Wednesday, October 8, 2008

The War of Wealth

The War of Wealth was Charles T. Dazey's broadway melodrama about a banker whose junior partner's speculation has threatened the very existence of the bank. The hero is released after an explosion from a bank vault where the villain has locked him and the express wagon arrives just in time to stop a run on the bank. All ends happily for the bank and the characters.

The War of Wealth was inspired by the Panic of 1893, which led to the "Long Depression." from 1873-1896. The panic was caused by a number of business failures and shaky financing which set off a series of bank failures. Sound familiar? As the state of the economy worsened, people withdrew their money from banks, causing runs. A credit crunch ensued. More than 15,000 companies and 500 banks failed during the crisis. Unemployment was high. Perhaps like Dazey's War of Wealth, a hero eventually arrives in the form of President McKinley and the Klondike gold rush. The economy plugs on for ten years of fast growth.

As Jason Kilborn reported, Congress approved the recent financial bailout. Yet, stocks were down to about 9605 at 2:30 p.m. today. Thinking about the numbers. The U.S. government has agreed to spend up to $700 billion. Washington Mutual Bank and Wachovia had about $1 trillion in assets together. Of course, we don't know how much of these assets are "troubled." We also don't know how many assets belonging to other banks are troubled and exactly which banks are on the FDIC's watch list. Bauer Financial Inc. gives banks "star" ratings based on information filed with the FDIC, with today's ratings being based on the June 30, 2008 filings. Wachovia Bank received a 3 Star rating for "adequate." Much has changed since mid-summer.

Last week, commenting on the proposed merger of Wachovia and Citigroup Inc., FDIC Chairman Sheila Blair commented:
"[o]n the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury."
Federal Reserve Chair Ben Bernanke was more cautious in his comments about the bailout, saying:
"I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses."
The Fed announced today that it will now pay interest on bank's required and excess reserve balances in an effort to encourage term lending. We'll have to wait and see what else develops as the government tries to stabilize markets.

I have my doubts about whether the bailout package will change things quickly toward greater stability. Like in 1893, there is a lot here to say about confidence in the markets. If today's market is any indicator, we (and banks) may be in for a rough ride. Andrew Gray, the Director of the Office of Public Affairs at the FDIC recently reminded us to "remember, no depositor has ever lost a penny of insured deposits, and never will." Consumers may lose elsewhere, but let's hope that Gray is correct on this small bit of good news. Not quite the hero of the War of Wealth variety, but it might have to do.


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