Monday, February 16, 2009

Whoa, they're getting closer...

It's not just big-city banks who are failing.
Corn Belt Bank and Trust Company, Pittsfield, Illinois, was closed today by the Division of Banking, Illinois Department of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with The Carlinville National Bank, Carlinville, Illinois, to assume all of the deposits of Corn Belt Bank and Trust Company.

Due to the observance of Presidents' Day on Monday, Corn Belt Bank and Trust Company's two offices will reopen on Tuesday as branches of The Carlinville National Bank. Depositors of Corn Belt Bank and Trust Company will automatically become depositors of The Carlinville National Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until The Carlinville National Bank can fully integrate the deposit records of Corn Belt Bank and Trust Company.

Over the weekend, depositors of Corn Belt Bank and Trust Company can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2008, Corn Belt Bank and Trust Company had total assets of approximately $271.8 million and total deposits of $234.4 million. The Carlinville National Bank will pay the FDIC a premium of 1.75 percent.

The Carlinville National Bank will not assume $92 million in brokered deposits held by Corn Belt Bank and Trust Company. The FDIC will pay the brokers directly for the amount of their insured funds. Customers who placed money with brokers should contact them directly for more information about the status of their deposits. [More]
The steady drip-drip of banks closing adds to the concerns of whether bigger banks are essentially insolvent. Growing calls for nationalization of such banks would present us with an entirely new financial landscape.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.
Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:
First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.
Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.
Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer. 
Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.
The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.[More]

What is notable  about the calls for nationalization is who they are coming from.  Roubini (above) is hardly a wild-eyed socialist. Indeed, the political gamble taken by recovering spend-aholic Republicans could really look narrow and self-serving as the size of the crisis makes their worst nightmares the most likely solution to embrace in the near future.  Screaming "socialist" at the President becomes a little humorous if you are in the same breath advocating goverment takeovers of banks, no?

The fallout from this would be considerable.  Will un-nationalized banks look like poor investments and see their stock prices plummet?  Very likely.  And them some of them would become insolvent.  But nobody knows how far that daisy-chain will extend.
One of the obvious concerns about having the government nationalize major banks is that it will create a contagion effect, scaring private capital away from all banks, not just the obviously insolvent ones. If that happens, the result will be that instead of only having to recapitalize a few banks, the government will end up having to recapitalize most or all of them, expanding the costs to taxpayers and making it more likely that the government will end up running most of the banking system for an extended period of time. (See Tyler Cowen, Felix Salmon and me on the subject.)[More]
To date, these types of discussions seem esoteric quibbling with little impact on whether I plant more beans than corn this year. But the effect for farmers would, I believe, be significant.  Removing capital-supplying vendors - or at least hobbling them with burdensome government operating rules - could mean more economic friction in the cpaital markets and less competition for loans.  All this points to rising interest rates despite what the Fed does.

The larger the farm (loan) the more likely to be effected. Even the Farm Credit System would be involved, as lower competition for top-tier loans may allow them to stay competitive as their funding costs rise with bigger spreads on their bonds.

Interest costs, like fuel costs, are not that high on the agenda for most of us now.  Our immediate problem is demand/prices for commodities. But until people who buy commodities can get credit from working banks we may not have much success finding eager customers.

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