Who Killed 21 Georgia Banks?

“It does gall you. Just because we’re a little bitty county doesn’t mean we don’t need a bank. It wasn’t our fault.”

— Hazel Bedingfield, 79, who now travels 24 miles for her Social Security payment at her new bank

You deposit your paycheck on Friday and can’t get money out on Saturday.

But don’t worry, the FDIC will cut you a check on Monday morning.

Your county commissioner tells the evening news: “The bank failure opens up an opportunity for another bank to set up here. Until then, customers will have to find another bank in a surrounding county.”

Your bank might have been built in 1905. It may have survived two world wars and a Great Depression. It was sold in 2000 and rebranded when the new owners moved headquarters to Atlanta…you can guess the rest.

This happened to citizens in Gibson, Georgia. And it could happen to you tomorrow.

The Feds raid your bank on Friday…They escort the CEO out. Then they empty the vault.

Right now, aren’t you wondering how much longer will this go on? The short answer: about $13 billion worth of FDIC intervention. I’m wondering if that’ll be enough.

Gargantuan, unfounded suburban growth ringing ’round the Peach State’s metropolis Hotlanta takes the brunt of the blame for bank collapses left and right. Especially those construction loans. A typical example of why these failed, according to FDIC investigation: Over 75% of the loan money was handed out before a single day of on-site construction began.

But here’s a big reason: Banks invest in other banks. Some banks never see nice depositors walk up to their ATMs or get lollipops at the counter. The wholesale bank’s only clients are other banks. If some of those big-ticket clients fold, well, there goes the bank. Silverton was just such a bank, with about 1,500 client banks in 44 of the 50 states. This earned Silverton the nickname “the Mini-Federal Reserve.”

The trouble came from the chunks of real estate loans Silverton sold to other banks in “low-growth” areas: deposit-rich regions that are “loan poor.” Guess that means places that aren’t Nevada, California or Georgia. It didn’t stop Florida Community Bank from adding a stake in the now-defunct Silverton bank to its $978 million dollar asset base. And the FCB ranks among the weakest financial institutions in Florida. We are not surprised.

Even Atlanta’s Federal Home Loan Bank, as 2009 dawned, was straddling the mere 3% capital ratio that would set a regulator’s teeth on edge. (The culprit there was the unwinding private-label mortgage-backed securities.)

Now get this. The Georgia banks facing FDIC conservatorship often depend on loan advances from the Federal Home Loan Bank of Atlanta to stay afloat, and the FHLB gets paid first, before depositors — costing the FDIC even more millions — even if the collateral isn’t there to do it.

Georgia regulators OK’d any fly-by-night bank startup. After all, who didn’t want a cut from making loans to real estate developers? At the start of the housing collapse, Georgia had 334 banks. That’s more than in California, which has four times Georgia’s population. Dan Amoss, the editor of Strategic Short Report, points a finger at this failed bank and offers some advice:

“A perfect example is Integrity Bank in Georgia, which should have been shut down long before it was allowed to attract new deposits with high CD rates.

“Also, note to Whiskey readers: If your CD rates seem too good to be true, your bank may not be healthy, and you may have to deal with the hassle of not accessing your money while the bank is resolved.”

All last week, Dan and I fired e-mails back and forth about the next U.S. bank to fail: The Great Southern behemoth: Colonial BancGroup. Then, on Friday Aug. 14, it finally happened…

BB&T to Swallow Colonial Whole: What Bones Will It Spit Out?

Colonial tapped the FDIC’s matchmaking skills to shack up with BB&T. Expect this marriage to look like the 20-something who marries the wealthy old man because she can’t wait to max out his credit cards. Dan bet me last Friday that dilutive stock offerings were on the way.

Sure enough, come Monday, BB&T offered 26.6 million brand-new shares to some willing dupes.

Like the other Southern banks we’ve been talking about, Alabama-based Colonial’s arms stretched into bad places like Georgia and Florida. And here’s what helped shake Colonial’s foundation. They call it warehouse lending. That’s short-term financing that independent mortgage bankers relied on to do business. Fannie, Freddie or Ginnie did not guarantee these loans.

Back in the 2007’s warehouse-lending heyday, the market was a $200 billion business. Lately, of course, the rich well dried up, to just $25 billion in lending. Colonial held the big 25% chunk of it. So now that it has dropped out of the race, who’s left?

The other warehouse-lending trendsetters already lie in the grave. The biggest tombstones: Countrywide and WaMu. And there’s a fresh hole dug for a new occupant: Guaranty Bank of Texas, which issued the FDIC red alert last month. Finally, we have National City (acquired by PNC).

What does this tell us? If all the big enablers for these loans are shutting up shop under duress, it makes you think there could be something wrong with the product. Instead of letting the free market eat the gross error of overexuberance, the industry is lobbying Washington to give government-backed Fannie Mae, Freddie Mac and Ginnie Mae a bigger role in warehouse lending.

Don’t Let the GSEs Take Over

Let’s flash back to a nice piece of advice that still holds true for Fannie, Freddie and fast-growing Ginnie. Back in March 2002, the prescient Chris Mayer (before he joined the Agora family) wrote a missive for Mises.org called “Mortgage Market Socialization.” Take a look at this bit of prophecy:

Forgotten is the truism that periods of prosperity necessarily precede periods of crisis. Thus, caution becomes heresy and optimism becomes the new religion.

The only way to correct this problem is the same way all socialistic practices are corrected — the government’s involvement must be severed completely. Just because the GSEs have led a charmed life so far is no reason to infer that their future will always be so bright. Socialism is not dead; it is alive in institutions like the GSEs.

The longer the GSEs are able to expand as they have, the more certain it becomes that someday taxpayers will have to bear the cost of such excess. Like Russian roulette, the longer you play, the more certain it becomes that you will bear the risk for playing.

I don’t know about Congress, but I think you Shooters would be eager to put down this particular gun. We’ve already paid about $86 billion in bailouts and what’s it gotten us? But since Fannie and Freddie backs or owns more than half of the single-family mortgages — probably yours — how about we just don’t load any more bullets?

Here’s the directionless drivel from Tim Geithner, recently before the Senate Banking Committee, as reported by Bloomberg:

“Fannie Mae and Freddie Mac will remain in limbo, as the U.S. Treasury secretary said the government doesn’t have time now to deal with the future of the two mortgage-finance companies it seized in September.

“We did not believe that we could at this time — in this time frame — lay out a sensible set of reforms to guide, to determine what their future role should be. We’re going to begin a process of looking at broader options for what their future should be…

“We just didn’t think it’s an essential thing to do just now, but it is an essential thing to do.”

Doesn’t this fill you with confidence? You see, Shooters, this whole mess began at an exclusive resort island off the coast of Georgia…The ol’ Jekyll Island Club set the foundation for sopping up and propping up incompetence in 1913.

Samantha Buker

August 21, 2009

The Daily Reckoning