July 1, 2009 - Bank failures are good. They get rid of banks that are mismanaged and have no business being in banking. Bad management at many banks made lots of bad loans and deserve to go under. The biggest example was Washington Mutual. And Countrywide belongs in there as well. Of course, there are a large number of community banks that also made bad loans that won't make it either.

Consumers may think that's a good deal for them, but it's not. Many of these high risk banks won't make it, and unless there's a merger or a buy out of the bad bank, the FDIC will take it over. Then consumers need to wait for their deposits to be returned, and those funds aren't earning interest once the bank is out of business. You can be sure that the highest deposit paying banks are in difficulty. As with all investments, the higher the possible return, the higher the risk. Keep that in mind as you seek a place to put your money. Always getting the highest rate may not be the best strategy.

The number of banks that have disappeared in 2009 is 45 as of this writing. Expect a lot more. Some analysts predict in the thousands. That seems like a lot until you realize that there are about 8200 banks in the U.S. If you just did a quick division of all 50 states, that's 164 unique banking entities in every state. Are all those banks really necessary? The market is saying no.

That's because bank management is no different from any other management. It has to add value in order for the enterprise to survive. Merely taking in deposits and lending them to bad projects doesn't qualify as good business. Some banks simply take in local deposits and participate in large loans originated by larger banks. Why have another unique bank gathering deposits when the larger bank could just as easily (and more efficiently) take in those same deposits?

But that isn't a blanket guarantee of continuing business if management isn't adding value by making solid loans or investing wisely. There's no room for those banks. While you can argue that the large banks that were bailed out were guilty of those sins, they're in a somewhat different category by virtue of their size. So they got bailed out, but they are paying for that rescue and will continue to pay for some time. Hopefully, the government actually makes money on those capital injections.

As for smaller banks, more will fail. Most will be taken over by a larger bank in the same region, one looking for a presence in the community. Depositors will see a name change on Monday morning, and most likely some new managers, but their money will be safe. The ones where the FDIC takes over because the banks are in such bad shape no one wants them, they'll have depositors getting to know the government program for refunding deposits. It may take a while, but they'll get their money. And another bank will disappear, one that wasn't well managed, one that made bad loans. And that's good for the whole economy.

- Ted Allrich