It looks like European banks have been hit much harder by the subprime crisis than U.S. banks. Last week, UBS (NYSE: UBS) wrote off about $19 billion, and today we have news that Royal Bank of Scotland (NYSE: RBS) suffered an $11.7 billion loss. We haven't seen numbers like that in the U.S. and this may be a story that needs to get more play. The European banking system is in far worse shape than the banks on our side of the Atlantic, and the impact that will have on global growth should not be underestimated.

Keep in mind that nothing like the FDIC or SIPC exists in Europe, so a major bank failure could be catastrophic for consumers. Banks have started tightening credit, and the once red-hot real estate sector has cooled, especially in places like Poland. I have friends who are in the real estate business in Eastern Europe and they say things have really slowed down.

FDIC Chairman Sheila Bair has been sounding alarm bells for more than a year about the hazards for banks as foreclosures increase. Now, her worst dreams may soon be reality. This morning, the FDIC released its year-end numbers and the number of "problem" institutions jumped to 76 at the end of 2007, up from 45 a year earlier -- a 69% increase. At the end of the third quarter that number was 65.

As a result, the FDIC is staffing up. The Wall Street Journal reported that the FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. At the height of the savings and loans crisis in 1993, there were 572 "problem" institutions, and back then the FDIC had more than three times the number of employees it has today. So the FDIC needs to hire some new folks who can quickly get up to speed in the process of dealing with bank failures. More than 90 duty locations are listed for R&R [Resolutions and Receiverships] Specialists, but the announcement specifically indicates that the FDIC plans to rehire 25 retirees. If you've got the experience the pay is great: $67,836 to $180,770.

Employees hired according to the job listing will "engage primarily in resolution and receivership activities of financial institutions. They will be responsible for gathering, compiling, researching and manipulating financial data to prepare a variety of financial documents, management reports and presentations." They must be able to "analyze financial statements, operating and project reports, cost data, managerial practices, capital and reserves, credit condition, loan file documentation, cash flows and other elements to determine the soundness of the assets held by an insured institution and determine the risks and value of the assets and liabilities." FDIC obviously wants to hire quickly. The job listing opened on 2/20/2008 and closes on 2/28/2008.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., is suggesting that some critics of President Bush's subprime bailout plan may not exactly have the most altruistic motives.

Ms. Bair, who was appointed by President Bush in 2006, told the Wall Street Journal (subscription required) that "I do worry that some of the investors have taken short positions on the ABX," an index based on subprime-mortgage-backed securities.

Well isn't that enlightened. A lot of people have spoken out with intelligent reason in opposition the President's bailout plan. And now the chairman of the FDIC is saying, utterly without evidence, that some of these people have nefarious ulterior motives.

Here's the problem with Bair's "worrying": This issue should be decided on the merits, regardless of the motives of the individuals behind the arguments. Short-sellers will always be criticized for "bashing." But they're usually right. And if the critics of the bailout are making reasonable arguments, who cares if they're short?

It's a really sad commentary on how low the debate has fallen when the chairman of the FDIC is resorting to what is essentially name calling, rather than defending a position on its merits. Happily, some of our bloggers have made cases on the merits -- without resorting to name calling, and they mostly oppose the bailout.

Homeowner bailout sets lousy precedent
Bust mortgage rescue plan: Winners and losers
Our government's mortgage bailout madness
Proposed subprime bailout gives the shaft to responsible consumers

Bloomberg reports this morning that Treasury Secretary Henry Paulson and President George Bush may announce as early as tomorrow that negotiations between Federal regulators and U.S. lenders will result in a five-year freeze on subprime mortgages. Paulson will brief House Republicans today on the plan, according to Bloomberg.

The deal comes down right in the middle of what the Office of Thrift Supervision wanted (3 to 5 years) and the FDIC wanted (5 to 7 years). The details about the deal are still pretty sketchy, but at least some people who have subprime mortgages will be helped. Most of the mortgages involved in this deal started at about 7% to 9% and are due to reset to 11% to 13% over the next two years, throwing many borrowers who can't afford the higher payments into foreclosure.

Analysts estimate that about 100,000 subprime loans will reset at a higher rate every month for the next two years. Credit Suisse Group estimates that right now, 30% of borrowers with subprime ARMs are behind on their mortgages, even before the reset. The FDIC puts the number at 20%. Regardless of the number, these borrowers probably won't be eligible for the freeze in rates.

On the heels of U.S. Federal Reserve Chairman Ben Bernanke's comments on "renewed turbulence," many traders and investors across sectors now expect the Fed to cut key short-term interest rates when it meets on December 11, according to one currency trader.

"I won't give you all the technical indicators, but basically almost all of them are pointing to a rate cut by the Fed when it meets [on December 11]," Currency Trader Andrew Resnick told BloggingStocks Friday. "The issue now is whether the Fed continues to cut after the December meeting."

Markets rally

Stock rallied early Friday on Bernanke's comments, with the Dow gaining over 80 points to about 13,394 and the Nasdaq gaining about 4 points to 2,674. Meanwhile, the dollar gained slightly, improving to $1.4730 against the euro and rising to 111.07 yen against the Japanese yen.

"Typically, when the Fed indicates it's likely to cut rates that causes the dollar to fall, but in this case, the market is saying 'The Fed is going to help the [U.S.] economy grow faster,' which is bullish for the dollar," Resnick said. Resnick added that he was flat - - or had no currency positions - on Friday.

The ever-prescient Financial Times columnist Martin Wolf, an economist, raises, and to some degree answers, a question that no-doubt has been on the minds of U.S. investors, readers, as well as Europeans: Why does banking generate such turmoil?

Or, as Wolf put it another way: why is banking an accident waiting to happen, with the crisis in securitized lending the latest example?

The answer - - or fault, to paraphrase Shakespeare - - lies within ourselves, Wolf argues, due to the very things nations have established to protect depositors - - namely, depositors' insurance and government guarantees, which prompts banks to take high risks.

U.S. Treasury Secretary Henry Paulson is on the wires again, this time predicting that the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007.

In an interview with The Wall Street Journal (subscription required), Paulson said, "The nature of the problem will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization, and no down payments. He added that "We'll watch carefully mortgages that will be reset."

Home prices fall

Paulson's comments came before the National Association of Realtors announced that home prices had fallen in 51 of 150 U.S. metropolitan areas in Q3, with the median sales price falling to $220,800 in Q3 2007, compared to $225,300 in Q3 2006. The NAR also announced that home sales fell to an annualized rate of 5.42 million units, including single-family homes and condominiums, compared to a 6.29-million-unit annualized rate a year ago.

NetBank, the online bank with $2.5 billion in assets, has been shut down by the FDIC after investments in risky mortgages defaulted at an alarming rate. Customers with less than $100,000 with the bank will be made whole by FDIC insurance, and those with more will become creditors in the bank's receivership.

While these failures are pretty rare, there are two lessons that investors/savers can take from it:

• FDIC insurance covers $100,000 of your money with each bank. To avoid the potential for stress (being a creditor in receivership is not a lot of fun), avoid putting more than $100,000 with any one bank. With high-yield savings accounts from banks including EmigrantDirect, E*Trade (NASDAQ: ETFC), Capital One (NYSE: COF), and ING (NYSE: ING), you should be able to find enough banks to spread out your savings, unless your last name happens to be Rockefeller.
• Already, a well-meaning friend who works at a bank told me about the NetBank meltdown, and explained that "These high-yield savings accounts are very risky. It's much better to go with a brick and mortar bank, even if the interest rate is 1% instead of 5%." Many retail banks will start trying to use that logic to trick customers into saving with them. It's a bunch of crap! Never trust your bank!

Looking at the $25 billion price tag, the leveraged buyout for SLM Corp. (NYSE: SLM), better known as Sallie Mae, seems like a typical deal. Nothing special.

Except there are some incredibly complex governmental regulations. Hey, after all, Sallie Mae is the biggest provider of school loans and has the federal government (i.e., the taxpayer) as its backstop.

Interestingly enough, according to a piece in The Wall Street Journal, SLM actually has its own state-chartered financing arm. It's known as an industrial-loan corporation, or ILC.

Basically, it helps to facilitate the large amount of loan volume, as well as cut costs. In fact, this is the kind of vehicle that Wal-Mart Stores (NYSE: WMT) tried to set up to fulfill its banking ambitions.

The rub? Well, ILCs also have the backing of the Federal Deposit Insurance Corp (FDIC), which is the agency that stands behind bank deposits.

This means that the federal government will be quite intrusive in SLM. Thus, the idea of Sallie Mae being a private company is a bit of fiction.

This is not to imply that the SLM deal will not get done. Rather, it's just the facts-of-life of big companies -- that is, things get complex and the government is usually entangled somehow.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Wal-Mart and some other large retailers want to have internally-operated commercial banking practices. This is not new news. However, anticipating a potential flood of new applications for ILCs (Industrial Loan Corporations), the FDIC just last week said that no new applications would be approved at this time for ILCs.

Apparently, the flood was just about to start, and why shouldn't it? If companies can process transactions internally and run credit cards as well, then the costs to have another financial institution do it effectively drops to zero. It's a cost-cutting move if nothing more, and if tens of millions of bottom-line operational costs can be saved, stakeholders in these companies should be applauding the move.

But, on a twist to this, many people and communities fear that Wal-Mart will eventually enter the consumer banking business to offer banking services directly to shoppers. Should communities and banks nationwide fear the reaper? Not according to Gary Stern, the President of the Minneapolis Federal Reserve. But, with Wal-Mart entering markets from A to Z and into any product imaginable -- from car washes to gas stations to hair salons -- is consumer banking on its future radar? What do you think?

Brian White has worked in various executive positions in technology and telecommunications and now focuses on editing and writing.

Wal-Mart and other large retailers are hoping to shave costs moving commercial banking inside the company. That process was dealt a pretty large setback late last week, as FDIC federal regulators said "no more" to any further approvals for new industrial loan corporations (ILCs), outside of the 12 approvals it has already given to large retail giants like Wal-Mart and Home Depot.

Being dubbed "Wal-Mart Banks" in the industry now, these ILCs are meant for (officially) banking and money/transaction processing to be done inside companies themselves as opposed to being outsourced to a third party -- effectively saving the companies millions (per day, probably) in transaction processing costs among other things.

One hundred members of the U.S. Congress, however, urged the FDIC to halt the consideration of any other approvals until lawmakers can draft and consider legislation that would prohibit commercial companies from owning ILCs. If such legislation passes, then all the larger companies wanting to own banking branches for their own purposes would have requests nullified.

Brian White has worked in various executive positions in technology and telecommunications and now focuses on editing and writing.

In addition to Wal-Mart waiting in line to be able and offer commercial/industrial banking services, companies like Home Depot and even Warren Buffet's Berkshire Hathaway are also on the list to receive approval from the FDIC to operate commercial bank operations. These Industrial Loan Corporations, or ILCs, are allowed to issue credit cards, take deposits and make loans. What they cannot do is offer standard checking accounts if their assets exceed $100 million.

Wal-Mart's stance is that it wants FDIC approval to operate a commercial bank so that it can process the 140 million customer transactions from debit and credit cards each year internally and save a huge amount of costs related to outsourcing this activity. That's all fine and good -- savings costs will make profits even that much better at Wal-Mart, which recently had a record-setting quarter in sales and profits.

With more than 13 companies waiting in line for FDIC approval to operate ILCs, the largest waiting line in FDIC's history at any given time, apparently Wal-Mart's strategy pertains to anyone who processes a slew of transactions per year at the cost of profits -- or is that the real reason? Looking at the companies standing in line, it most likely is. From retailers to insurance companies, the sheer number of payments and transactions taken on each year, and processed by a third-party, has to be astronomical. So, who are the larger credit card processors who will be dinged by all this movement to ILCs? Answer: All of them.

Even though Wal-Mart has said its proposed banking plans are not meant - and won't be used - to open public banking branches or anything of the sort inside its stores, the "industrial loan" banking plan they have in mind could still be used to create severe public economic issues, according to COMTEX.

An industrial banking apparatus by retailing behemoth Wal-Mart is said to have access to certain regulatory loopholes that would allow Wal-Mart to de-stabilize local economies and living standards. This argument was heard by the FDIC last week and will soon show its roots - we look forward to the outcome.