How do you stop a devastating bank run?

The Treasury is stress-testing 19 banks. Would announcing that one of the big boys is a goner send all the others spiraling down?


Andrew Leonard
March 5, 2009 8:19PM (UTC)

On Wednesday, Paul Krugman dismissed President Obama's contention the U.S. was less likely to go the bank nationalization route than Sweden because the U.S. had "thousands of banks" while Sweden "had like five banks." Krugman, citing the Financial Times' Martin Wolf, pointed out that the four biggest banks in the U.S., J.P. Morgan Chase, Citigroup, Bank of America, and Wells Fargo, possess "64 percent of the assets of U.S. commercial banks."

So as far as this discussion is concerned, we've got, like, four banks. The "thousands of banks" line is just a diversion.

More accurately, we've got, like, 19 banks. That is the number of banks which are getting stress tests from the U.S. Treasury. ProPublica has the list. Total assets on the books for all 19 together comes out to about 11 and a half trillion. The four biggest banks control a little over 7 trillion, or about 63 percent.

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But quibbling about thousands, 19, or 4 misses the point. The real question is what effect would the announcement of the likely nationalization of one or two of the big banks have on all the others. As in, say, on Monday, Treasury Secretary Geithner declares that Bank of America and Citigroup are toast. What happens to all the rest on Tuesday? A massive bank run that takes down all the rest of the big 19 is not out of the question.

That has to be part of what the administration is thinking. Maybe? Please? In a post published Tuesday, Justin Fox says he still "harboring the hope that Geithner has more up his sleeve..." And he quotes the conclusion to a recent segment on the banking crisis from "This American Life."

Of course, if they were planning to take over the banking system, they wouldn't announce it beforehand. They'd probably say exactly what they're saying right now, at least until they got everything set up, they hired enough people, put all their plans in order. And then one Friday evening they'd make an announcement, and nationalize the banks over the weekend.

Exactly. However, as Fox acknowledges, we have "no evidence whatsoever" to base any such hope on. Which is either a good sign, because it means that lips are sealed. Or a very bad sign, because it means there is no such hope at all.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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