unable to pay dividends on money extended to them under the Troubled Asset Relief Program, or TARP. These are banks that the regulators handpicked as probable survivors of the financial meltdown, which has claimed 260 institutions since 2008.

The government in 2008 purchased $204.9 billion of preferred stock in more than 700 banks so they would have sufficient capital to make loans at a time when the credit markets nearly had frozen solid. (Another $331.7 billion in TARP funds was invested in car makers, American International Group and other programs. I'm limiting the discussion here to banks).

Treasury says a total of 91 banks in 30 states didn't make a quarterly dividend payment due in May, with 23 institutions missing for the first time. Most of the delinquent lenders are small, community institutions with less than $1 billion in assets. Sixty-five of them are listed companies, traded now primarily on the over-the-counter bulletin board.

It isn't as though the banks are a crucial part of TARP. They received a total of $3.5 billion, less than 2% of all funds under the government program. They missed a combined $151 million in dividends, including $50 million they were supposed to pay the Treasury in May. By contrast, Treasury collected $9.4 billon in dividends from all other TARP institutions.

Still, the delinquencies are a grim sign. When small banks are strapped for cash, their communities usually don't do much better. And the situation isn't improving. The 91 delinquent banks are up from 74 in February and 55 in 2009, according to SNL Financial in Charlottesville, Va.

Back in 2009, the largest 19 firms receiving TARP funds were subjected to so-called stress tests. Computer models predicted how much capital they would need from Treasury to weather the equivalent of a 1929 Depression. The firms' losses proved to be less than anticipated. They have had no problem retiring TARP borrowings and replacing them with money from the Street. Most of the remaining banks applying for the capital infusions were picked for the program based on regulator recommendations.

The largest concentration of delinquent banks -- 21 -- is in California. Washington state has seven institutions; Texas and Missouri have six each; and Florida has five.

While the banks are under pressure, they won't necessarily fail. Often they are trying to preserve capital while raising more from asset sales and new investors. These transactions can take months, because Main Street firms don't have the same easy access to capital markets as their bigger brethren. But for the residents of Main Street, months with weakened banks can feel like years.

Comments

[Omitted Kingdom]

Let the banks collapse. Let people who work at banks find real jobs. Keeping bankers on food stamps is much simpler.

[William Mcdonald]

The die was cast when the decision was made to bail out the big banks. Perhaps as some have suggested, they should have have given the money to the regional banks and forced them to loan it out, maybe it would be different now.

Of course, the money's gone, and the Wall Street types act like they never were once forced to come hat in hand to the Feds to stay afloat.

It's all water under the bridge now as we face our bitter, broke future.

Bill Mcdonald
http://morongobillsbackporch.blogspot.com