Why banks fail.  I was tempted to call this Why Banks SHOULD Fail.  But I was feeling charitable.  I want to share with you a personal experience of the failure of the American banking system.

Many years ago my wife and I opened checking and savings accounts at a local bank.  They had maybe three branches, one three blocks from our home.  Over the years they were gobbled up by a larger bank, then the gobbler became the "gobblee," and this scenario replayed itself a couple of times over the years.

About three years ago we grew weary of the poor service our national mega-bank was providing, so we switched over to large regional that promised and delivered more service.  We were very pleased.

However, every month we received a statement from Mega-Bank stating we had a zero balance.  We ignored it.  We knew we had closed all our accounts.  There seemed to be little reason to be concerned, but we started to be annoyed by the waste of postage and paper.

My wife finally called Mega-Bank the other day, and after the better part of an hour the customer service person discovered the reason we kept receiving zero-balance statements.  It seems that one of our earlier banks, gobbled up subsequently by Mega-Bank, in its infinite wisdom had granted us an open line of credit.  We never used it.  It was - are you surprised? - a zero-balance account.  Nevertheless, Mega-Bank dutifully sent a statement every month.

I am not a financial wizard - I don't even play one on TV like Jim Cramer.  However, it would seem to me that our line of credit must have been calculated into their balance sheet somehow.  After all, we could have written a rather large check without warning that Mega-Bank would have had to honor.  Wasn't this a potential liability?  Where were the reserves that would have covered it?  How many accounts like this does Mega-Bank have?  As far as I can determine, they swallowed about three banks that we had done business with, and probably some others as well. 

Here's the kicker.  Mega-Bank was one of those major banks that received a bunch of billions of dollars from the federal government under TARP.  Were there losses and liabilities like mine?  Were they really in such bad shape?

There is much about our banking system that needs more scrutiny than has ever been given to this point.  Stress-testing could be interesting, if my experience is any indicator.