Your Bank's Horoscope: I See a Bailout in Your Future

If banks had their own Chinese Horoscope it may read something like this: 2008--The Year of The Bailout. It seems as though every time I pick up a financial magazine, read the business section of the newspaper, or flip through the national news networks I read more doom and gloom regarding the financial strength of the American Banking Market. How many more bailouts can we afford? That of course is a very silly question because we should all know that the answer is that we couldn't afford any in the first place! Here is a quick recap of "2008--The Year of the Bailout"

1. Bear Stearns.

Cost to taxpayers: 29 Billion.

This was apparently a small price to pay to prevent "a meltdown" in the financial markets. This is just the beginning of a scary trend, and as I see it, not an insulator for our financial markets.

2. Fannie Mae and Freddie Mac.

Cost to taxpayers: 200 Billion

Worth it because interest rates fell? Or because the mortgage market didn't completely collapse?

3. IndyMac and 10 other banks.

Cost to taxpayers: Nothing!

O.k, nothing is probably a stretch, but thanks to strong banks that pay FDIC insurance, taxpayers aren't footing the bill directly but the FDIC is likely to raise these premiums which I am guessing banks aren't going to swallow that cost without increasing the fees charged to customers. We should be able to sleep o.k at night knowing that our money is safe and sound because the FDIC is there to protect us.....right?

Total cost and counting....: About 400 Billion, Poor Lehman Brothers should have jumped on the bailout bandwagon a little earlier and perhaps the government would have been willing to bail them out too.

The last time we saw bailouts like these were in the late 1980's.

Cost to taxpayers in the late 80's: 130 Billion


400 Billion is only about 1/10 of our country's annual spending. We can afford it, because surely the alternatives to not bailing these companies out would have far worse consequences. I am not sure on that, there may be evidence--"statistics" that support this, but in my lifetime I have learned that being bailed out of a bad situation rarely leads to learning from my mistakes because I haven't really had to pay any consequences. It looks like we are paying the consequences (to the tune of 400 Billion dollars) for the mistakes of our country's finest financial professionals.

It might be too soon to mark 2008 as The Year of the Bailouts because there are more in the works! Some of them include:

The Detroit automakers.

Cost: Yet to come... The bill is set to pass through Congress would commit up to $6 billion in low-interest loans to General Motors, Ford, and Chrysler. This number could go up to $50 billion.

We are supposed to be in support of this though because it is a loan program and not a bailout, that is until the loans aren't able to be reapaid because as we know, the auto industry is not poised for a recovery any time soon. Essentially the government is doing the exact thing that is putting smaller banks on the FDIC watchlist by making loans to a company thats profits are sharply declining.

100+ Banks in America.

Cost to taxpayers: Yet to Come........

The FDIC is closely watching 117 problem banks. Combined these banks have about $78 billion in assets that the FDIC will have to insure. Being watched by the FDIC isn't exactly good for business in the case of banks. Consumers will be quick to pull thier deposits out of a bank that is shown to be losing money. Loan officers are also going to be on the lookout for new opportunities with stronger institutions. When these banks lose key decision makers, they are not able to be competitive in attracting the best in the industry and many times are not allowed to make new hires because of the declining profits. This is an equation for failure not only for our banks, but for the ways that the government is failing business in this country.