When push come to shove among bankers

Since it is increasingly clear, reading between the lines of the business press, that there are going to be bank runs in America and other western nations, it seems prudent to wonder just how and they will occur. Bernanke himself said in February that

"There probably will be some bank failures," he said, though they are likely to be among smaller regional banks that are particularly exposed to falling property markets.

So, Bernanke expects smaller banks to fail? Aren't some of the largest investment banks heavily exposed to mortgage bond losses? I think he is suggesting some consolidation will be happening. What might occur is larger banks preying on smaller banks in cannibalistic fashion. If all banks are finding it hard to make any money and can't borrow, the larger ones, especially those with access to the Fed's "discount window" and "term auction facility", could take over pretty much any bank they want. They will of course choose the most solvent ones, which have capital on deposit. They will use that money to pay off their bad loans! Any bad loans on the consumed bank's books will not be absorbed, rather it will be disposed of by being passed off to "garbage can" banks. Jim Willie has written extensively about how JP Morgan functions as the Fed's depository of debt that must never see the light of day

Continuing in this extrapolating manner, of positing free ranging thought experiments, I'll point out another thing. This process might continue up the food chain. The big New York banks and investment houses have always assumed that the Fed has their back and wouldn't let anything truly bad happen to them. Such assumptions are true to a point. The Fed is just one more bank, albeit the biggest. The Fed is having problems of it's own. It has blown almost its whole stash of capital trying to stabilize the credit crisis, and it has failed. It can neither raise nor lower interest rates. It can only create more "dollars", of uncertain worth, but they hemorrhage out of the financial system faster than the Fed can create them. I don't think Wall Street can be too confident that the Fed has their back for ever. At some point, after much bank-failing and insolvencies have come to light, and when the Citibanks and Goldman Sachs are still struggling to survive, they might realize that the Fed is now looking at them with a hungry eye, and inventorying their balance sheets for morsels.

OK, one more thing, on banks. Suppose you are a bank with a lot of unsalvageable mortgage debt. You have no morsels of good loans, and little capital to attract predators (i.e. investors). There is no market for your shit, and you know, deep in your heart, that there never will be, and you can't raise capital from any friendly Saudi Princes. Bankruptcy is inevitable. About the only thing you can do is control the timing. Maybe you can choose a favorable moment to go out? A good time might be when a lot of other banks go down. Or when there is an international crisis. Perhaps a currency crisis! Then you will be less exposed to liability. You might even get to claim a force majeure. Corporations always think of their liability first. Will they consider their depositors in this calculus? No way. Only liability.