Small-town America in Real Financial Trouble

If you think U.S. banks got by unscathed in 2011, think again…

There were 92 U.S. bank failures in 2011. Total assets of those banks were just over $36.0 billion. (Wonder why we didn’t read much about this in the news.)

Since the credit crisis began in late 2007 to the end of 2011, there were a total of 417 U.S. bank failures whose assets totaled about $680 billion (source: FDIC). The number of people that lost their jobs at these 417 institutions has obviously not helped job creation in this country.

What is more distressing, dear reader, is that the Federal Deposit Insurance Corporation (FDIC) reported that the number of current troubled banks rose to 111 in its latest quarterly report. That many distressed banks for a single quarter is at a 15-year high. The stresses on the financial systems are mounting and we may be talking about job losses, not job creation, in the coming quarters.

Total assets represented by those 111 banks are a stunning $180 billion…and that’s only one quarter’s worth!

There have been many articles written on the big banks that are “too big to fail” since the crisis erupted in 2008, but little has been written about the smaller banks, which, by and large, have not had the luxury of bailout money from the Fed. Small banks were once a big part of job creation. Not anymore.

What many fail to realize:

It is the smaller regional bank that lends to small businesses in its community and supports job creation, not the big banks. It is the smaller regional bank that helps support the local real estate market resulting in job creation, not the big banks.

There is no question that small businesses are an important source of job creation in this country.

The very high number of distressed U.S. banks point to a real estate market that is not recovering, and small businesses that are not borrowing, which implies little job creation.

Further evidence comes from some of the CEOs of the smaller banks themselves, which have recently indicated how little lending is occurring at the small business level, and how they see no recovery in the real estate market in their local communities (again no job creation).

Small-town America is in trouble.

The first thing you should do as an investor and consumer is to verify that your bank is on the distressed list. However, you should also be very careful as to your investment portfolio to ensure you do not own stocks in companies that have exposure to smaller U.S.  banks. Sure, the FDIC provides depositor insurance, but only to a set amount.

The above has been a grassroots look at what is happening in local communities and the smaller banks that are such a big part of these banks. The news isn’t good. If real estate and small businesses are under duress (and we know they are), then there can be no job creation, which means the GDP numbers will continue to come under pressure and job creation will be elusive…possibly resulting in a higher unemployment rate.

Small-town America is what made this country and it’s suffering big-time right now. Small businesses employee about half of all private employees in the U.S. (source: SBA). The government focus since the credit crisis began has been about Wall Street, the Big Banks, and “Too Big to Fail” companies.

There has been very little done to help the backbone of America, small businesses. And this is one of the main reasons the economy cannot get going in 2012 and why I’m predicting it will be a very difficult year for U.S. economic growth. Job creation will continue to elude us. (See: Recent GDP Numbers Confirm My Prediction.)

Michael’s Personal Notes:

The victim toll of the European Union’s recession is beginning to mount…

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided 150 million to the airline to help it get through difficult times.

The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over 300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent 150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated 349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.