Rescued Banks Teeter Towards Collapse

The Huffington Post | Amy Lee | 12-27-10

Nearly 100 banks previously rescued by the federal government are again poised to fail, despite billions of dollars of support from the American Treasury.

The number of banks on the brink of collapse rose from 86 to 98 during the summer months, according to analysis of federal data from the Wall Street Journal. The banks in question have received $4.2 billion dollars in aid through the Troubled Asset Relief Program (TARP). Most of the troubled institutions are relatively small.

The latest sign of distress in the financial system suggests the bailout may have simply been a stopgap solution for a sector still contending with the aftershocks of the greatest banking crisis in 80 years.

The continued weakness of some banks now threatens to impede a tentative economic recovery, say experts. With many banks still troubled, lending remains tight, depriving businesses of capital to expand and hire. With expansion and hiring rare, the economy remains weak, depriving the banks of healthy customers--in short, a feedback loop of trouble.

The Wall Street Journal defined "troubled banks" as those with less than 6 percent of their primary assets both reliable and liquid.

Through TARP, the government has purchased hundreds of billions of troubled assets from banks in danger. Though the program was purportedly meant to benefit healthy institutions with a good chance of survival, these latest failures suggest that many banks were in tenuous shape to begin with. Seven TARP recipients have already failed, at a loss of $2.7 billion.

But some analysts pointed to the fact that most of the failing institutions are relatively small in dismissing concerns.

"If Citibank and Bank of America were going under, that would be a problem," said Mark Blyth, a political economy professor at Brown and a fellow of the Watson Institute for International Studies. "The bailout was meant to deal with a global systemic crisis. It was not to make sure that some bank in Utah with dodgy commercial real estate would be okay."

Blyth expects some smaller banks to continue to fall, due in large part to the lack of growth in the economy.

"People aren't borrowing," he said. "The reason they're not borrowing is because they're up to their eyeballs in debt."