Uncertainty and Banking Much Like Oil and Water

Uncertainty and banking are a lot like oil and water; they just don't mix together very well. People expect their money in banks to be safe. However the Obama administration's recent ambiguity regarding the future of private-sector banking has caused many to question the viability of the current U.S. banking system.

Much of this week the markets have been free falling on the fear the current administration might consider nationalizing banks. As Wall Street Journal article titled, "U.S. Seeks to Stem Bank Fears" shows sometimes not saying anything projects something. Until Friday of this week the 800 lb gorilla in the room was the fear that some U.S. banks may fall victim to nationalization. Fears seemed to abate somewhat when on Friday afternoon White House spokesman Robert Gibbs stated that the administration, "continues to strongly believe that a privately held banking system is the correct way to go." Following the comments from the White House, the Dow came off its lows of the day which had threatened to return the exchange to levels not seen since 1997.

When there is an absence of clear policy, uneasy markets become institutions that are ripe for rumors to take hold. Last year Bear Sterns, a financial giant that had been on business since 1923, collapsed in less than 10 days amidst rumors of liquidity problems. Right now a repeat of the Bear Sterns collapse is what many banks fear the most. Citigroup is keeping close watch of its deposits. Any indication of a disturbing rate of outflows could bring on rapid failure. It is apparent that one thing is for certain, financial institutions don't like uncertainty.