In the past month, 24 US banks have failed, two big finance companies have gone into bankruptcy, followed by a small credit card provider.

As well, a big bond insurer, Ambac is having troubles, while another, MBIA lost more than  $US700 million ($A750 million) in the September quarter.

Commercial real estate is bringing down many of these banks and certainly helped force the two big financiers, CIT and Capmark, into bankruptcy.

So far 123 US banks have failed, been closed or sold off at a cost to the main regulator the FDIC, of almost $US30 billion.

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The losses in the CIT and Capmark failures could equal that as debts owed by the two struggling groups are slashed or exchanged for debt in the pre-arranged bankruptcies.

CIT was the fourth  biggest collapse in US history at $US70 billion in debt owed; Capmark was smaller. but manages $US295 billion in investment funds and managed loans, mainly in commercial property, worldwide.

Overnight the Fitch ratings group warned that many American banks may face defaults on 10% of their $US1.1 trillion of commercial property loans, with regional lenders vulnerable to “significant” cuts in their credit grades. About $US138 billion of these loans have already gone bad, according to estimates.

CIT’s failure cost the US taxpayer $US2.3 billion in federal (so-called Tarp money). The failure of United Commercial, a California bank last week, cost the Fed’s another $US225 million: all gone.

Capmark was spun off from GMAC, the car lender once fully owned by GM, but now 51%-owned by a private equity group. GMAC is searching for a fresh $US11.5 billion in new capital after it was named last week as the only one of the 19 big US financial groups stress tested back in February and March.

Advanta was much smaller: it was brought down by soaring loan losses on its credit cards, held by about 260,000 customers who owe $US2.7 billion, on which payments are still being made. Advanta’s default rate reached 24% in September, up from 11% one year ago. That’s one dollar in every four owed to the group was not being collected.

These failures have flowed off the market’s back like the proverbial water off a duck’s back. Ten months ago the casualty toll would have had the market trembling daily, as would have the troubles confronting Ambac, the big bond insurer.

But American investors don’t care; they know if the banks are small enough, as are many of the 123 failures, the regulators, led by the FDIC, will clean up; if they are bigger, a larger regional bank will mop it up, financed by Federal money. And if they are really big, well the government will do everything to prevent a collapse that could scuttle the rally. Too big to fail remains the driving mantra for the US investor playing with cheap money advanced by the Fed.

But the biggest concern is the future of Ambac, which had a deadline of close of business Monday, US time, to update Wisconsin insurance regulators on its end of third quarter capital levels.

Ambac’s insurance arm is domiciled in Wisconsin, so the insurance regulators in that state oversee its business. Bond insurers regulated in Wisconsin are required to maintain minimum surpluses or risk being taken over.

But US market reports say they doubt there would be a takeover because that could trigger insurance claims on tens of billions of dollar’s worth of bonds insured with Ambac for a range of financial products, from mortgage-backed bonds to corporate securities, junk, municipal issues and many more.

Collapse or a government takeover might trigger a house-of-cards effect within many troubled US banks, even the supposedly health Wall Street giants.

US analysts refer to collapse or takeover as a “nuclear event”, a wonderful term because it could blow up a large section of the financial market, especially in the badly stretched commercial real estate sector, which is where the failures of many of those 123 banks, and CIT and Capmark, found their origins.

Any sort of delinquency action against Ambac could trigger termination payouts of $US23.1 billion by its insurance unit on credit-default swap contracts, according to the company’s latest regulatory filing a week ago.

Ambac also may be required to accelerate the payment of $US1.6 billion of debt in the New York-based holding company. Ambac’s insurance arm can’t pay dividends to the parent company, which has also warned that it may run out of money by mid-2011 when a big debt payment is due to be made by the holding company.

As a Crikey subscriber and someone who began working as a journalist in 1957, I am passionate about the importance of independent media like Crikey. I met a lot of Australians from many walks of life during my career and did my best to share their stories honestly and fairly with their fellow citizens.

And I never forgot how important it is to hold politicians to account. Crikey does that – something that is more important now than ever before in Australia.

North Stradbroke Island, QLD

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