Look out below!

It's beginning to look like we're going to start seeing bank failures along with everything else:

BANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.

Figures compiled by the Federal Deposit Insurance Corporation and released last week show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.

For most of this decade, that was a good strategy. Construction loans proved to be very profitable, particularly for smaller banks as competition from larger banks and securities markets eroded their position in areas like mortgage lending and credit card issuance.

Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.

Such problems are not spread evenly across all banks, of course. “When you look at the regional impact, the areas that were the booming condominium markets, like South Florida, have shown a surge in delinquency rates,” said Matthew Anderson, a partner in Foresight Analytics, a real estate market analysis firm based in Oakland, Calif.

“I think there will be a wave of bank failures in the not-too-distant future,” he added, “although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly.”

The financial system in this country is very closely interlinked, much like a house of cards. When one thing begins to topple, it can very easily bring the whole house down. Now, we are seeing the bond and mortgage insurers failing. That means the bonds they insured are going to be less valuable. That, in turn, means whoever owns those bonds and mortgages will be less valuable. Since everything is leveraged, it doesn't take much to bring each structure down.

I think we may be in for some very tough times over the next few years.

As Atrios says there's a whole lot of crap in the "big Shitpile" out there, and you can't make a silk purse out of a sow's ear. The loans to people with no job, no assets, and no income just aren't going to be good, no matter how many ways you carve them up and cover them with lipstick.