Bank failures to flare up in '09

NEW YORK -- How many banks will fail this year? No one knows of course, but the answer is many. So far in 2009, we've already had three, putting us on a one-per-week pace. That could mean a doubling of last year's tally of 25, and only slightly less than the total number of failures heretofore over the entire decade (57).

On Friday, regulators shut down First Centennial Bank in California of Redlands. (Redlands, the "Jewel of the Inland Empire" is located in San Bernardino County off I-10 on the way to Joshua Tree and Palm Springs.) On January 16, Bank of Clark County, Vancouver, Washington (love the Vancouver Sausage Fest each September) and National Bank of Commerce, Berkeley, Illinois (home to World Dryer Corp) both went splat.

It's dire and scary stuff, but sadly we have seen much worse in this country and you don't have to go back to the 1930s to find it. True, the 1930s were a disaster for banks. In the panic of 1933, more than 4,000 failed which led to the creation of the Federal Deposit Insurance Corporation. But the FDIC hardly made bank failures obsolete. Since 1934 some 3,565 banks have flamed out in this country. A great majority of them hit the wall in the 15-year period between 1979 and 1994. The peak year was 1989, when 534 banks either failed or required "assistance transactions" from the FDIC. This massive failing was of course brought on by the savings and loan crisis that devastated thousands of banks. (To be clear not all these banks technically failed. The FDIC website indicates there are nine possible interventions, including some where the institution's charter survives, such as "reprivatizations," and others where the charter is terminated, such as a purchase and assumption where the institution is sold. No question though that every bank on this list at the FDIC website had basically failed.)

So 25 or 50 bank failures, or even a few dozen more, pales in comparison to the number of failures 20 years ago. But that's cold comfort for a number of reasons.

First, remember that big banks were in lousy shape back then too. In May 1984, Continental Illinois, the nation's seventh-largest bank became insolvent. Interestingly the bank, which became 80% owned by the U.S. government, was bought by Bank of America in 1994, which of course has its own problems right now.

Other big bank failures back then include First Republic of Dallas (1988) and Bank of New England (1991). You may also remember that in 1990, Saudi investor Prince Alwaleed pumped hundreds of millions of dollars into Citibank (C, Fortune 500), (as he did again recently), to shore up that battered bank's balance sheets. Alwaleed's Wiki page notes, "his investments in Citibank earned him the title of "Saudi Warren Buffett," though the past tense here seems most appropriate.

Even with all that historical pain. though, I would argue the situation is worse today. True we don't have the plethora of failures as we did back in the day--though we still might. But last year's Washington Mutual's failure far and away topped Continental Illinois's demise as the biggest in U.S. history and IndyMac now checks in as #3. And, of course, I think it is unassailable that Citi is in worse shape today with tens of billions of dollars of losses and tens of billions of dollars of government guarantees. Bank of America (BAC, Fortune 500) is in the deep soup too. Not a surprise then that the Keefe Bruyette Woods Bank Index (KBW) (which has 24 bank stocks) has fallen some 80% from its peak in February 2007. That's huge! But it is also almost exactly the same decline financial stocks experienced in 1929 to 1933.

Bottom line is this: When the only benchmarks we have to compare the current situation with the banks are the 1930s and the savings and loan crisis, you know you are a really bad place.