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The Bear Market Is Not In China Or Greece; The Bear Market Is A Drive Down The Street

I am a frequent reader of Seeking Alpha, Ignites, Fund Fire and Zero Hedge, but in all my reading I see the contributors focused on securities, companies and a wide cast net of a macro view of what will cause the market to rise or fall. The articles on these sites have been ignoring a number that has enormous significance and consequence to the United States domestic economy and is a barometer to the U.S. Government Sovereign Stability as a whole, and is a canary in the coal mine for the U.S. Economy suggesting that we are still dangling in the unclenched jaws of a bear market. The number that investors and prognosticators should be looking at and discussing is the number of distressed banks on the FDIC watch list and the number of failed banks that have closed since 2008.

Back in February of 2010 the N.Y. Times reported that “On Tuesday, the agency [FDIC] announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.” (Full Article)

Since then the number of “problem” banks has only increased and the number is now closer to 750-760 banks that are essentially on the brink. Not all of the banks on the watch list are doomed to fail but the fact that the number is still on the rise in May 2010 does not bode well for the United States economy because the number has been on the rise in a time period that should be a credit Valhalla for lenders.

The reason that this should be a major concern is that the number of problem banks have been rising in a 0% interest rate time period. Banks are able to essentially access free money from the Federal Government and from each other, yet the number of banks on the distress list has been rising. When the Federal Reserve starts to tighten credit by raising the interest rates, the discount window rate and the interbank rate the costs to banks will increase, leaning particularly hard on the at risk banks that do not have adequate reserves at the end of the day. As well, the banks will no longer have access to a 0% credit line where they can then charge the lendee interest on the loan while paying little or nothing to make the loan. If a bank borrows to lend it will be paying to access that money and will not have nearly the amount of federal money at the ready for profit earning purposes.

I fear that once the Federal Government ends the access to easy money the amount of banks on the watch list will increase.

The FDIC will then have to dip further into its coffers to cover the cost of deposit insurance (remember it has already required banks to pay future costs through 2012 to move back into the black after FDIC ran out of money in the fall of 2010). As well further consolidation will have to occur in the banking industry as suitors need to be found for the worthy deposits at the institution. The consolidation will lead to more risk being under one umbrella as the banks consolidate (1 review by regulators of an institution as opposed to 2 reviews of two institutions and consolidation in the lobbying power of decreased regulation on the part of the now larger bank). The Federal Government will have to take on more bad debt as FDIC acts in its receiver capability.

For all the Bulls out there I suggest taking a second look at the banking system of the United States and consider the implications of reduced Federal Government support in the banking system as well as the idea of diminishing returns. As bank consolidation continues the time horizon and expense to move deposits from the failed banks to the new institution will increase as the appetite decreases. The U.S. Banking system is still in the doldrums and the good ole USA will not be able to enter confidentially back into a Bull Cycle until the major faults of the banking system are addressed, fixed and risks truly mitigated. Liquidity and lending at the consumer and small business level will cast a far reaching shadow on the prospects of a quick recovery.



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