Bank on this: Bank failures will rise in next year

The biggest question is how many will perish and how they will be put out of their misery--in outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.

Enfeebled by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.

The government's commitment to spend up to $700 billion buying bad debts from ailing banks is likely to save some institutions that would have otherwise died, but analysts doubt it will be enough to avert a major shakeout.

"It will help, but it's not going to be the saving grace" because a lot of banks are holding construction loans and other types of deteriorating assets that the government won't take off their books, predicted Stanford Financial analyst Jaret Seiberg. He expects more than 100 banks nationwide to fail next year.

The darkening clouds already have some depositors pondering a question that always seems to crop up in financial panics despite deposit insurance: Could it possibly make more sense to stash cash in a mattress than in a bank account?

"It sounds like a joke," said business owner Mauricoa Quintero as he recently paused outside a Wachovia Bank branch in Miami. "But it sounds safer than the turmoil out there right now."

Not as many banks are likely to fail as in the S&L crisis, largely because there are about 8,000 fewer today than there were in 1988.

But that doesn't necessarily mean the problems won't be as costly or as unnerving; banks are much larger than they were 20 years ago, thanks to laws passed in the 1990s.

"I don't see why things will be that much different this time," said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. "We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No."