The Banking Crisis – Two Years Later

As we wind down September, 2010, I am reminded of the second anniversary of the darkest days of modern commercial banking. It is still painful for me to recall going to my bank job each day in September and October 2008 wondering what else in the world could go wrong.

Just recount what happened over the course of roughly forty-five days:

• US Treasury placed Fannie Mae and Freddie Mac into receivership
• Lehman Bros. filed the largest bankruptcy in history for $639 billion
• Merrill Lynch was acquired by Bank of America in a controversial transaction
• Federal Reserve paid $122 billion for an 80% stake of AIG to prevent its failure
• Wachovia avoided breakdown with an FDIC-forced “merger” with Wells Fargo
• Treasury Secretary Paulsen compelled the 20 largest U.S. banks to accept a $250 billion preferred stock investment to assure systematic liquidity
• Congress adopted the Emergency Economic Stabilization Act that made $700 billion of capital available to banks across the nation, known as TARP funds
• Dow Jones average fell 3,000 pts. as the banking system inched toward collapse

It still gives me chills to read through this list of earth-moving business events, any one of which would have been the most talked about story of any year in normal circumstances. But for all of these groundbreaking episodes to occur in such a short span reflects how close our economy was to a complete meltdown.

Two years later the economy remains in recovery, but the growth rate is insufficient to overcome the loss of millions of jobs. Consumer confidence remains pessimistically low, actually spurring a gain in our national savings rate. While that is normally a positive development, increasing savings now means that consumers are hoarding cash, further aggravating spending needed to fuel the GDP and job growth.

The banking system has fared very poorly during this mess. To be fair, the Federal Reserve, FDIC and Comptroller of the Currency issued a joint study in 2006 warning of the concentration of bank credit in commercial real estate. These regulators urged banks to begin diversifying assets and lowering exposure to high volumes of debt ostensibly secured with commercial properties and real estate developments.

While that warning may have been late and perhaps should have been followed with firmer regulatory actions, the residential and commercial real estate markets folded in 2007-2008. That real estate bubble has been followed by more than 285 bank failures in its wake to date.

Where are we going from here? It’s too early to be confident, but I don’t believe we have hit the bottom of the banking system demise. Consumer spending will probably continue to be sluggish until there is real job growth, and jobs won’t come until there is more federal policy initiatives that spur them.

Financial regulatory reform will be a good change and step in the right direction, if painful for the moment to banks, and more restrictive in the future. Meanwhile, let’s all hope we don’t return to the world of September, 2008, nor the out-of-control banking practices that led to it.

This article was originally published on AdviceOnLoan.com