The rise and (almost) fall of banks in America

Associated Press

These days, you can roll up to an ATM at the grocery, the pharmacy, the gas station, the hardware store, the office, even the ballpark. You can check your Bank of America balance on your iPhone. You can text Chase, and Chase will text you back.

That’s banking today: It has grown from an almost quaint relationship between teller and customer into a massive, dizzyingly interconnected network that touches almost every adult in this country.

And right now, the federal government — working without a road map, and without a net — is putting together a plan to keep U.S. banks from collapsing.

Not just to get the banks lending again. To keep them alive.

Perhaps as early as this week, the government will announce a plan that analysts expect will include lifting soured mortgage assets off selected banks’ books, possibly along with guarantees against other losses and maybe more direct injections of cash.

Financial industry experts say it is a matter of choosing the best of several options, none of them very palatable.

And no one knows for sure what will work because nothing like this has happened in living memory.

Getting it wrong could trigger a replay of what happened after Lehman Brothers collapsed last fall — the stock market in free fall, seizure of the credit markets, ripples of layoffs. Perhaps even a run on other banks — so many customers rushing to pull out their cash that it would make the bank run in “It’s a Wonderful Life” look like, well, a feel-good holiday movie.

“The banks are at a terrible junction,” says Robert Reich, a labor secretary under President Bill Clinton. “The bottom is falling out. Almost every area of the credit markets, we’re finding people unable to repay their loans. That means many banks are basically insolvent.”

“If one big bank implodes,” he says, “the reverberations could be endless.”

This January, the government took over six failed banks, including three on a single day. Last year, it took over a total of 25.

When it happens, the government swoops in and try to minimize disruption. Recently, it has tended to close banks on a Friday and achieve something close to business as usual by Monday morning, arranging for other banks to take on the assets. ATMs have kept working, and people have had access to their cash.

So far, most of the failed banks have been relatively small, many with assets only in the hundreds of millions of dollars. But what would happen if one of the nation’s big banks, the kind that manage hundreds of billions in assets, went down?

“That would probably cause a complete meltdown of the American financial system,” says Andreas Hauskrecht, an associate professor of money, banking and finance at Indiana University.

After the financial crisis accelerated last fall, the government increased the limit for the amount of bank deposits it will insure for individual depositors, from $100,000 to $250,000, effective through the end of this year.