Financial 411: How the Nation's Banks are Faring

Home prices rose for the third month in a row in June, by more than 4 percent compared to a year ago, thanks in large part to the tax credit worth up to $8,000 for home buyers. The Standard & Poor's Case Shiller report found 17 cities out of 20 saw home prices increase, including here in New York City. But with recent sales down, the survey's directors worry prices could now be falling.

Meanwhile, consumer confidence rose unexpectedly in August. The Conference Board says it was the first increase after two months of declines. But it is still significantly below the level considered healthy for economic growth. Lynn Franco, director of the Conference Board's Consumer Research Center says it comes down to just one thing: "Jobs remain the No. 1 concern amongst consumers, and overall their outlook is still rather pessimistic."

But the news was good enough for investors to keep the market flat today. The Dow added 5 points, closing at 10,015. The Nasdaq and the S&P were also nearly unchanged.

Are Banks Doing Better or Worse?

We learned today that the number of banks on the FDIC’s “problem” list -- these are banks that could be seized and shut down by the government -- rose to the highest level in more than 16 years. There are now 829 banks being tracked by the banking regulator. At the same time, the bank industry reported nearly $22 billion in total earnings in the second quarter of this year, the highest since the summer of 2007.

Diane Brady, senior editor with Bloomberg BusinessWeek, helps us figure out if banks are doing better or worse.

How do you interpret this report from the FDIC?

Overall, it's actually relatively good news, because even though the number of problem banks has gone up, we actually saw the increase not quite as big as it's been in previous quarters, and also the size of the banks we're talking about, the assets are smaller. So overall, people have greeted this as somewhat good news, but you're talking about more than 10 percent of the banks that are FDIC-insured are now considered problems. What it is, is this really is a growing divide between the small and the big, much like we see with individuals in this country, we're seeing it in the banking system as well. Those that are in the big category are doing very well. The small, they're the ones in trouble.

So are the big banks the ones reporting near-record earnings?

They are. In fact, banks that have over $10 billion in assets, which is really only about 1 percent of all the banks -- they accounted for almost $20 billion of these earnings, and it was only about $21.6, so they're very much in the strongest category. They can borrow on the cheap, they've gotten rid of their bad debt, so they're in a very strong position. The ones that are in the troubled camp are much smaller, they depend much more on commercial property, they're tied to regional markets and they're dealing with some pretty heavy loan losses from individuals, too. Whether we walk away from our mortgages or we can't repay our auto loans, they're the ones that have to suffer.         

So explain this for me -- why are we seeing these small banks fail? I thought they were the ones that avoided some of the more risky loans that the big banks were engaging in during the financial meltdown.  

I think they probably didn't have the access to some of the more esoteric products that we hear about, the credit default swaps and the like. But basically, they were very much tied to their local markets. They were engaging in, especially commercial real-estate, commercial property, that's sort of the life blood of a regional bank, and that's where we're seeing a lot more of the damage right now. The consumer case, you know, what's happened in the housing market, has, if not played out, it certainly -- we've been living with it for two years. We're really just starting to see a lot of the issues with the malls, the commercial developments, so they're still suffering quite a bit. They didn't engage in this behavior, they didn't get the big rescue, as some of the big banks did, and the reality is they're not out there making the big cheap loans right now.

So these community banks are really victims of the recession.

I think in very many ways they are. They're victims of both small businesses that are not taking out loans because they're not confident about consumer spending, they're victims of malls that are going under, they're victims of commercial property, loans that are being essentially left behind, and then also consumers, of course. So I guess if you track the problem banks, they'd be very much in the areas where we've seen a lot of the issues with housing: Nevada, Florida, California. The thing with the problem banks, unlike failed banks, they don't actually reveal the names, probably for good reason. I'm sure [being] dubbed a problem bank, that could increase your problems quite a bit.  

Government Spending On the Rise

U.S. government spending from 2008 to 2009 rose by the fastest rate in more than a quarter of a century. Last year the federal government spent more than $3.2 trillion on domestic programs, in large part because of last year's stimulus bill. That works out to about $10,500 for every person in the U.S.