Lots of Banks Going Broke, as is FDIC

A total of 30 banks have failed as of March 12, putting 2010 ahead of last year's pace when 140 banking institutions went under.

That was the highest total since 1992, when 181 banks failed at the tail end of the S&L crisis.

As of the end of last year, the FDIC said that 702 banks were at risk of going under, a number that has been steadily growing. And still, that seems to be a very conservative estimate.

CreditSights, which tracks bank failures, predicts that in the current cycle, from 2008 through 2011, as many as 1,100 banks will fail. That would wipe out 13.4% of all U.S. banks, representing 7% of U.S. banking assets.

Veteran bank analyst Gerard Cassidy of RBC Capital Markets agrees, expecting as many as 1000 banks to ultimately go bust.

Most of the troubled banks are concentrated at the regional and community level, and are weighed down by commercial real estate and construction loans.

The problem is that the $6.4 trillion commercial real estate market is under duress as businesses across the country go under. Stores are closing, mall vacancies are increasing, office space is all too available, and construction projects across the country have halted as builders have gone belly-up.

Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners.

However, the collateral value underlying many of these loans is depreciating. That means many borrowers will have trouble rolling over their loans, resulting in continued defaults and heavy bank losses.

Banks face up to $300 billion in losses on loans made for commercial property and development, according to a report by the Congressional Oversight Panel

The report also said that on nearly half of all commercial real estate loans, the borrowers owe more than the property is worth, and the biggest loan losses are expected for 2011 and beyond. In other words, the worst of the problems are just getting started.

And the money to cover this coming tidal wave of losses simply doesn't exist. The FDIC's deposit insurance fund was $20.9 billion in deficit as of December 31, the agency reported.

FDIC Chairman Sheila Bair said the fund is expected to bottom out this year, and that further bank failures are expected to cost the fund around $100 billion through 2013.

So, the FDIC is essentially broke. It will soon have to ask the equally bankrupt Treasury for a bailout. What an absurd proposition.

The true scope of the problems on bank balance sheets has been hidden as the government placated banks by radically changing age-old, sound, and transparent accounting rules.

This much we know; $6.4 billion in commercial real estate investments didn't qualify for refinancing in the first ten months of 2009. And nothing has changed. The problems are only worsening.

Since banks are not required to mark their loans to market prices, no one knows the true values of the loans on their books. But as the commercial real estate market nose dives, many more banks will go down with it.

Banks in jeopardy of failing simply aren't going to take on any risky loans. And in this environment, that means most loans.

When all these commercial loans can't be rolled over, it will only result in a very bitter irony.

The banks are damned if the do loan, and damned if they don't. But ultimately, American taxpayers will be stuck with the bills.