Eight more banks were shut last Friday while the avalanche of bank failures this season achieved 106, probably the most in any year since 181 collapsed in most of 1992, through the savings and loan crisis.
Last drop, it was the nation's greatest banks that faltered, like Citibank and Bank of America, who had made poor bets on complex, high-risk investments. Today, smaller banks are increasingly being undone by something more conventional - real estate, construction and commercial loans - that have gone inverted as designers abandon declining jobs, and landlords can't meet their loan payments. Little and mid-sized banks hold many of these loans and have now been harm significantly more than huge banks by the wreckage industrial real-estate market.
Therefore exactly why is that beneficial to daily investors? We'll get compared to that in a moment.
Hundreds of the banks stay start although they're as bothered as these which have been closed. The FDIC is shutting banks gradually - partially to prevent panic and partially since finding customers for bad banks is tough. Bank failures have cost the FDIC about $25 million this season and are anticipated to price $100 million before it's all over.
It's Different Than Last Time
Compared to the last financial melt down through the savings and loan disaster, this routine of bank failures has played out very differently. First, the fresh amounts of failed banks is lower in this cycle but the advantage measurements are much bigger and the losses in bad debt are a somewhat bigger percentage of assets (about 25% in this pattern compared to 11% in the earlier cycle).
To date, the majority of the unsuccessful banks have already been handled by the FDIC offering the entire bank to a different bank (a merger, therefore to speak). In a merger by purchase, the FDIC never takes control of the resources but just pays the acquiring bank to get the bad assets since that is the more affordable way to deal with the problem.
Therefore, again you are thinking, why is this best for everyday investors? Solution: The Legacy Loan Plan, also called PPIP.
The Heritage Securities Public-Private Expense Program. (PPIP)
In September of this year, the US Treasury proved the start of the History Securities Public-Private Investment Program (PPIP). Under this system, the Treasury Department will invest as much as $30 billion of equity and debt to fit resources established through individual industry finance managers and personal investors for the purpose of getting "legacy" real estate backed securities; quite simply, the mortgage debt inherited from failed banks.
In Sept and Oct, the FDIC come up with 2 big deals totaling $5.8 Million in price based on residential mortgage and structure loans, which we believe to be the initial of many such deals. We anticipate as many as 850 more of small to mid-sized banks may crash and thus, there will be a lot more resources that the FDIC will have to package with.