I turned on the TV this morning to catch an update on the hurricane in New Orleans, hoping it was better. Thank goodness no deja vu, the storm appeared to be less intense than originally feared. I flipped the channels and saw Geraldo Rivera holding an anemometer counting off the wind speed. It reached 70mph, and thought, this is simply perverse.

Despite all the coverage and worry, the FDIC has reported only 10 bank failures so far this year. Granted, there were only 3 in 2007, 4 in 2004, 3 in 2003, 12 in 2002, 4 in 2001 and 2 in 2000, but from all the coverage, I would have expected 50 by now. Of the failures this year, Indymac was the only biggie.

The watch list has grown from 90 to 117 (and Indymac wasn’t on the watch list).

>The Federal Deposit Insurance Corporation, or FDIC, insures bank deposits of up to $100,000 at nearly 8,500 of the nation’s banks and also keeps a watch list of banks that it considers in trouble.

>Thanks to a collapsing housing market and a weak economy, a growing number of banks are struggling to stay afloat, with not enough cash on hand to cover losses from bad loans.

>At the beginning of the year, 90 banks were on the FDIC watch list. There are now 117, FDIC chairwoman Sheila C. Bair announced at a news conference this afternoon. That is the highest number in five years, but some analysts expect the list to grow even more in coming months.

This is supposed to be one of the biggest financial catastrophes in US history, no? In the 1980s FDIC removed nearly 2,000 institutions and S&L from the face of the earth. I remember the unbelievable stuff we saw as appraisers, performing workouts for RTC and FDIC in the early 1990s. Incredible stupidity abound.

Because it’s not all about the traditional banks…

It’s about the investment banks and the investors. Banks were able to shift the risk to third parties via securitization.


  1. Edd C Gillespie September 2, 2008 at 11:36 am

    I understand the risk avoidance and frankly, aside from the social premium we put on being up front and facing the music, what better way to make money than to avoid loosing it? Makes good business sense to me.
    But help me here. I thought there was trickle back going on and the funders closer to the beginning of these loans were being required to eat them. Is it just the investment banks that put up the wholesale money that the market is holding accountable?

  2. Jonathan J. Miller September 2, 2008 at 11:42 am

    More like trying to tread water, really. Yes, a lot of eating going on and many more may fail, but the investment banks, who made a cottage industry out of mortgage tranches, are on the front line with investors. It has been a year since this all began.

  3. Edd C Gillespie September 2, 2008 at 12:15 pm

    I’m hearing that many funders and brokers were making their money from sales commissions and servicing fees. I heard that faucet having been locked is the cause of the retail banks being shakey and mortgage brokers returning to surfing for living

    Am I wrong and Wall Street and the Investment Banks have figured out how dodge this bullet with pass through?

  4. Jonathan September 2, 2008 at 12:27 pm

    Could it be that the movement to securitize risk and distribute it was a reaction to the S&L crisis and the concentration of risk in the Banks? OK — so it didn’t work out to well and the really good parts that couldn’t be sold (since the returns were too low) turned into crapola. But it looked like it was a good idea at the time….

  5. Jonathan J. Miller September 2, 2008 at 12:50 pm

    I do think that. I can correlate the move to reduce risk in the mid-1990s from my appraisal practice and that was about the first light of day seen after the S&L debacle. The growth of appraisal management companies and the attempt to commoditize my profession, which turned out to be a dismal failure.

  6. Edd C Gillespie September 2, 2008 at 1:21 pm

    Appraisals do not lend themselves at all to being commodities. Unfortunately, most mortgage appraisers, and many others, do not understand that. If they did there would be no use for the Fannie forms or life left in the AMCs.

    There are AMCs who are still spreading the word that they will mandatory come January 1, 2009. I guess they haven’t been following the fate of HAVOC. And there are appraisers who believe them. Where is our leadership when we so desperately need to rise up and assert our collective self?

  7. L'Emmerdeur September 2, 2008 at 9:41 pm

    Stuffing these rotten loans down the originating bank’s gullet is a legal process, and the courts are being overwhelmed with this crap. Furthermore, a lot of the documentation is being contested by one side or the other, or the judge (note I’m not saying the docs are incomplete or otherwise unacceptable, I’m saying they are being contested, further delaying matters).

    As for bank failures… it’s the small and mid-sized regionals that will be taken down by their commercial RE loans, which were not securitized (regionals moved into commercial RE after the S&L meltdown). I believe most of this year’s failures were in this category. There will be many, many more of these as commercial RE follows residential down (it always does, with a lag).

    Furthermore, the S&L crisis was solely a thrift and bank crisis because the loans were not securitized , but held by the banks. With securitization, any company’s treasury department might have bought these to enhance yields, and will not show pain until they are forced to move them from held-to-maturity (ALM) into available-for-sale (Trading) – most likely during a cashflow crisis, after they have sold off any liquid or profitable assets.

    Be patient, it’s coming.

  8. Justin Morton September 3, 2008 at 11:27 am

    It does seem that this time around the banks spread the loss around. So that instead of taking the hit completely, they gave some of it to farms in Norway, pensions in Iowa, and of course your everyday run of the mill hedge-fund.

    That said, I do think we’re going to see quite a few more banks fail before this is all said and done.

  9. Edd C Gillespie September 3, 2008 at 12:39 pm

    Just to make it interesting I will play the Diablo. I think the bank failures due to what ever this thing is called, are done for now. There will always be failures for one reason or another, but this one is over. These guys will revamp and find another way to make money. All that remains is to figure out how to get the $$ going around again. It won’t take long. There isn’t a big switch in the sky, nor is there any one switch anywhere. We are strong enough and resilient enough to make it go again.
    The only thing I would say is that your sanity should be questioned if you continue to appraise for mortgage work after what we have seen.

    Incidentally for you Appraisal Port supporters read this:

    ** Case number: RWT 07cv1203

    REALTY, INC., et al. **
    Plaintiffs **
    v. FNC, INC., *
    Defendant *
    Bite ’em back guys.

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