FDIC Adds Twenty-Seven More Banks to “Troubled” List

By Evelyn Black, on August 29th, 2008

On August 26, the Federal Deposit Insurance Corporation increased the number of banks it considers in danger of failure from 90 to 117 and responded indirectly to concerns about its ability to insure money on deposit at retail banking institutions. The FDIC is considering increasing the fee it charges retail banks to insure their deposits to 14 cents for every 100 dollars of insured deposit money this October. A serious fight from the banking industry is expected since banks are already struggling to survive. The fee increase could not come at a worse time for them, and yet without functional FDIC deposit insurance, bank runs become all too likely all over again.

In the immediate aftermath of the recent failure of IndyMac Bank in California, FDIC officials were all over the media assuring a skittish public that the situation was well in hand and that the number of banks on the troubled list is actually lower than it was in the 1990s. What was not said, possibly because it defeated the whole point of going on TV to reassure the public, was that the size and scope of the banks currently facing failure is far beyond anything the FDIC has had to face since the Depression.

IndyMac was the third largest bank failure in history, and it is but one of a large number of major regional banks that are currently struggling to stay above water. Earnings at banks and thrifts declined a whopping 86% from April to June and are currently down to $4.96 billion from $36.8 billion only a year earlier. At the same time, the credit crisis appears to be spreading to lending products that were not really of concern only six months to a year ago. Credit cards, auto loans, and other types of retail consumer debt are beginning to go into default a higher and higher rates, and already institutions are experiencing a rapid increase in late payments.

Small business credit lines, which insure the smooth operation of daily life in many cities, are already getting much tighter as underwriting departments react to a steady drop in the value of business capital due to the housing crisis. While it is true that more homes sold this July than expected, the drop in housing values for June was the largest on record. Many of those sales were “short sales” on foreclosures.

As home prices continue to plummet, both personal and small business customers have fewer and fewer options for securing needed credit. Already many homeowners are “upside down” on their mortgages; that is, they own more on their homes than their homes are currently worth. When this happens to customers who have home equity lines at retail banks, the lines are frozen and credit is no longer available.

Sadly, many customers are tapping their unsecured credit cards to fill the gap and are consequently having a harder and harder time managing those payments now too. The high cost of gasoline and the rise in foreclosures has also resulted in an increase in voluntary defaults on auto loans. Banks don’t really want or need a wave of people calling in to “give back” their SUVs right now since, with gasoline still closer to $4 a gallon than $3, those vehicles are incredibly hard to sell at any price.

Many analysts fear a second huge waive of defaults on credit cards, HELOCs, and auto loans that will hit banks harder than they can stand to be hit right now. The FDIC currently provides up to $100,000 per customer in insurance for checking and savings accounts and up to $200,000 for married couples, per financial institution. However, much of that promise depends on the FDIC never having to actually deliver on that promise in a truly huge way.

Even in the wake of the single IndyMac failure, some multinational banks were refusing to cash checks issued by the FDIC on IndyMac acccounts, putting extensive holds on the deposited items or refusing them altogether, hoping to shuffle these customers off to another bank before anything went to court. It’s hard to imagine the chaos that might be caused by multiple simultaneous bank failures, so we don’t see a lot of open discussion about that possibility.

That lack of discussion doesn’t mean the possibility isn’t out there, it just means the topic of simultaneous multiple bank failures has become “the elephant in the living room.” Banks, federal regulators, and some customers see the danger quite clearly, but no one knows quite what to do about it. Add to that the concern about not causing panic and you have a truly uncomfortable situation for all concerned.

The financial crisis that has gripped the U.S. since last November as the subprime loan mess began to hit full force has been like that all along: a series of choices between difficult options both of which might have major negative consequences. For example, when the Fed cut the interest rate for the funds banks lend each other daily from from 5.25% to 2% over the course of less than a year, it probably saved credit markets from freezing up completely. On the other hand, it almost certainly fueled inflation, which is now at record levels.

If the FDIC draws undue attention to itself by increasing the fee it charges retail banks to insure their customers’ deposits, it will almost surely provoke the very reaction it wants to avoid: runs on the most troubled banks. If the FDIC does not increase this fee, it risks having inadequate resources to actually provide the money for the insured deposits should more banks fail. That’s a devil versus the deep blue sea sort of decision, and right now, there’s really no avoiding it.

The year 2009 promises to be as difficult, if not more difficult, for retail banks and the Federal Reserve as the year 2008 was. At the bottom of the whole mess is a lot of American consumer debt, a huge tremendous amount of debt, much of it probably bad debt, that no one is quite sure how to manage. The economy can’t recover without spending, people can’t spend without credit, and banks really can’t afford to extend any more credit given the current economic conditions.

That’s a recipe for disaster (for the banks at least), but in the long run, if it provokes a broader discussion of debt and the American consumer lifestyle, it might not be such a bad thing. This mess didn’t create itself: a lot of bad decisions at the level of individual people and banks themselves got us into this. I don’t think we can really get out of it without a long, hard discussion of those bad decisions and how to avoid them in the American’s economic future.

In the meantime, if you still have unsecured credit available to you, you may want to pay it down or off as soon as possible. Already major banks are slashing credit limits even on good customers in anticipation of further problems. If you have $5000 charged on a card with a $10,000 limit and your limit is reduced suddenly to $5100, your credit score instantly plummets, making it harder for you to get a mortgage or conventional secured loan.

All of which puts the banks into one of those lose/lose situations too: reduce unsecured lending and banks reduce credit card losses but also credit card profits, right at a time when profit is dropping like an SUV off a Minneapolis bridge.

One last thought: if you’re losing your house, now might not be the best time to sleep under a bridge either.



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The Economy’s Affect on Artists: A Bifurcated Reality

By B.P.T., on August 29th, 2008

When the economy is in a slump, for the vast majority of the population, discretionary income is often cut, leaving people to spend for necessities rather than luxuries. Save an elite few, art is generally considered a luxury or perhaps an investment rather than a daily need. But for those who make their living creating and selling art, a shaky economic environment can have a surprising range of effects. Further, artists, including visual and musical artists, are exploring and expanding new venues to sell their creations, bypassing the traditional routes along the way.

What is perhaps ironic is that higher end artists and galleries have less trouble selling in today’s limping economy than those who attempt to sell at lower prices. There is a high end niche market that is relatively unaffected by varying market conditions. A recent article in the Boston Globe quotes Barbara Krakow, a long time high end gallery owner, who discusses the fact that some galleries are seemingly unaffected by outside economic forces. She tells the Globe, “There’s a pocket in the art world not affected by what’s going on economically at all.” She should know – her clients buy her artists’ work at prices that reach upwards of $150,000.

Discretionary Spending: Alive and Well?

The Art Newspaper has focused on information along the same vein. A recent article by Brooke S. Mason reports on art market shifts and quotes gallery owner David Maupin as saying, “I have far more people I can call for a $75,000 to $100,000 work than the lower-priced artists.” He also says the category of younger (and less-expensively priced) artists’ sales has dropped by half in the past few months. The art journal Big, Red, and Shiny published a recent interview with gallery owner Joseph Carroll in which he discusses the current economy and its effects. He points to the recent Francis Bacon triptych, which sold at Sotheby’s for an astounding $86 million. Carroll sums the situation up nicely saying, “I don’t think the art market is independent of the larger economy but they don’t appear to be synchronized at the moment. At a certain level, like the recent auctions show, the market is independent of the general economy. At the lower end, I would say they are more closely linked.”

But what about those younger, emerging artists? This younger generation of artists and dealers has found alternatives to sell their creations besides the traditional, sometimes stuffy, brick-and-mortar galleries. Between increasing commercial rents in traditionally established art markets like Boston, Santa Fe and New York and increasing rents for residential areas, these regions are getting tougher for up-and-coming artists to thrive.

Many artists and gallery owners have turned to alternative routes to sell their work. Art fairs have become quite popular, and the art fair “circuit” extends around the country. While the travel and setup can become expensive, the overhead can be considerably less than a traditional gallery. And artists often don’t have to travel far afield to attend multiple art fairs. Some cities hold several fairs per year, or even per month, and fairs have become popular worldwide. A number of websites are dedicated to maintaining art fair listings both large and small, including www.artfairsinternational.com, www.festivalnet.com and www.artfairsourcebook.com. These are not local hack events either. These events are generally juried, well-publicized affairs attended by large numbers of people.

Online Galleries

In addition to art fairs, the biggest change to hit the art scene over the past decade or two is the proliferation of art sales on the Internet. Gallery owners and artists alike can show their art to buyers around the world with very little overhead costs and can easily ship worldwide. Whether selling through online auctions or sales websites, art can be shown and purchased at the click of a mouse, and the World Wide Web has changed the art sales landscape, much the same way the MySpace phenomenon has changed the indie music business. Even that mammoth of art dealers, Sotheby’s, offers previews of art online so potential buyers can get a good look at the art before attending a live auction.

One other perhaps less well-known option for struggling artists is to attend an MFA program at a university. Because most public and private donations for artists go to institutions and not individual artists, a Master of Fine Arts program can be a place artists can study, create and build a reputation. Of course, like anyone who chooses additional higher education, there is always the issue of cost to live and attend school, but scholarships and other grants can help pave the way, and the long term benefits hopefully outweigh current costs.

The art world is perhaps one of the most intriguing pockets of an economy not affected by outside forces. While high end collectors and investors (and the artists they patronize) are seemingly unaffected by the more pedestrian issues of high gas prices and rising food costs, emerging artists and the galleries that support them around the country are getting crunched by increasing rents and fewer buyers in their category. Whether this bifurcation of the art world persists as the economy continues to struggle remains to be seen, but for art enthusiasts, it will certainly be interesting.



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Very Soon, You Can Invest in Australia

By G.L.C., on August 29th, 2008

On August 25, the U.S and Australian regulators agreed to allow brokers and exchanges to do business in each county while being regulated only by the their home country. This could start as early as January. For the United States Securities and Exchange Commission (SEC), this is seen as a step towards its goal of globalizing investing. This is the SEC’s first mutual recognition agreement with an overseas regulator as part of its campaign to become more international and improve the competitiveness of U.S. markets. The SEC is also in discussion with Canada and other countries to develop a process to discuss mutual recognition. The SEC and the Australian Securities and Investment Commission (SIC) have also agreed to increase cooperation on cross border enforcement and approved an agreement to step up cross border supervision of financial firms.

If this agreement is approved, it would be a first for the U.S. U.S. brokers and exchanges can seek relief from existing restrictions on doing business with institutional investors in Australia. Australian brokers and exchanges can seek the same relief on doing business with U.S. institutional clients. The exemption from dual-regulation would not be automatic and would still be subject to conditions from each country’s authorities. Previously, cross-border operators needed regulatory compliance with both the SEC and the SIC. Each country will retain jurisdiction to pursue violations of their respective anti-fraud laws and regulations.

An application for relief by an Australian broker or exchange will be subject to a public comment period and will not become final without a vote of approval by the five member SEC. It is expected that the procedure for U.S. brokers and exchanges seeking relief in Australia would be similar.

Retail investors in the U.S will be able to access the Australian market directly through the U.S. brokers and enjoy U.S. regulatory protection.

The lowering of the barriers is expected to benefit the two countries by increasing cross border capital flows and reducing transaction costs. The agreement will also enhance cross border law enforcement cooperation, facilitate regulatory coordination, and increase investor access to well regulated capital markets.

Critics point out that such an agreement is deregulatory and passes on the burden of protecting the U.S. investors to other countries that don’t answer to the U.S. The government must look at the breakdowns that led to the current credit crunch before opening up the market. There is also serious concern about allowing individual investors direct access to non-U.S. market through foreign brokers. It would preempt oversight from state laws and other regulatory vehicles.

Wall Street trade groups such as Securities Industry and Financial Markets Association have welcomed the agreement. Hopefully, this is the first of many such agreements that compare regulatory regimes and reduce barriers to investment for firms and individuals in the participating countries. The agreement is being hailed as a groundbreaking effort that will expand access to overseas markets without sacrificing investor protections.



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