Bank Rescue Update

Fed Chairman Ben Bernanke’s attempt to drive all cash out of..well…cash and into riskier assets continues apace.  The American Banker reports that the market for bad loans is brisk with higher prices.

Through the first two months of this year, sales of more than $5.2 billion of residential loans and $1.9 billion of commercial loans were announced, a pace that could lead to a 20% to 40% jump in overall sales this year, says David Tobin, a principal at Mission Capital Advisors, a New York loan advisory firm.

The big banks are peddling their bad paper at higher prices and now the small banks can do the same. The prices of impaired loans and non-performing loans have increased roughly 10% since a year ago.

“Banks are clearing more stuff off their books and what’s driving the increase is pricing,” says Tobin. “It’s a virtuous cycle upward, kind of like a short squeeze. There’s not a lot of inventory, lots of people are trying to buy and that drives nonperforming loan prices higher.”

Meanwhile the number of banks continues to shrink. In 1996 there were 11,454 FDIC insured institutions. At the end of 2012 that number had shrunk 38% to 7,083. Of that total, 651 banks are on the deposit insurer’s secret “problem” list.

Either no one wants to start a new bank or the FDIC isn’t allowing it, either way, according to the FDIC’s Quarterly Banking Profile

For the sixth quarter in a row, no new reporting institutions were added. The year 2012 is the first in FDIC history that no new reporting institutions were added, and the second year in a row with no start-up de novo charters (the three new reporters in 2011 were all charters created to absorb failed banks).

About Douglas French 16 Articles

Affiliation: Agora Financial

Douglas E. French is senior editor of the Laissez Faire Club. He received his master's degree under the direction of Murray N. Rothbard at the University of Nevada, Las Vegas, after many years in the business of banking. He is the author of three books, Early Speculative Bubbles and Increases in the Supply of Money, the first major empirical study of the relationship between early bubbles and the money supply; Walk Away, a monograph assessing the philosophy and morality of strategic default; and The Failure of Common Knowledge, which takes on many common economic fallacies. He is founder and editor of LibertyWatch magazine.

Visit: Laissez Faire Club

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