More Bank failures, More Foreclosures, More Homes Under Water

Editor’s Note: Home sales will continue to drop, home prices will continue to drop, banks will continue to fail until principal reduction is recognized as the reality of the situation. More than 11 million homeowners are reportedly under water. The real number is closer to 20 million. see Modifications Pushing More Homes Underwater. Our economy cannot withstand this pressure. It is a false pressure because the real loss is on Wall Street but they have managed to shift the loss to homeowners and investors and of course, the U.S. Taxpayer. Yet it is will be real as long as we treat it as real.

see also Bloomberg – Home Sales Drop

February 24, 2010

At F.D.I.C. , Bracing for a Wave of Failures

The Federal Deposit Insurance Corporation is bracing for a new wave of bank failures that could cost the agency many billions of dollars and further strain its finances.

With bank failures running at their highest level in nearly two decades, the F.D.I.C. is racing to keep up with rising losses to its insurance fund, which safeguards savers’ deposits. On Tuesday, the agency announced that it had placed 702 lenders on its list of “problem” banks, the highest number since 1993.

Not all of those banks are destined to founder, and F.D.I.C. officials said Tuesday that they expected failures to peak this year. But they also warned that the fund might have to cover $20 billion in additional losses by 2013 — a bill that could be even greater if the economy worsens.

F.D.I.C. officials say the fund has ample resources to cope with its projected losses.

“We think that we have the cash we need,” Sheila C. Bair, the F.D.I.C. chairwoman, said in an interview on Tuesday. She said it was unlikely the F.D.I.C. would need to tap its emergency credit line with the Treasury Department, although she did not rule out such an action.

Despite resurgent profits and pay at the giants of American finance, many of the nation’s 8,000 banks remain under stress, according to a quarterly report the F.D.I.C. released Tuesday.

About 140 banks failed in 2009, and Ms. Bair said she expected even more than that to go under this year. The F.D.I.C. does not disclose which banks it considers at risk.

Bad credit card, mortgage and corporate loans escalated in the final months of 2009 — the 12th consecutive quarterly increase — albeit at a slower pace. During the fourth quarter, the banking industry as a whole turned a mere $914 million profit. “We’ve gone from the eye of the hurricane to cleaning up after the hurricane,” said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods in New York.

Still, with so many banks failing, the federal deposit insurance fund has been severely depleted. At the end of 2009, it carried a negative balance of $20.9 billion.

The insurance fund is in better shape than such numbers might suggest, however. Officials estimate that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.

After slipping into the red last fall, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.

In September, the F.D.I.C. ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal. For accounting purposes, the agency will add that money to the fund in small doses over the next 13 quarters, which explains the current negative balance.

Together, these moves buy time for the agency to determine its next steps in the event its losses worsen. In such a case, banks might be called on to chip in more money, either through new special assessments, prepaid fees or premium increases. F.D.I.C. officials said no such plans were in the works.

“The good news is that the industry will power through this,” said Bert Ely, a longtime banking industry consultant in Washington. The fund has “taken a lot of hits along the way, but I still don’t expect the taxpayer to ride to the rescue.”

To protect the fund, the F.D.I.C. also has found creative ways to bring in more money. On Tuesday, Ms. Bair said that the agency would soon issue bonds backed by the assets of failed banks and guaranteed by the government. The program aims to attract nontraditional buyers of bank assets, like insurance companies, pension funds and mutual funds.

“We would like to test the market to see if we can get better pricing,” Ms. Bair said. “We may or may not succeed, but we thought we should try it.”

The F.D.I.C. has also tried to entice private equity firms and other investment groups to bid for insolvent banks, with mixed success. The agency is betting that more potential buyers will ultimately result in higher prices.

Foreclosure Defense: Impact of Bank Failures

I have been thinking about this as the questions pile in. Here are my thoughts so far —

1. Be careful with the Lehman bankruptcy and any other bankruptcy filing by one of the financial services companies that was even tangentially related to the process of the securitization of mortgages. Bankruptcy law has some features that are not apparent or even comprehensible to layman and even many lawyers who do not regularly practice in bankruptcy court. If you even hear that a company went bankrupt, you should consult with a competent bankruptcy practitioner in your area and ask him whether you need to file a proof of claim or some other paper that tells the Federal Court where the bankruptcy was filed that you have claims and defense regarding your mortgage and note, that you do not intend to waive them, and that if anyone buys our note or mortgage they take it subject to your claims and defenses.

2. How this might affect your claims and defenses. The burden is still on the party seeking to foreclose on your mortgage. They must allege that they are the lender, the holder of the note and that the note is in default, subject to acceleration pursuant to the terms of the mortgage indentures and the terms of the note. As with any other situation involving foreclosure if you snooze you lose. Do nothing and the Court is allowed to and required to assume and proceed as though you have no claims or defenses. Do nothing and your house will be sold at auction and then you will be scrambling to set the sale aside, which has been done, as we have reported here, but it sure makes your position more precarious than if you act proactively before anything happens.

  • ASSUME NOTHING AND CHALLENGE EVERYTHING: Just because a letter was sent out declaring a default doesn’t mean that the person who signed it knew anything about the account or that they were properly authorized to send it, or even that their company was the proper party to declare the default, or, even that their company knew or had performed any due diligence to determine if payments to teh true holder in due course )holders of mortgage backed securities) had been paid by co-obligors acquired as the loan went up through teh chain of securitizarion.

3. Proof and evidence: The failure of a bank and the takeover by another bank creates several opportunities for borrowers that did not exist before, if you know how to navigate the system. The time is NOW to act proactively, get your audit done, announce rescission, demand satisfaction of your mortgage and note, and to file for quiet title.

4. You ALWAYS want to keep the burden on the “lender” or those claiming through the “lender.” Do everything you can to keep the burden on THEM to produce the note, produce ALL the assignments that show proper chain of title on the note and mortgage, and produce the Assignment and Assumption of Mortgage Agreement(S), and the Pooling and Service Agreement(s).

5. Thus far it appears as though there in only ONE set of master agreements executed by the lender, the mortgage aggregation and the trustee of the pool of assets. The date of these agreements will almost always precede the date the date the mortgage and note came into existence and will without exception predate the date of default. For lawyers, this presents a number of arguments that can be used to throw the other side into disarray as to what assignment, if any, was valid, and whether they were hiding third parties at the loan closing (violation of TILA) and whether they were hiding third party payments at closing (TILA violation).

6. It also gives you grounds for saying that since the REAL lender was not disclosed, the three day rescission right continued up to and including the date when the REAL lender was disclosed. Either they disclose the REAL lender and then you have all your remedies against both the pretender lender and the real lender (probably unchartered as bank or lender and even unregistered as business to do business in the state) or they don’t disclose it and you push the issue of non -disclosure by demanding the records of the mortgage servicer and the mortgage originator and the title/escrow agent to track where the money came from and where it went after closing.

7. LAWYERS TAKE WARNING: First of all remember that the competency of a witness contains four elements (oath, perception, memory and communication) and that proof can only be offered upon a proper foundation. It is here where these overnight mergers, the firings of thousands of people, and the locations of records is going to be a real challenge to the lenders.



Some interesting thoughts about the effect of bank failure.

  • If the bank was the “lender” on your mortgage (or Deed of Trust) and note, what happens to the mortgage and note? Mutual of Omaha here is taking over the deposits of these failed banks. See below.
  • Is FDIC going to foreclose on “non-performing” loans? If so, are they not in the even more difficult position of defending charges of predatory practices and improper transfers of negotiable instruments that were created by fraud and ultimately sold within a single transaction that required fraud and deception on both ends of the transaction?
  • With all the employees scattered to the four winds, how will anyone wishing to foreclose be able to come up with a single witness that has personal knowledge of the loan transaction or what happened during the securitization process?
  • And by the way, has it occurred to Lenders that their interests are actually more closely aligned with borrowers than with their counterparts upstream in the securitization process? Lenders could staunch the bleeding in a New York minute by simply rolling over on the people upstream who initiated this scheme. Buyback liability would be stopped and the bank would remain whole.


Two more banks fail; FDIC sells deposits

Mutual of Omaha Bank takes over accounts of California, Nevada lenders

By MarketWatch
Last update: 3:24 p.m. EDT July 26, 2008
SAN FRANCISCO (MarketWatch) — Two more banks were shut down by federal regulators late Friday, who sold the banks’ deposits to Mutual of Omaha Bank. It brings to seven the number of bank failures so far this year.
The Federal Deposit Insurance Corp. said it was appointed receiver of First National Bank of Nevada, based in Reno, Nev., and First Heritage Bank of Newport Beach, Calif. – both units of First National Bank Holding Co., of Scottsdale, Ariz.
Mutual of Omaha Bank’s acquisition of all deposits was the “least costly” resolution for the Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the banks’ franchises, the FDIC said in a statement.
All depositors, including those with deposits in excess of the FDIC’s insurance limits, will automatically become depositors of Mutual of Omaha Bank for the full amount of their deposits, the FDIC said.
Over the weekend, customers of the banks can access their money by writing checks or using ATM or debit cards. Checks drawn on the banks will be processed normally. Loan customers should continue to make loan payments as usual.
As of June 30, 2008, First National of Nevada had total assets of $3.4 billion and total deposits of $3.0 billion. First Heritage Bank had total assets of $254 million and total deposits of $233 million, the FDIC said.
In addition to assuming all of the deposits of the banks, Mutual of Omaha Bank will purchase approximately $200 million of assets from the receiverships.
Mutual of Omaha Bank will pay the FDIC a premium of 4.41% to assume all the deposits. The FDIC will retain the remaining assets for later disposition, the FDIC said.
FDIC will retain most of First National’s loan portfolio, Mutual of Omaha Bank said in a statement on its Web site.
The FDIC said the failures would likely cost the FDIC’s deposit insurance fund roughly $862 million. The failed banks had combined assets of $3.6 billion, .03% of the $13.4 trillion in assets held by the 8,494 institutions insured by the FDIC.
Overwhelmed by problem loans
The Office of the Comptroller of the Currency, a division of the Treasury Department, said First National Bank of Nevada “was undercapitalized and had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices,” according to a report in the online edition of The Wall Street Journal.
First National Bank of Nevada had 25 branches, 15 in Arizona and 10 in Nevada, some of which came from its June 30 merger with the First National Bank of Arizona.
The Journal also reported that according to regulatory filings, the Arizona-based bank that was folded into First National Bank of Nevada had a net loss of $131.3 million in the first quarter. The bank had $95.9 million in loan-loss provisions, a sign that it was being overwhelmed by problem loans, the Journal report noted. First National Bank of Nevada had a first-quarter net loss of $7.3 million, hurt by a loan-loss provision of $18 million.
First Heritage Bank, which specializes in commercial banking, operated three locations in the Los Angeles area. It had a first-quarter net loss of $1.9 million, according to a regulatory filing.
Mutual of Omaha Bank has more than $750 million in assets and operates 14 retail branches in Nebraska and Colorado with commercial lending offices in Dallas and Des Moines, Iowa. It is a subsidiary of insurance and financial services company Mutual of Omaha.
“We would first like to reassure all customers of First National Bank of Nevada and First Heritage Bank that all their deposits are safe and accessible,” Jeffrey R. Schmid, Mutual of Omaha Bank’s chairman and chief executive, said in a statement. “Their deposits will automatically transition to Mutual of Omaha Bank and we will be open for business on Monday morning.”
Earlier this month, IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis over the weekend, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever. See related story. End of Story

Mortgage Meltdown: Second Wave Approaches as Banks Fail

Financial Services
Bad News Banks
Liz Moyer, 05.29.08, 3:00 PM ET 


The number of troubled U.S. banks is rising. The outlook: more pain as the credit crisis enters its second wave.

The Federal Deposit Insurance Corp. (FDIC) is now tracking 90 “problem” banks, 18% more than in the fourth quarter and the most in almost four years. Banks are struggling with mounting loan losses and the need to reserve for future losses at a time when revenues are slowing or even falling.

Loan loss reserves also rose 18% in the first quarter, to $120 billion, the largest increase in two decades, but non-current loans rose at an even faster pace, and approach $140 billion. That means reserves aren’t keeping pace with loan deterioration, a potentially worrisome development.

The FDIC said Thursday the reserve “coverage ratio,” which describes loss reserves as a percentage of non-performing loans, fell to 89 cents for every $1 of non-current loans, from 93 cents per $1 in the previous quarter.

“It’s the kind of thing that gives regulators heartburn,” said Sheila Bair, the chairman of the FDIC. “Given the weaker economy and rising level of problem loans, we’re encouraging bank managers to stay on their toes.”

Another sign of stress in an industry that has been walloped by the credit crisis: Bank failures are rising. The FDIC is adding staff to prepare for an increase in troubled banks after a historic period of calm that ended last year when problems in the subprime mortgage sector erupted. Still, just three banks have failed so far this year, including ANB Financial of Bentonville, Ark., earlier this month.

One significant contributor: a high percentage of brokered deposits, purchased from other banks to help fuel rapid lending growth. Four of the last five bank failures involved institutions that relied on them. ANB, for example, had $1.6 billion of brokered deposits out of $1.8 billion of total deposits.

Brokered deposits are not a new phenomenon, but they have lost some of the stigma they carried for decades after sharing the blame for the savings and loan crisis of the late 1980s. Wall Street’s heavyweights, including Citigroupand Merrill Lynch, do a brisk business arranging brokered deposits, which rose to $520 billion for the industry last year, from $482 billion the year before and well up from $58 billion a decade ago.

The criticism of them is that they tempt banks, which have to pay a premium to buy the deposits, to make riskier loans to keep a profitable margin. They also put physical and psychological distance between the depositor and his bank, which is counter to the idea of a community bank. Finally, depositors don’t have an incentive to pick soundly managed banks because of the back-stop of federal deposit insurance.

“All deposit insurance is a moral hazard, and brokered deposits are a moral hazard, squared,” says Alex Pollock, a former head of the Federal Home Loan Bank of Chicago and now a fellow at the American Enterprise Institute.

Often start-up banks rely on brokered deposits to get their businesses moving and then wean themselves off them. But that is something regulators are taking a closer look at. There have been 40 applications this year to start new banks (incidentally, that’s half the levels of last year), and the FDIC is taking a much closer look at their reliance on them.

“We’ll be reminding our examiners about the risks,” said Serena Owens, who oversees the application process for the FDIC, in a recent interview.

The FDIC, like other bank regulators, has been encouraging banks to raise capital levels to buffer against the expected rise in losses and write-downs. Half of the 3,776 banks that pay dividends paid lower dividends in the first quarter, which is one way to preserve capital.

A total of $156 billion has been raised for financial companies so far this year, according to Keefe Bruyette & Woods, $94 billion of that on behalf of 30 large and mid-sized banks. Texas Pacific Group, the private equity firm that took a $2 billion stake in Washington Mutual earlier this year, even has its eyes on a $7 billion new fund focused on financial services.

That is something regulators are only too happy to encourage.

“We’re urging all institutions to make sure their reserves are large enough to cover expected losses,” the FDIC’s Bair said Thursday. “We also want them to beef up their capital cushions beyond regulatory minimums, given uncertainties about the housing markets and the economy.”

Mortgage Meltdown and Foreclosure Defense: Bank Failures Expected to Soar

While you might be thinking it couldn’t happen to better people, bank failures are not good for you or anyone else in the economy, as a general rule. But, on the other hand, it is quite possible that in the crush of failures expected in 2008-2011, that loan you have on your house, car, boat or anything else might fall through the cracks. It HAS happened. Be alert.


Bank failures to surge in coming years

IndyMac, Corus, UCBH under pressure as credit crunch slows economy

SAN FRANCISCO (MarketWatch) — By April, Gary Holloway was almost three years into retirement.
He’d built a new home by a lake in Texas, bought a boat and was working on his golf game. While taking on some part-time work, Holloway also traveled for months across the U.S. with his wife, from Seattle to Washington D.C., catching up with old friends and family.
That life of leisure abruptly changed about six weeks ago when Holloway got a phone call from his former employer, the Federal Deposit Insurance Corp., or FDIC, which regulates U.S. banks and insures deposits.
Holloway, a 30-year FDIC veteran, had worked extensively with failed lenders in Houston during the savings and loan crisis in the late 1980s and early 1990s, when thousands of thrifts collapsed.
Earlier this year, the FDIC began trying to lure roughly 25 retirees like Holloway back to prepare for an increase in bank failures. It’s also hiring about 75 new staff.
Holloway quickly went back to work. ANB Financial N.A., a bank in Bentonville, Ark. with $2.1 billion in assets and $1.8 billion in customer deposits, was failing and an expert like Holloway was needed to value the assets and find a stronger institution to take them on.
“I was very excited about coming back,” Holloway said in an interview. “I’m now 57. There’s still a lot of life left and the juices are flowing again.”
On May 9, life for ANB ended when the FDIC and the Office of the Comptroller of the Currency, another bank regulator, announced that the lender was closing. See full story.
Only three banks have failed so far in 2008. But that number is set to surge as the credit crunch slows economic growth and hammers some lenders that grew too fast during the recent real-estate boom, experts say.
The roots of today’s banking crisis grew out of the boom and bust in the real estate market. Lenders originated more and more mortgages, while other banks, particularly smaller and medium-sized institutions, ploughed money into construction and development loans.
‘You don’t avoid the problem. It’s too late to wait and hope that things get better.’
— Joseph Mason, Drexel University
While loan growth soared in 2004 and 2005, most regulators failed to scrutinize many banks or restrain this heady expansion of credit. Now that the loans have been made and delinquencies are climbing, some banks may already be doomed.
Marriages and managing
“At this point in the crisis, you can’t stop bank failures,” said Joseph Mason, associate professor of finance at Drexel University’s LeBow College of Business, who has studied past financial crises.
“At this point you manage through failures and arrange marriages where another stronger bank takes on the assets and deposits,” he said. “You move through the problem. You don’t avoid the problem. It’s too late to wait and hope that things get better.”
Things may get worse before they get better.
At least 150 banks will fail in the U.S. during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.
‘There has been excessive loan growth and some banks won’t be able to access capital markets to replace the money that will disappear as credit losses rise.’
— Gerard Cassidy, RBC Capital Markets
If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990’s, the number of failures will be much higher this time around — probably as high as 300 of them, by RBC’s reckoning.
That’s a massive surge compared to the recent boom years of the credit and real estate markets. From the second half of 2004 through end of 2006 there were 10 consecutive quarters without a bank failure in the U.S. — a record length of time, Cassidy notes.
“This downturn will trigger a significant amount of bank failures relative to the past five years,” he said. “There has been excessive loan growth and some banks won’t be able to access capital markets to replace the money that will disappear as credit losses rise.”
Texas Ratio Cassidy and his colleagues have developed an early-warning system for spotting future trouble at banks called the Texas Ratio. The ratio is calculated by dividing a bank’s non-performing loans, including those 90 days delinquent, by the company’s tangible equity capital plus money set aside for future loan losses. The number basically measures credit problems as a percentage of the capital a lender has available to deal with them.
Cassidy came up with the idea after covering Texas banks in the 1980s. Until the recession hit that decade, many banks in the state were considered some of the best in the country. But as problem assets climbed, that view was cruelly challenged, Cassidy recalls.
The analyst noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under. A similar pattern occurred in the New England banking sector during the recession of the early 1990s, Cassidy said.
Along with his colleagues, Cassidy applied the same ratio to commercial banks at the end of this year’s first quarter and found some disturbing trends.
UCBH Holdings Inc. (UCBH, a San Francisco-based bank, saw its Texas Ratio jump to 31% at the end of the first quarter from 4.7% in 2006, according to RBC.
The Texas Ratio of Colonial BancGroup (CNB, based in Montgomery, Ala., jumped from 1.5% in 2006 to 25% at the end of March.
Sterling Financial Corp. (STSA) , headquartered in Spokane, Wash., had a Texas ratio of 1.9% in 2006. It was nearly 24% at the end of the first quarter, RBC data show.
These banks are no where near RBC’s 100% critical threshold, and several lenders have raised new capital since the first quarter. For instance, National City Corp. (NCCtopped RBC’s list with a Texas Ratio of 40% at the end of March, though the bank did raise $7 billion in new capital in April.
“But these ratios have skyrocketed in recent years,” Cassidy warned. “If that trend continues, some of these banks may be in trouble.”
CD signs of stress
Other lenders are already in more dire straits.
IndyMac Bancorp (IMBa large savings and loan institution and a leading mortgage lender, is one of Cassidy’s biggest concerns, with a whopping Texas Ratio around 140%.
IndyMac is finding it much tougher to package up and sell the mortgages it originates in securitizations. That used to be a major source of new money for the company to turn around and use in further lending.
When lenders need to raise new capital, they can try to boost deposits by offering attractive interest rates on certificates of deposits, or CDs.
IndyMac is currently offering the highest rates on one-year CDs, according to Others in the top 10 include Corus Bankshares (CORS, Imperial Capital Bancorp (IMPand GMAC bank. When Countrywide Financial (CFCwas struggling last year, its federal savings bank unit began offering some of the highest CD rates in the U.S. to build deposits. Bank of America (BAChas since agreed to acquire Countrywide and it didn’t make it onto’s list of top 10 CD rates this week. “These banks that are challenged for liquidity are having to go out and pay up in the market for CDs,” Joe Morford, a colleague of Cassidy’s at RBC, said. Imperial Capital stopped paying dividends earlier this year. GMAC, owned by leveraged buyout giant Cerberus Capital Management and General Motors (GM, is struggling to keep its Residential Capital mortgage business afloat.
Corus, offering the fifth-highest rates on one-year CDs, had a Texas Ratio of nearly 70% at the end of the first quarter, up from 9.1% in 2006, according to Morford.
Construction loan destruction
Corus is also highly exposed to types of loans that some experts worry will be the next major source of losses for banks after the mortgage meltdown.
Construction and development, or C&D, loans made up 83% of the Chicago-based bank’s total loans at the end of 2007, according to RiskMetrics Group.
This type of loans helps to pay for things like the building of real-estate development projects and the construction of office buildings.
Small and medium-sized banks found it difficult to compete with large lenders in the national markets for mortgages and other consumer loans. So many focused on C&D loans because this type of financing relies more on local, personal connections, said Zach Gast, financial sector analyst at RiskMetrics.
As the real estate market boomed, C&D loans did too. A decade ago, bank holding companies had $60 billion of these loans. That number is now $480 billion, according to Gast, who also notes that C&D loans are almost never securitized, so they’re held on banks’ balance sheets.
Such rapid loan growth usually creates trouble later. Indeed, delinquencies represented 7.1% of total C&D loans at the end of the first quarter, up from 0.9% at the end of 2005, Gast said.
“It’s a huge increase. Most of the deterioration seems to be coming from residential construction projects, but certainly there’s deterioration in commercial projects too,” the analyst said. “The rate of deterioration is still accelerating.”
Colonial BancGroup had 37% of its loans in C&D loans at the end of last year, while Sterling Financial had 33% and UCBH had 20%. East West Bancorp (EWBC, a rival to UCBH, is also exposed, with 25% of total loans in C&D assets at the end of 2007, RiskMetrics data show.
Where were regulators when these banks built up such large exposures?
That’s a question RBC’s Cassidy has been asking himself, noting that “they dropped the ball in a big way.” Officials at the FDIC declined to comment. Efforts by the Securities and Exchange Commission to make sure banks report accurate earnings may have made the situation worse, Cassidy says. Bank regulators try to encourage institutions to build reserves in good times, so they’re ready for downturns. But the SEC has been worried that banks might use reserves to smooth reported earnings, so it advised some lenders that they couldn’t set aside reserves if they weren’t experiencing commensurate credit losses, Cassidy explained.
That left reserves relatively low at the end of 2007, as the credit crunch was building momentum, Gast said.
Still, regulators have responded strongly so far this year. In addition to the FDIC’s efforts to bolster its staff, the Office of the Comptroller of the Currency has been telling banks to boost reserves even if accountants worry that such steps will stray from SEC guidance, Gast explained.
Crisis redux?
The FDIC had highlighted 76 banks that it considered troubled at the end of 2007. That’s up from 50 at the end of 2006, which was the lowest level for at least 25 years.
Once identified by regulators, troubled banks are often required to limit or halt loan growth and shrink their balance sheets by selling some assets, Cassidy said.
Resolution and receivership specialists at the FDIC, like Gary Holloway, value troubled banks’ assets as quickly as possible and try to find a stronger bank to absorb the weaker entity through an acquisition.
The current crisis hasn’t reached the scale of the savings and loan crisis. In 1990, more than 1,500 banks were on the FDIC’s troubled watch list, out of a total of roughly 15,000. More than 1,000 banks failed in 1988 and 1989, FDIC data show.
But it’s possible for such comparisons to understate the scope of the coming wave of insolvencies.
During the late 1980s, banks in Texas couldn’t open a new branch in another county without forming a new commercial bank. That meant there were lots more lenders in the state when the S&L crisis struck.
So when a bank failed, “40 of its other banks failed on the same day,” Cassidy recalls.
Today, no states have such requirements, so there will be fewer bank failures this time, but those that do fail may be larger.
That means each bank failure may have a larger effect on the U.S. economy, withdrawing a bigger chunk of capital from the financial system each time.
“Bank failures don’t cause recessions, they lengthen them,” Mason, the Drexel professor, explained. “We could get a mild recession that could linger for a while longer because of the inability to recharge capital in the banking and financial system.” End of Story
Alistair Barr is a reporter for MarketWatch in San Francisco.
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