October 20, 2008

For a while, I have said that the broad U.S. banking system was sound and solvent. This was even prior to the passage of the TARP legislation, or Troubled Asset Relief Program, which is known fondly as the bank bailout package.

Certainly some banks were likely to fail. After all, in total there are approximately 8,450 U.S. banks — small, medium and large — and it is typical that some banks close their doors as a result of an economic downturn due to weakness in a region of the economy or poor business practices.

Do I still stand by that conviction that the U.S. banking system is sound and solvent? Absolutely. A little surprising trivia is that from July 15 through Oct. 16, a diversified basket of regional bank stocks, as measured by the KBW Regional Banking Index, is up 48 percent, while the Standard and Poor's 500 is down 21 percent over that same period. Now, it is true that just a few weeks ago the banking system faced a huge challenge with the potential for a catastrophe. Public panic is a dangerous thing. That's why Franklin D. Roosevelt said, "We have nothing to fear but fear itself."

A few weeks ago, individuals started to question the safety of any liquidity they had in bank deposits or money markets because of the “news” of a pending global financial crisis. Strong warnings from regulators and politicians, which they deemed necessary for passage of the bailout package, fueled the flames and thousands of investors moved their liquidity to the higher ground of U.S. government-guaranteed Treasury bills and notes. In some cases, this was advisable.