Isn't the "banking crisis" really and investment banking crisis?

[AndyHammond1970]

Seems to that the banks like I think of in small town where I live are still banks in the older sense of the word. They carry on the normal functions that we think of when we generally speak of a bank. I wonder if the crisis is not being defined incorrectly in the public discussion. These Wall Street monsters of banks are really investment institutions more than banks in the traditional sense. These mega banks that at the heart of this crisis should be nationalized if, as I and many others suspect, they are insolvent. These giants are chimera like entities that have been allowed to get this way after the repeal of major banking regulations over the last few decades. They need to be taken and split up into smaller manageable units and their complex and toxic assets need to have their component loans and mortgages de-coupled from one another so they can be valued and then held in some way that makes real world common sense. Until this mess is dealt with I don't see how the economy can make any real progress.

[Turbineguy]

1. Yes,

I saw CNN at the Atlanta Airport yesterday pimping this as a real estate caused/driven crisis. It is not. It was caused by Wall Street and their shaky investment schemes.

[Joe Chi Minh]

2. Precisely.

[terisan]

3. yes.

[Oregone]

4. As I understand it, this is wrong

A measure was repealed a decade ago that allowed any normal bank to function as an investment bank (so now, they are one and the same and no distinction should be made). Of the countless bank failures, it hasn't been just the big banks at all (just the opposite, as anyone can dabble in these irresponsible practices). The last bank that failed, Silver Falls bank, was relatively small with three branches total (and if you ever have been to Silverton, you would realize how much of a small town it is). This is a true banking crisis and you are going to see small and large banks fail alike (you will just see the media report more on the big ones, as they have a larger impact).

It doesn't matter how small a bank is. In this age of corruption and incompetence, they've over played their hands, placed their bets on the over-exuberant big time local developers, dabbled in investment activities over their head, and are also just as insolvent.

[TBF]

6. Not true.

Yes, they CAN function that way (that was Bill Clinton repealing Glass-Steagull that you are talking about), but it doesn't mean they are required to act that way.

"True banking crisis" is the republican/media meme.

[Oregone]

7. Right....so small banks aren't failing and insolvent?

I realize that it doesn't make as big of a splash when it happens, but as more small banks find themselves insolvent from playing their hand at Russian Roulette in the age of unsustainable capitalism, you will see the collective impact is anything but benign.

[zagging]

9. It wasn't just the Glass-Steagall repeal

But the Gramm-Leachy-Bliley act, also.

http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act

And to say that they were not required to act that way is rather...naive? When an industry pushes for changes it can be understood that those changes will be implemented.

The crisis is universal. There is only one American currency, and it is the currency that is in crisis. Every economy in the world is tied to American currency. Every bank, every business, every individual is subject to collapse at this point.

[TBF]

10. I realize everything is subject to collapse, but it doesn't have to be.

The banks are guaranteed by the FDIC, and nationalization with those accounts insured would take care of alot of the problems. The reason some of you are determined to tie banks to investment banks (2 different vehicles) is that you're worried about your own investments. Investment banks are like casinos and always have been - no guarantees.

[zagging]

11. I'm not determined to tie anything

It is already predetermined by the very fact that they are bound by the same currency, namely the dollar. It is the dollar that is under extreme pressure. The FDIC is also subject to the same rules. If the dollar collapses, what power will the FDIC have to restore value to it?

[TBF]

12. The dollar has no value due to our debt. Procuring more debt to bail out

investment banks is not the way to pump up the dollar.

[zagging]

15. I didn't say it was

And I don't agree with the approach. We are not debating the same point.

On edit, read #13 and #14. They explain the global impact of the current problem.

[TBF]

16. Yes, I agree with post #14. n/t

[TBF]

5. You are correct -

it is the investment banks that are at risk (and investment arms of some large banks, like BofA or Citi). Your smaller banks and credit unions are not the problem.

[Kip Humphrey]

8. Aw, but now that the big investment houses have been converted to federal banks, its more

difficult to spot the wolves among the flock.

[FarCenter]

13. Neither, the crises is that private and foreign lenders aren't buying securitized debt

In the past several years huge amounts of non-bank lending occured. While the loans may have been originated by banks, they were securitized and passed on as asset backed securities and collateralized debt obligations to verious non-bank investors. Many of the non-bank investors were foreign banks, insurance companies, pension funds, governmental units, etc. Others were hedge funds, insurance companies, pension funds, mutual funds, etc., domestically.

None of these investors want ABS or CDO paper backed by US borrowers, since they are too risky.

So yes, the investment banks that securitized the loans and sold them to the investors have folded up and it is not likely that this business can be restarted.

Pretty much the only solution is for the government to sell Treasury debt, and then turn around and make loans.

[EVDebs]

14. Derivative driven, meaning it's mostly speculative debt ('casino banking')

The Village Voice article What Cooked The World's Economy ? It wasn't your overdue mortgage
http://www.villagevoice.com/2009-01-28/news/what-cooked-the-world-s-economy/

shows us the world's derivative debt is around $600 trillion. The OCC's Quarterly Report, mentioned in Stephen Pizzo's article Failed Banks Want More Porridge
http://www.smirkingchimp.com/thread/20032

OCC US Treasury page 22 Table 1 mentioned in the article
http://www.occ.treas.gov/ftp/release/2008-152a.pdf

shows us that US banks are on the hook for around $176 trillion of that $600 trillion.

In order to get out from under this speculative debt bomb the bankrupt banks must first be nationalized. Until Obama's people get this through their skulls, the economy will continue to sink and we'll be on the bailout merry-go-round 'till the bitter end.