While the federal government recognized the necessity, and opportunity to bail out nearly all of the largest banks in America, it has overlooked a huge number of smaller lenders. Like driftwood on an abandoned beach, smaller banks have been neglected, just like all small businesses, in the bailout strategy designed to preserve jobs.
Let us now get confused, every bank that is in trouble right now got there by granting higher risk loans to candidates who probably did not deserve them and could not pay them. Many of these loans were to real estate developers who were planning to build more in an overbuilt market, and failed due to lack of watching the trends in the market. Others were loans to people who may have lost their jobs, or fallen on hard times in some other way and can not make their bills any longer.
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With unemployment raging out of control across the nation, many homeowners are losing their jobs and are being left without any way to pay for their home loan payments. What this means to many small or local banks is that they are left holding loans that are quickly turning toxic and driving them into the ground.
With loan defaults from both developers and home owners continuing to rise and foreclosures remaining to dominate the market predictably for the next several years to come, the U.S. real estate market is far from being on the road to recover. The media continually posts comments and editorials with a slant toward saying the recession is over and the real estate market is recovering, but that is far from the truth.
The feds are keeping an ever growing list of "troubled" banks but they do not want to tell the customers for fear of stimulating a bank run. Instead, they opt for monitoring banks to see if they reach the point of being so overburdened that the FDIC needs to step in and take over.
Given that nearly all of the large banks that received bailout money are now posting record profits, which seem profoundly easy to do given the nearly zero interest rate they are paying for it, small banks should be able to use the bailout money too.
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