Bank Crisis in USA

Your question on "crisis faced by Banks in USA" has
set me thinking. I am giving below my views.
First let us look at the source of funding for Banks. For deposit taking banks, the source of funding is deposit and inter-bank borrowing. For Investment Banks which do not take deposits, the source of funding is their equity,reserves and money of their clients. High networth individuals,known as HNI,keep big money with Investment Banks. Over a period of time, their clients were getting good returns. There are some families in USA who have kept accounts with Lehman Brother for nearly a century.Now they are wiped out. In India, if a Bank accepts Rs 100/ as deposit they can lend only 63 percent. Nearly ten percent is kept in Cash Reserves ,Known as CRR-Cash Reserve Ratio. This is fixed by RBI. This money lies in Bank!s vaults and with Reserve Bank/State Bank. Another 27 percent has to be invested in Central and State Government Bonds. These are known as Statutory Liquidity Ratios.In practice, the credit-deposit ratio of Indian Banks does not exceed 70 percent.The monitoring mechanism instituted by RBI (such weekly returns as of Friday) ensures this. In view of this, Banks in India have not failed after 1940!s.The regulatory mechanism in India is in place and is functioning.Consequent to this credit-deposit ratio, profitability of Indian Banks is not great.(unlike in USA).
Investment Banks in USA and Europe invest in Forex Market,deriatives and real Estate Bonds. While they have expertise to deal in Forex Market, their experiance in Deriatives is not that great. When there was a boom in real estate in USA, they expected their prices to rise over the next five years. They had large surplus funds to be deployed. They invested in real estate deriatives. As they cannot lend directly to a buyer, they lent through deriatives. Banks in turn gave loans without margins by inflating the prices of the properties. They also lent without much credit checking and to people who were not in a position to pay, should the markets drop. The market for real estate came down and individual borrowers defaulted in a big way. The Banks were sweeping the same under carpet for some time. When problems became unmanaegable, the cat was out of the bag. When Banks default and do not keep their commitments on due dates and defualt on deriatives, Investment Banking Institutions in turn could not keept their commitments. This set in cycle of defaults which became alarming as days and months passed. The main causes of this problem, according to me, are as under:

1) Failure of regulatory mechanism-such Federal Reserve. When the going was good, nobody felt the need to monitor and regulate.
2)Excesive greed of banks. There is a concept known as "Funding and Lending". Banks, apart from using their depsoit base, also borrowed in the inter-bank market in a big way to fund these real estate loans. The credit-deposit ratio of some of the smaller Banks in USA such Wachova Banks was more than 200 percent. This cycle will receive a big set-back if there are defaults and this will in turn set in motion a chain re-action.
3)Lack of leadership at the top level in both Banks and Investment Banks. Top Management was more concerned with their annual income than thinking about "what will happen if there is over-exposure" to one sector of the economy.
I think there will be more bank failures in USA. Some of the smaller banks will not even be able to re-pay their deposits. If you have kept money in a smaller bank, then withdraw it.Smallers Banks with potential will be taken over by big Banks or by the Government. In other words, there will be indirect nationalisation of smaller banks Providing 700 billion dollars will not solve the problems. The problem is more deep-rooted. The man
chosen to lead an independent institution to ensure distribution of 700 billion is an inexperienced Indian who is just 35 years of age. People like Paulson cannot think beyond their close circle of people. The saying "out of sight ,out of mind" applies to them in a big way. We are in troubled times. Worst is to come as yet. Hold on to your money and spend only on where you must.

The whole crisis has claimed a victim in UCO Bank Family. My good friend A.V.Rajaram!s son, Karthik, killed himself and other members of the family, in Los Angeles.Fortunately his father-in-law Mr Ramaseshan, who also worked in UCO Bank, was away in Chennai. If he had been with his daughter, he would also have met the same fate as his wife.Mr Rajaram is in Bangalore and is in a state of shock.I felt very sad that this had to happen to a an exemplary gentleman like Rajaram. Incidentally, I bought my first TV (EC TV) from Mr Rajaram in 1976.
These are my own views.