The Fed and Treasury propped up the banking sector fearing that a collapse would choke the life out of the economy.  Credit had to keep flowing, or the economy would grind to a halt, and this was particularly true in the housing market.

Today, the banks are indeed making mortgage loans again, but not quite the way the government intended.  As the Wall Street Journal reports, “Banks Load Up on Mortgages, in New Way.”

Rather than use TARP funds to make mortgage loans, the newly risk-averse banks are instead using the funds to buy government-guaranteed Ginnie Mae bonds.  And they’ve been buying them by the truckload.  Read the rest of this entry »

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