US Fed fu­eled bank fail­ures

The Pak Banker - - Front Page -

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

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