Sunday, September 27, 2009

95 and Counting

This is becoming so common it hardly raises eyebrows any longer.

On Friday, the FDIC closed the 95th local bank to fail in the current economic crisis.

According to Saturday's New York Times:

Atlanta-based Georgian Bank was closed by regulators on Friday, marking the 95th U.S. bank failure of the year as the credit crunch continues claiming victims.

Georgian Bank had $2 billion in assets and $2 billion in deposits as of July 24, according to the Federal Deposit Insurance Corp.

Columbia, S.C.-based First Citizens Bank and Trust Company Inc. has agreed to assume the failed bank's deposits, the FDIC said in a statement.

The FDIC estimated that the cost of the bank's failure to the federal deposit insurance fund will be $892 million.

Georgian Bank was also the second-largest local bank in the
Metro Atlanta area and the 26th local bank to fail in the
State of Georgia since January.

The trend is ominous. And equally disturbing is the reason
for all of these failures.
The banks are largely failing because of
their exposure to Commercial Real Estate.

Commercial Real Estate? Wait a minute. Did these guys lose
their minds and start investing in New York office buildings
and California shopping malls?

Not quite. It's a little bit closer to home than that.

The failed local banks made loans to the little guy - the local
developer of a strip center, or the the local builder of a small
condominium project.

And when "the economy" caught the little guys, the bank went
down with them.

And we can expect more of this. The FDIC's insurance fund - the
funds it relies on to seize, conserve, and sell off failed banks - is
down to $10.2 billion, its lowest level since 1982. And should the
present trend continue, the FDIC will require another $70 billion
by 2013.

It should be noted, though, that these figures do not
include the loan-loss reserves - $26.3 billion - set aside
to pay off depositors.

But this is troubling. Once the failed-bank count passes 100, we
will have experienced the largest number of failed local
institutions since the Savings and Loan Crisis of the late 1980's.
And there appears to be no end in sight.

In my opinion, the problem is not "Small Enough to Fail" but
"Too Small to Succeed".

These institutions can't "securitize" their loans - sell them off to
an investor. They don't have access to the Fed's discount window.
They didn't get TARP funds. There's no Troubled Asset Lending
Facility for their portfolio.

And that's a big reason for the credit crunch on Main Street.
While The "Too Big to Fail" institutions are back to business
as usual - running The Wall Street Casino, speculating for their
own account, paying big bonuses to traders and arbitrageurs -
their Main Street colleagues are not.

With a large "overhang" of problem loans - they can't make
new ones.

That means no credit for even the most credit-worthy local
merchant or consumer. And when you consider that Main Street
small business creates 80% of America's jobs, it's easy to see how
a problem with local banking can create a problem with
employment as well.

It's a problem that the Administration will have to address
sooner rather than later.

Stay tuned for developments.

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