Government's problems with banks may still be massive

The Wall Street Journal has published an exclusive report looking at possible losses at small and medium-sized banks that could result from trouble in their real estate portfolios. The total of the red ink could hit $200 billion. That may leave the government holding another big bag of bank stock shares, if it decides, as it will, to prop these firms up.

According to the paper, "more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators." The paper used the same "stress test" measures to look at the smaller banks that the government used on larger ones.

The Treasury and taxpayers have been looking forward to the day when large banks will pay back their TARP obligations. This will put less government money at risk and increase the balance of the TARP in the event that the money is needed for another banking crisis. That crisis may be just around the corner, raising the question of whether the $115 billion, an estimate used by most analysts, still left in the TARP fund will be enough.

Now that several large American banks like Bank of America (BAC) and Citigroup (C) are healthy enough to raise capital, is the banking crisis ending? Probably not. The next tier of U.S. banks may be in a great deal of trouble.

Douglas A. McIntyre is an editor at 24/7 Wall St.


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