Bank Failures

Wamu Suing the FDIC

Now this is interesting! Who would have thought that a bank would sue the Federal Depository Insurance Company? It comes as a surprise to me, but apparently they are indeed.

Any they aren’t looking for small change, they are suing for billions of dollars.

I found out about this via a Portland Business Journal article, and I’m sure a story of this complexity will produce many more articles.

More Credit Reductions

Chase sent my business the dreaded credit line reduction letters this past week. Does anyone else find it bothersome that American taxpayers are lending these big banks money, only to have them hoard it, and refrain from lending it back to us? Why don’t we just keep the money ourselves?

I find it especially bothersome that these letters (including the one from American Express) are coming after $350 billion of the TARP funds have been released. And what adds insult to injury is that the banks are “rationalizing” their decision based upon credit reports saying that the amount of outstanding debt to available credit ratio is too high. Strange, that ratio for my business has only gotten better (much better, I might add) over the past year. I hate to second guess the rationale there, but I’d venture to guess that the real reason is that the banks themselves are still in terrible financial shape due to their own mismanagement.

Shouldn’t this type of action on the banks’ part have happened before they found themselves in dire straights? If so, does it mean that last year when they went begging to Congress they were only crying wolf, and are now seriously in rough shape? I hope not, I really hope not.

In the end, its these types of credit restrictions which cause more damage than good. It encourages people and banks to borrow more than they need, hoard cash, and not repay their debts when they can with excess capital. It further exacerbates the lack of cash flow and available credit. Dare I say there will be a prolonged financial ice age before there is any hope of a financial rebirth?

Is this nonsense happening to anyone else? Please share your stories, thanks!

First Georgia Community Bank Closed

First Georgia Community Bank was seized by the FDIC yesterday. Its a small bank, so not too many people will be affected. I believe that the bank’s assets will be quickly purchased, thus I doubt that any depositors will have any issue, or even delay in being able to access their funds. Their website says that all deposits have been transferred to United Bank in Zebulon, GA. Side note: Zebulon is a great name for a town, don’t you think?

According to the bank’s website, which is still active, the bank only has four locations, and originally opened in 1996. It is reportedly the twenty third bank failure this year.

Credit Rating Agencies

I’ve been listening to the Senate hearings about the financial market meltdown, and recently there has been a lot of talk about the credit rating agencies: Moody’s, Standard & Poors, among others. From what I’ve gathered, they were rating bonds which were secured by sub-prime mortgages as AAA, or investment grade. Since these bonds were rated so highly, those who sold them were able to pay lower interest rates to their purchasers.

As it turned out, the sub-prime mortgages were not very good quality assets, and they could indeed lose value - a lot of value. When they did lose value, not only did the bonds which were secured by the mortgages lose value, but as the credit rating went down, the interest rate upon which the bond issuer must pay went up.

Even without this knowledge, I had a feeling that the problems in the sub-prime mortgage marketplace would have far reaching implications. In learning about how these credit rating agencies essentially portrayed speculation as reliable investments, it makes sense that the housing bubble not only inflated house values, but also the value of the stock market in general.

I’m still learning a lot about this fiasco, how wide spread it is, what caused it, and what some potential solutions might be, and as I learn more, I’ll be posting my thoughts here on Informed Banking.

Bailout Busted

The $700 billion bailout was voted down. From what I’ve heard, there were some lame reasons for voting against it, like partisan bickering, as well as some good reasons, like outrage by the public and glaring oddities in the bill.

For example, I saw one report on the news that said a congressional office received over 100 calls in a short period of time, all of the calls expressing a strong opposition to the bill, and only one “I’ll think about it” expression. Another example, one congresswoman explained that the bill asked for $700 billion in capital to buy distressed mortgage assets, but also raised the Federal debt limit from $9 trillion to $11 trillion.

It certainly sounds like most average American citizens accept that the letting the economy fail will be bad for everyone, but they continue to accept responsibility for it. If the system is broken, filling it up with more money won’t fix it, they say.

I’m still not sure what to make of the situation. What do you think?