Two More Banks Died Friday, Many More Coming

...bringing the total number of bank failures in the US this year to fifteen.

Meridian Bank of Eldred, Illinois, with $39 million in assets and $37 million in deposits, was shut by the state yesterday and National Bank of Hillsboro, Illinois, bought the deposits from the Federal Deposit Insurance Corp. Four branches in southern and western Illinois reopen today, a fifth opens Oct. 14, the FDIC said in a statement.

Main Street Bank of Northville, Michigan, with $98 million in assets and $86 million in deposits, was turned over to the FDIC yesterday. Monroe Bank & Trust of Monroe, Michigan, bought the deposits and today will open its two offices near Detroit as branches.

``The dramatic downturn in the residential real estate market unfortunately knocked the wind'' out of Main Street, Ken Ross, commissioner of Michigan's Office of Financial and Insurance Regulation, said in a statement.

Regulators have now closed the most banks in 15 years, and the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to enactment of a $700 billion bank rescue plan, and triggered a bankruptcy by Lehman Brothers Holdings Inc. and nationalization of Fannie Mae and Freddie Mac.

These banks won't be the last, either. The number of bank failures during the Great Depression didn't really ramp up until late 1930 into 1931...more than a year after the Stock Market Crash of October 1929. Granted, things move faster these days, but the majority of the bank failures that caused the Depression happened after the Crash, particularly after the US failed to stop the loss in confidence in bank deposits, causing bank runs across the country.

Sound familiar? It should. It's the same problem we have now only much worse: it's Global No-Confidence these days. Hammerin' Hank Paulson's plan to purchase bank stocks isn't going to solve the credit market problem of illiquid assets causing insolvency. If anything, the reverse will happen: since the banks will have to create new shares for the government to buy, the value of existing shares could get diluted and lose value sharply...completely negating the additional capitalization that purchasing banks shares is supposed to bring. After all, if you know the government is stepping in to prop up a financial stock YOU have in YOUR portfolio, aren't you going to want to get out of that stock considering the government's efforts have so far failed miserably across the board?

Example: Bank XYZ has 30 million share oustanding at $12, for a total worth of $360 million. The Government steps in and creates 10 million shares at that $12, giving the bank an extra $120 million in asset value, for a total of $480 million. Looks good on paper except for the fact that people are going to be selling XYZ stock like crazy if the US Government needs to step in to save that bank!

So the share price of Bank XYZ drops like a rock to $9 a share. It now has 40 million shares outstanding...worth $9 a piece for a total of $360 million...exactly what it had before. If the share price dropped to $6 instead, the bank would now be only worth $240 million, having actually lost money on the scheme! Only now the government owns 25% of the bank that still needs more capital injected into it...so the Government buys MORE SHARES...

And the death spiral continues. The plan's not going to work. The credit crisis is a short-term disaster coming in a matter of weeks, but the confidence problem is instant-term right now. No confidence indeed. Unprecedented global action from the G7 is needed NOW or the game ends next week.

But the G7 plan looks like it's going to be worthless.

The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no collective course of action to avert a deep global recession.

In a surprisingly brief statement following a 3-1/2 hour meeting, the Group of Seven stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as a vital step to end 14 months of turmoil and growing panic on financial markets.

"The G7 agrees today that the current situation calls for urgent and exceptional action," the United States, Canada, Britain, France, Italy, Germany and Japan said.

Boy, that'll help the markets!

We're at the point in this economy where our choices are everyone pulling up on the control stick at once and making an emergency landing on the freeway with no landing gear, or arguing loudly while the plane smashes nose first into the ground.

We have days, and then hours left before the markets open. Without extraordinary worldwide action, the spectre of global depression hangs over us all. The IMF is warning inaction this weekend could lead to another 20% market fall like we had worldwide this week. I honestly think it could get much worse than that.

Less than 36 hours and counting until the Nikkei opens most likely with another staggering loss and the spiral continues unabated next week, wiping out trillions and trillions. Less than 48 hours until the US stock markets open (bond markets are closed for Columbus Day but not stock markets.)

The Crash of 2008 may just be beginning.