Semi-Systemic Bank Failure

LOLFed » Sneaking In A Little Fail Before 5PM:

With $4.1 billion in assets, Silverton is the fifth largest bank to fail since the financial crisis intensified in 2008. Its impact could be profound. It provides services to one out of every five banks in the country, and its customers, depositors, and investors are all banks. It did not take deposits from the general public or make loans to consumers.

Some Georgia bankers argued to FDIC officials that Silverton was actually “too big to fail” because they said that its collapse could take at least 8 to 12 banks down with it. Roughly 400 banks are investors in Silverton Bank, and it clears payments and participates in loans with more than 1,000 lenders. It is the largest bankers’ bank in the country.

This is an interesting sort of "test case" for what might happen if BofA goes under (due to, perhaps, needing to raise $60 billion dollars). Silverton was a big bank and no one wanted to buy it; so a "bridge bank" was created. As LolFed says in the article, bankers at one in five of all other banks in the US might be very concerned because a lot of those banks owned bonds backed by Silverton, which are now worthless; the disappearance of the value of those bonds from (potentially) many banks' balance sheets could cause them to become insolvent.

The most likely situation in the case of BofA is that it will in fact be nationalized. The problem with nationalizing BofA is that most businesses won't trust the government to run BofA in an honorable fashion, just as there are huge concerns about strong-arm tactics vis-a-vis Chrysler.

Somtimes the government says it will honor contracts (hmm, well, the one big time was regarding the AIG counterparty payments and bonuses), and other times, uh, not so much.
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