Why More US Banks Aren't Being Allowed to Fail

FBR says bad assets could be put into a RTC-like entity and estimates the process could take six months to a year for the large institutions to be healthy enough to be sold back to the private sector

They argue concerns about nationalization are misguided because bank debt guarantees, TARP funding and credit wraps — most if not all of which have been used at the biggest problem big banks, Citigroup and Bank of America — constitute “soft” nationalization.

Kaufman says Citigroup and Bank of America “technically have failed” already because they needed “government assistance.”

AP

There’s also a growing sense in some quarters of the banking committee that the problem really turns on a few big banks and is not yet industry wide.

“The sentiment is Citigroup has failed, so lets tear down the facade and deal with Citi," says Robert C. Schwartz, a partner in the law firm of Smith, Gambrell & Russell, which represents community banks in the Southeast. “It just adds angst and uncertainty into the system.”

Schwartz says the 30-plus community banks his firm represents don’t have a “toxic assets problem” but are worried about what they call the “second wave,” managing a bank through a tough recession.

That’s partly evident in the number of banks classified as a problem by the FDIC. Troubled assets on their balance sheets rose from $78.3 billion to $115.6 billion in the third quarter of 2008.  The number of troubled institutions jumped 38 percent to 117, the most since 1995.  Only 14 banks, however, wound up failing in the 1995-1996 period. (Fourth-quarter data is due out Thursday.)

Analysts say small banks, even regional banks, are not the problem or the threat.

“It’s the biggest banks that need the bailout,” says Walker, and those hold the vast majority of the estimated $4.54 trillion in FDIC insured deposits.

Conventional wisdom says these banks are too big to fail, but that’s different than being taken over by the government for a period of time, then sold back to the private sector in whole or in part.

Analysts say the Obama administration is struggling over how to take more aggressive steps in dealing with the banking industry problems because of vast public outrage over both the bailout efforts to date and excessive executive compensation.

The President appeared to take a first step in his speech to Congress Tuesday night, saying "I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions...But I also know that in a time of crisis, we cannot afford to govern out of anger, or yield to the politics of the moment. My job — our job — is to solve the problem."

“They know that the clock is running,” says Johnson. “He’s [Obama] got to decide what to do. Not deciding can look powerless.”

© 2011 CNBC.com

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