Bank Failures Will Continue As The Economy Improves

The chart above shows the American S&L failures over 15 years. This puts into historical perspective our current financial crisis. The common denominator? If you guessed real-estate speculation...you're correct. Ageing has few benefits and you often find yourself in a state of deja vu.

Three more U.S. banks failed on Friday, bringing the total to 84 so far this year, as the industry continues to grapple with deteriorating loans on their books.

112 Banks have failed over the last three years

FDIC Chairman Sheila Bair said this week that bank failures will remain elevated as banks go through the painful process of recognizing loan losses and cleaning up balance sheets. The total of 84 failures this year marks a sharp rise over the 25 last year, and the three failures in all of 2007.

She noted that the banking industry's performance is a lagging indicator and will continue to suffer even as the economy begins to improve.

2,935 small Savings & Loans institutions failed between 1979-94, setting the stage for the rise of big national banks

The U.S. is no stranger to prolonged periods of bank failures, the Great Depression resulted in many more failures. America experienced the loss of the Savings and Loan industry between 1987-91. More than 2,300 financial institutions went under peaking with the failure of 534 banks in 1989. This became know as the S&L debacle or S&L crisis.

Now those perdicting impending doom, that everyone wants to hear in a crisis, point out how the prime loan and commercial real-estate crisis is just picking up loss momentum this year. Well, they are correct. Lenny Dykstra could be the poster child for both problems. Read the Lenny Dykstra Bubble Signal.

But this comes as no suprise to students of past real-estate cycles. At the dusk of day you can count on it getting darker outside. And just as dusk leds to the darkness of night...night leds to day. To us old-timers this is deja vu all over again. Like the stock market the roaing 20's witness a great real-estate boom. We saw it again after WWII from the 50's to the 70's and again from the early 90's throught 2006.

Now a harder forecast to make is estimating the impact of this crisis on the stock market. That will need to be the subject of another Article. Still, one doesn't need to be a financial wizard to recall that one of the greatest 20 year booms in the market began during the 80's financial crisis.

While the size of assets is greater, the cost to FDIC will be less

So, how does this crisis compare to the S&L failures. It's too early to compare total failures as history teaches more are coming. In terms of assets, bank failures for 2008 totaled approximately $370 billion. This compares to approximately $164 billion in 1989, which was the worst year for the savings & loan debacle. If we adjusted that total for inflation, it would be roughly $300 billion today. So, 2008 is the worst in terms of assets for bank failures compared to the worst single year of the S&L crisis.

However, during the S&L crisis, bank failures hit nearly $150 billion or more per year for three years running. Total assets of failed institutions back then was $519 billion. If we adjust for inflation, we get a total in today’s dollars of over $800 billion. But, based upon the current 2009 trends and 2010 estimates this crisis would clearly be much worse than the S&L crisis.

The S&L Crisis cost FDIC $125 billion

While totaling up the assets of the failed banks is interesting, a more important point for taxpayers is what is the likely cost to the FDIC of taking over these banks? An FDIC report cited $124 billion as the cost to taxpayers for the S&L debacle. This includes costs to the Federal Savings and Loan Insurance Corporation (FSLIC) and the Resolution Trust Corporation (RTC).

The FDIC estimates this crisis will cost $70 billion

The FDIC estimate for the cost of taking over these banks is not $370 billion. The lastest estimate (Aug. 28th 2009) for the cost (projected through 2013) to the FDIC for these failures is $70 billion. That’s a lot of money, but still modest given the level of assets at the failed institutions. Still, given the FDIC has already doubled the size of forecasted losses in just 9 months it may be wise to assume 12 months from now the estimates could be even higher.

Even if we assume the FDIC is off by 50%, then the total cost will be $105 billion. That’s still a long way from $124 billion for the over 2.395 S&Ls that failed over 15years. And after adjusting for inflation the cost is far less catastrophic then the S&L debacle.

So, as little Orphan Annie sang in the hit movie musical during the 80's recession,"The Sun is Going To Come Out Tommorrow."

Failed Bank List

FDIC May Need Help

The Official FDIC Statement

Life Lessons of Lasting Investment Value

I'm not here to sell a product or service. I'm here to share the cumulative wisdom and mistakes I've learned over 38 years through Investment experience and education. No, I'm not going to get into my own stock picks. Yes, I'm going to provide advice of more lasting value with a much higher probable outcome of success. From time-to-time I do promise to provide readers with links to articles on specific stock recommendations and market forecast from people I regard as worth reading.

Here is five of my best investment advice...life lessons of lasting value:

Lesson #1: Invest in your education and a profession first. Yes, knowledge is power -not just in investing but in securing a job and career. It took me about 10 years to fully appreciate the wisdom of a fellow finance student at lunch in 1975. Five of us BBA's were discussing what stocks to buy and the market trends. I ask one older student, who was just listening and smiling, for his views. He replied, "Guys, the best investment you can make is not in a stock. The best investment we'll ever make is to finish our BBA degree's and secure job's that lead to a career. If you earn just $15.000 more per year and save that money in a simply no-risk FDIC insured bank account earning a measly 4.25% over your 40 year career you will have $1.5 million more money at age 65."

Lesson #2: Forget thinking you're going to turn coal into gold. I see many young people thinking they're going to take their $5,000 in life savings and turn it into $5 million by becoming a full-time day trader of stocks, options and foreign currency markets. Lots of things are possible but this is highly improbable. Anyone can claim anything on the wild-west internet with little fear of investigation or fines for false or unsubstantiated claims. Many people lose more than they make and if you have less than $100,000 my advice...forget it...read Lesson #1.

Lesson #3: Seek professional help. I've learned over the years that I'm worthless as a carpenter or mechanic. So I forget the do-it-yourself mentality and hire a professional to do it for me. If your business needs an accounting system interview your local CPA's (I'd pass on a bookkeeper). You need taxes done right? Interview your local H&R Block or CPA tax pros. Not happy with your current Insurance company or agent? Search on the internet for a local CLU and CPCU. You will not pay anymore for your insurance but you'll be assured of competence. Got a legal problem? Talk with a lawyer not your brother-in-law. So, when it comes to your investments seek a professional with experience. Talk with a locally Certified Financial Planner (CFP) or Charter Financial Consultant (ChFc) or A Certified Financial Analyst (CFA). Ask if they have a college degree with training in finance, accounting, Modern Porfolio Theory (MPT). Ask about the training and resources provided by their employer. Think about it folks, would you rather buy meat that is FDA inspected from a trusted name brand source or from a foreign vendor on a street corner?

Lesson #4: Get A Plan First...Choose Investments Second. First things first. You need to think beyond next month and next year. You need to think about what you want or need in your investment account values at age 65. Forget asking for a hot stock tip or about the best performing mutual funds of last year. You need a destination objective. You need a financial goal and a financial plan to reach that goal. No ideas? Then think, "how much can I or should I save monthly".

Lesson #5: Spend Less, save more and save now. Remember this simple rule. Achieving long-run financial health means saving as much as you can...as soon as you can. Saving just $350 more per month and earning an average return of just 4.5% (compounded monthly) over 25 years means you'll have an extra $194,275. Putting off saving for 5 years and you'll have $57,922 less in 25 years.

If you are investing you can earn much higher returns which could double the value of these dollars to you. But you need to understand markets often decline and no one can consistantly provide you with an early warning buy or sell system. So, you'll need to maintain a long term plan that forces you to invest more during market declines and purhaps less after major advances using a rebalancing system which a local CFP can explain in detail.

Extra Credit Reading Material

Financial Planner

BalanceTrack Free Financial Education Chapter 1-5

Financial Long-Run Planning. The process begins with assessing your current financial situation, determining what you want to achieve and building tailored made solutions to achieve your goals. Whatever goals you have set for yourself, your financial advisor can help you build a clear, concrete plan to help reach them. Your advisor will develop a personal financial plan based on your needs and careful analysis of your specific situation. Once completed, you and your financial advisor can work together to move forward on your plan.

“The best way to predict your future is to create it.”...Stephen Covey

WARNING: Many less experienced people tend to extrapolate out average returns of 9-10% claiming that's the average historical return. This has often been true but it's not always true -a big difference. No one considered the fact that the S&P 500 Index return could be a NEGATIVE 3.5% average annually return -as it has been over the last decade. After the 1929 Market Crash the market took about 20 years to return to that level again. Another major flaw in planning is using fixed high average annual returns compounded monthly over long periods to show how money invested can grow. Stock markets and stocks are not bank CD's that may compound returns daily or monthly. Stock markets fluxuate daily not compound daily. So, you'll need a professional with some college level finance training in probability and statistics analysis who can show you growth outcomes using "Monte Carlo Theory" and utilizing a historical data base of monthly market returns. This simulation analysis will show you a range of most probable outcomes over various time frames.