US Fed fueled bank failures
WASHINGTON: The Federal Reserve Board, chastised for regulatory inaction that contributed to the subprime mortgage meltdown, also missed a chance to prevent much of the financial chaos now ravaging hundreds of small and midsized banks.
Many of these banks had long been bedrocks of smaller cities and towns across the nation, including two in the South Sound region. Tacoma's Rainier Pacific Bank failed in February and DuPont's Venture Bank failed in September 2009.
A four-month McClatchy Newspapers investigation has found that in 2005 the Fed rejected calls from one of the nation's top banking regulators, a professional accounting board and the Fed's own staff for curbs on the banks' use of trust-preferred securities to raise capital that was allowing them to mushroom in size.
The board's decision to leave the rule unchanged enabled Wall Street to encourage many community banks to take on huge debt and to plunge the borrowings into real estate loans. Adding to the problems, investment banks aggressively pooled the securities into complex bonds - much like the complex mortgage bonds that nearly brought down the financial system in 2008. Since 2008, 324 banks have failed across the country. The parent companies of at least 136 of them issued and later defaulted on more than $5 billion of the special securities.
As of Sept. 30, the Federal Deposit Insurance Corp. had 860 small banks on its "watch list" for possible failure. And the picture is sure to grow uglier in 2011.
Fitch Ratings, which rates the likelihood of bond defaults, said that another 380 bank holding companies that issued $7.1 billion of the securities have exercised their rights to defer paying interest to investors for up to five years. -PB News