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Economy Improving…But Banks and FDIC Still in Trouble

The Wall Street Journal has a great interactive graphic that breaks down the string of bank failure since the onset of the crisis: WSJ graphic. The enormous bubble that engulfs the entire northwest corner of the US map is, of course, Washington Mutual — the biggest bank failure in US history with $188 billion in deposits. Luckily, JP Morgan Chase stepped in and took control, otherwise Wamu would have single-handedly wiped out the FDIC. According to the WSJ, the FDIC insurance fund has a whopping $10 billion…which doesn’t go too far when you’re insuring $6 trillion in deposits!

Meanwhile, the number of problem banks continues to rise. The WSJ writes, “The Federal Deposit Insurance Corp. said it had 416 banks on its “problem list” at the end of June, equivalent to about 5% of the nation’s banks, up from 305 at the end of March and 117 at the end of June 2008. Problem banks had a combined $299.8 billion of assets at the end of June, compared with $78.3 billion a year ago.”

So, while the economy does appear to be improving for now, the banking system remains in sorry shape. Ultimately, this will mean less credit creation and continued deflationary pressure, which should linger for years. We’re not out of the woods yet.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy