How did Georgia become the ‘Chernobyl of banking’?
Since August, 72 banks around the country have closed their doors. Fourteen of those bank failures — almost 20 percent of the national total — occurred here in metro Atlanta.
As one expert recently told The Wall Street Journal, Georgia is now “the Chernobyl of banking.”
How did it come to this? The short answer is that in hindsight, Georgia banks concentrated too much of their loan business in commercial real estate — suburban housing projects, intown condos, strip malls and office buildings. Those loans produced so much profit during the boom that new banks were popping up all over North Georgia to take advantage of the easy money.
But once the market for those projects collapsed, developers were unable to repay the loans and bank failures soon followed.
As usual in such large-scale failures, everybody wants to play helpless victim to forces beyond their control. But that narrative is rarely true, and it’s certainly not in this case.
For one thing, while the collapse of the commercial real estate market was a nationwide phenomenon, it doesn’t explain why bank failures have clustered here in Georgia.
Furthermore, it’s simply not true that no one saw this coming. But those who warned of the danger and tried to prepare for it were ignored by others blinded by the allure of easy fortunes.
Part of the blame can be aimed at regulators who grew too lax.
For example, Alpha Bank of Alpharetta was one of those banks created to cash in on the development spree. Its collapse last November after just 29 months in existence forced the Federal Deposit Insurance Corp. to cough up $158 million to cover deposits. In his “autopsy” of the bank, the FDIC inspector general attributed Alpha’s failure to bank management’s aggressive pursuit of high-risk loans and the failure of regulators to spot the problem early and demand action. Similar language is found in autopsies of other failed Georgia banks.
Given that history, it was no surprise that the FDIC announced last week that four top officials at its Atlanta regional office were being reassigned.
To be fair, the FDIC and other federal regulators did understand early that a problem was developing. Back in January 2006, they proposed to tighten scrutiny of banks with high concentrations of commercial real estate loans. Regulators worried that if the market fell, “these concentrations may make the institutions more vulnerable” to failure.
Unfortunately, that proposal met with strong objections from bankers and state regulators.
Robert Braswell, commissioner of the Georgia Department of Banking and Finance, acknowledged in a 2006 letter to federal regulators that under the proposed rules, “a materially large percentage of banks that are in the metro Atlanta area are going to be subject to the expanded procedures.” However, Braswell argued that the rules were unnecessary because regulators and bank officials were aware of the danger and knew how to handle it. (Braswell did not return phone calls seeking comment.)
Joe Brannen, president of the Georgia Bankers Association, was even more blunt. He wrote that “the proposed guidance unreasonably exaggerates the potential exposure of those institutions to weaknesses in the commercial real-estate sector. … we strongly believe that more formal or more extensive regulatory measures are neither necessary nor appropriate.”
A lawyer for United Community Banks Inc., headquartered in Blairsville, even wrote dismissively of “economists who seem instinctively to believe that there is a real estate ‘bubble’ that could soon burst and affect the nation’s economy.” In fact, he argued that by reducing real estate loans, the rules could “bring about the economic downturn that the proposal presumably is intended to protect against.”
In other words, tougher rules might burst the “bubble” that supposedly didn’t exist.
Facing such arguments, federal regulators greatly watered down the proposed rules. By doing so, they helped to set the stage for today’s troubles.
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275 comments Add your comment
Northern Songs, Ltd.
July 14th, 2009
7:17 am
There’s gonna be a special place in “H E double hockey sticks” for the people.
Northern Songs, Ltd.
July 14th, 2009
7:18 am
uh, “these” people. not awake yet. need coffee.
Redneck Convert
July 14th, 2009
7:21 am
Well, good old boys and a bunch of money just don’t mix too good. And they don’t take to people that want to tell them things they can’t do. That’s why so many GA banks go bust.
And that’s why I keep my money in my cement vault. Leastwise I know where it is and it ain’t going no place. And this Pelousy woman can’t get her hands on it to tax it. She can’t even find it. Heck, half the time I can’t find it because I forget where I hid it.
Have a good day everybody.
USinUK
July 14th, 2009
7:39 am
yep. another shining example of why regulation is bad. mmm-hmm. it would have been SO onerous for those failed banks to be subject to more oversight. mmm-hmm. yep. that “free market system” sure does work!
oh, and as for the FDIC, it’s currently having a crisis of its own and needs to borrow $500 BILLION because between 2000 and 2006, Congress refused to let the FDIC enforce insurance premium collection from the banks it is now forced to pay out on.
http://www.boston.com/news/nation/washington/articles/2009/03/11/now_needy_fdic_collected_little_in_premiums/?page=full?ref=fp1
so, here’s yet another “no one could have predicted …” moment to lay square at the feet of the GOP.
I Report :-) You Whine :-(
July 14th, 2009
7:41 am
Boy, those “tax cuts” for small business that Obozo promised sure would come in handy now, wouldn’t they?
DB, Gwinnettian
July 14th, 2009
7:46 am
so, here’s yet another “no one could have predicted …” moment to lay square at the feet of the GOP.
I don’t think anybody anticipated a failure of Georgia banks that’d over-invested in speculative business real estate.
Mrs. Godzilla
July 14th, 2009
7:49 am
not to mention the stress that overdevelopment put on the region in environmental terms……
Kamchak
July 14th, 2009
7:50 am
USinUK
I wanted to ask you about this yesterday
http://online.wsj.com/article/BT-CO-20090710-713165.html
Has this been factored in to economic/housing forecasts, or is this fecal material heading for the spinning blades?
ByteMe
July 14th, 2009
7:54 am
Whiner: do share your wisdom with us by explaining how Alpha Bank lost $158 million of depositor money and you somehow relate that to a “small business”.
Uh huh. Thought so.
ByteMe
July 14th, 2009
7:56 am
Anyone see Palin’s ghost-written WaPo opinion piece? Got the annoying tone she uses to talk down about people who disagree with her, but it has too many big words for it to really be something she wrote.
jt
July 14th, 2009
7:58 am
The culprit that all of these failed institutions have in comman are the big three credit rating agencies. No one got fired from these entities and they are still being used.
Anyhow, the following creature was found at Chernoble. Wait until you see it’s head.
I researched it and I did confirm that it is true.
http://www.youtube.com/watch?v=eFGXKbeiixA&feature=related
DB, Gwinnettian
July 14th, 2009
7:59 am
Amvet, downstairs, regarding the NY Dolls:
Man, they sûcked. Notwithstanding the Rundgren connection, no-talent caterwauling assclowns.
Amvet, for the record, you are officially Dead To Me now.
FinnMcCool
July 14th, 2009
8:00 am
Off topic
I heard Saxby this morning on NPR talking about the F-22. You can tell by his voice he has no skin in the game. Passionless. Here’s a soldier’s take on this piece of junk:
Over $44,000 an Hour to Fly: Putting the F-22 in Perspective
http://www.vetvoice.com/showDiary.do?diaryId=2945
jt
July 14th, 2009
8:01 am
Here is one more Chernoble creature.
I’m still researching to determine authenticity.
http://www.youtube.com/watch?v=LfV4eSzhxAo&feature=related
Angry Black Man
July 14th, 2009
8:03 am
People in the financial world need to listen to some Kenny Rogers from time to time. “You got to know when to hold’em, know when to fold’em. Know when to walk away, and when to run.” That money train never lasts forever. Deregulation is just like putting a race car on the track at Talladega with no brakes. It’s fun while the racing is going on, but when it’s time to pit, it get’s very ugly.
Joey
July 14th, 2009
8:04 am
A major contribution, also in the year 2006, to the Banking and Finance problems:
Chris Dodd, Barney Frank, Maxine Waters and other Democrats boldly blocking the path of regulators who wanted to reign in Fannie Mae and Freddie Mac.
TW
July 14th, 2009
8:04 am
Anybody know the real unemployment numbers down here? The ones with the 1099 folks figured in? Being that so much of the employed WERE construction related, the 1099s have to bump that number way up as that they’re not fugured in already.
FinnMcCool
July 14th, 2009
8:05 am
JT, if anyone wants to find a bunch of idiot employees they can look at Morningstar or any of those credit rating agencies.
What a bunch of yokel math geeks. No clue as to the extent they’ve been played like cheap whores. They must hold the bankers in awe like rock stars.
USinUK
July 14th, 2009
8:05 am
Hi Kam!!
“Has this been factored in to economic/housing forecasts, or is this fecal material heading for the spinning blades?”
as far as the WSJ article, this has been discussed for a couple of months now – google “second wave foreclosures”
So, I guess the short answer to your question is that this isn’t news.
A slightly longer answer is that most institutional investors have been culling their portfolios over the last year (gah! can you believe we’ve been going through this crap for a year already) and are less vulnerable to this kind of fall-out.
I Report :-) You Whine :-(
July 14th, 2009
8:06 am
Whiner: do share your wisdom with us by explaining how Alpha Bank lost $158 million of depositor money and you somehow relate that to a “small business”.
Uh huh. Thought so.
BiteMe- Small business defaults on their loans, um, no money comes back to the bank.
capiche?
Angry Black Man
July 14th, 2009
8:06 am
Finn, all Saxby cares about is Saxby. He’s a prime example of why term limits need to be enacted.
USinUK
July 14th, 2009
8:07 am
jt –
“The culprit that all of these failed institutions have in comman are the big three credit rating agencies. No one got fired from these entities and they are still being used.”
I’m just shocked that there STILL hasn’t been a class action lawsuit filed against them
Doggone/GA
July 14th, 2009
8:09 am
“He’s a prime example of why term limits need to be enacted.”
We already have term limits…they’re called elections. If keeps getting elected, well…then “the people” get what they deserve.
USinUK
July 14th, 2009
8:09 am
ByteMe – and you know Palin didn’t write it because there is only a single “also”.
Redneck Convert
July 14th, 2009
8:10 am
Well, like I said before good old boys and lots of money don’t mix too good.
But it ain’t the regulations that’s the killer. These boys just make a whole bunch of bad loans.
Here’s a redneck that wants a loan to buy a new doublewide. He’s got a steady income and he ain’t never been late with a payment in his whole life. Well, the banker will check everything he can about the guy, including his small gut and his big gut. And he’ll decide he can only loan half the money. Even tho if the redneck goes bust the doublewide could be sold for more money than the guy would ever owe. And in the end he’ll turn down that redneck.
Now here comes a guy that wants a loan of $10 million bucks to build a new shopping center. He’s gone bust before but he has a “III” or “IV” after his last name. And he’ll take the banker out for a round of golf at his country club. He’ll get that loan with no money down and if he goes bust the banker will be left with nothing but a hole in the ground and a couple cinder blocks that’s been laid.
You can fix alot of things, but you can’t fix stupid. Not even with regulations. And that’s another reason why so many GA banks go bust. Have a good day everybody.
Angry Black Man
July 14th, 2009
8:11 am
Hey Joey, don’t you think Grahamm had a few irons in the fire as well for that deregulation bill he brought forth? I’d add Clinton’s name too, for signing that bill… You really sound partisan by blaming those that you mentioned.
Angry Black Man
July 14th, 2009
8:12 am
Doggone, that’s why I have yet to cast a vote for any incumbent since I’ve been in GA. Pretty much did the same thing in AL.
USinUK
July 14th, 2009
8:14 am
“We already have term limits…they’re called elections. If keeps getting elected, well…then “the people” get what they deserve.”
didn’t we already cover this yesterday???
criminey.
Kamchak
July 14th, 2009
8:14 am
USinUK
Thanks.
USinUK
July 14th, 2009
8:15 am
Kamchak –
de nachos!
Angry Black Man
July 14th, 2009
8:15 am
I missed out on yesterday. I see there’s some catch-up reading that needs to be done.
Doggone/GA
July 14th, 2009
8:15 am
“that’s why I have yet to cast a vote for any incumbent since I’ve been in GA.”
Yeah…now we just have to persuade enough other people to do the same thing.
Trust me
July 14th, 2009
8:18 am
Jay,
Any more word on that Sonny loan? Also, what’s the word on our DOE head and her family’s bankruptcy. Don’t they understand that they should not over-extend themselves like that. Republicans that I have ‘heard’ from are pretty much in agreement when it comes to finances — you are supposed to know better. So, I don’t think folks should be able to get off the hook so easily with these bankruptcy filings. They should be required to go to work picking peanuts or something in order to pay back their debt. Otherwise, the government just keeps on getting bigger and bigger and using up more and more of our tax dollars to cover these worthless no good people’s bad debts. At least, that’s the way I have ‘heard’ these Republicans talk about such things. And, all those people that had deposits at all these failed banks are now indebted to the taxpayers as well and we all know that such a thing just is not right. These people should have researched their banks better and we sure don’t need to be covering their bad bets. Let those depositers go down with the ship. Anyway, that’s the ‘right’ way to think about this whole mess, especially right here in Georgia, the red clay state.
Doggone/GA
July 14th, 2009
8:18 am
“didn’t we already cover this yesterday??? ”
Yep…and every time. I am adamantly opposed to forced term limits, because they throw the good out with the bad. You never hear anyone call for term limits when politicians do something good…only when they do something stupid.
Angry Black Man
July 14th, 2009
8:19 am
It’s easy for me Doggone. My dad is a politician, so I caught on early. I trust politicians as far as I can throw them.
jt
July 14th, 2009
8:19 am
USinUK-
Have you ever known anyone to forget driving on the “wrong” side of the road in the UK.?
I feel as if I could be acceptable to this.
ByteMe
July 14th, 2009
8:19 am
Whiner: thanks for the explanation. It’s wrong, but thanks. A small biz tax cut won’t save a business with no customers (since they don’t pay taxes anyway). And houses and commercial real estate have no customers right now, and all those loans still need to be paid back, so tax cut or no, money flowing to real estate started in 2005-2007 isn’t going to go back to the bank any time soon.
To everyone else: my understanding of the reason GA has more bank shutdowns is because we have a lot more “community banks” than most states and these are the ones at most risk. The larger banks got to tap into taxpayer money to stay afloat, the smaller ones get to sink with the rest of the garbage.
USinUK
July 14th, 2009
8:20 am
Doggone –
“Yep…and every time. I am adamantly opposed to forced term limits, because they throw the good out with the bad. You never hear anyone call for term limits when politicians do something good…only when they do something stupid.”
I got your back, my friend – I’m opposed to them, as well.
it’s democracy for the too effing lazy
Peadawg
July 14th, 2009
8:20 am
“Doggone, that’s why I have yet to cast a vote for any incumbent since I’ve been in GA. Pretty much did the same thing in AL.”
So, you going to do the same in 2012 if Obama is a failure? Somehow I doubt that.
Joey
July 14th, 2009
8:24 am
Angry Black Man:
I posted that 8:04 seemingly partisan statement after reading more than one post identifying the GOP as the party at fault.
Question: Did those post raise the “partisan flag” for you?
To answer your question: I think a lot of Senators and Congressmen, regardless of political party, were nursing that sugar teat.
Angry Black Man
July 14th, 2009
8:24 am
Yes sir, peadawg. I don’t play favorites to anyone. My future and that of my daughters is too much to gamble with.
I Report :-) You Whine :-(
July 14th, 2009
8:25 am
Whiner: thanks for the explanation. It’s wrong, but thanks. A small biz tax cut won’t save a business with no customers (since they don’t pay taxes anyway)
You gotta think big, BiteMe, do I have to explain everything?
The exact opposite of a low capital gains/ business operating tax environment is the fear of investing hard earned capital and exposing it to confiscatory tax rates, which the democrats have all but promised to do, and if they haven’t promised it, then they are lying.
Bite the hand that feeds you, this is what you get.
Why keep feeding you?
Angry Black Man
July 14th, 2009
8:28 am
Joey, I just read that particular statement, but yes, people that only blame the Republicans are equally as partisan.
To answer your question: I think a lot of Senators and Congressmen, regardless of political party, were nursing that sugar teat.”
If everyone could reason that way, I don’t think we’d be in the trouble that we’re in. I couldn’t agree with you more on this statement.
DB, Gwinnettian
July 14th, 2009
8:30 am
I see there’s some catch-up reading that needs to be done.
Let me know when you get to Whiner’s claim that “The next time the democrats defend America, it’ll be the first time.”
USinUK
July 14th, 2009
8:35 am
Joey –
“I posted that 8:04 seemingly partisan statement after reading more than one post identifying the GOP as the party at fault.”
some of us blame the GOP when the GOP is to blame – it’s not partisan, it’s calling a spade a spade. who controlled congress from 2000-2006??? these are the years during which the FDIC was not allowed to collect the insurance premiums that they so desperately need right now.
“To answer your question: I think a lot of Senators and Congressmen, regardless of political party, were nursing that sugar teat.”
on this we agree – look at the vote on the bankruptcy bill of 2005 – there were members of both parties doing the banking industry’s bidding on that.
additionally, I’ll also add that back in the early 1990s, one woman (whose name eludes me at the moment) was sounding the alarm on the derivative market, saying that it needed greater oversight and Greenspan, Rubin and Summers fought her on it.
Trust me
July 14th, 2009
8:35 am
Isn’t it about time for a Republican to tell us all about how these banks here in Georgia would not have failed had it not been for the actions of Obama or some other equally ignorant reason. And, how about Georgia’s red budget and employment rate. How do those also get blamed on Obama or the Democratic party. Come on. Y’all Republicans come down from the hills and up from the corn fields and melon patches and tell us all about how a bunch of illegal aliens were led by a bunch of Obama-backed insurgents down to Georgia’s banks to terrorize their hardly-working, God-fearing depositers and ultimately lead those bank executives to commit sepuku via a thousand paper cuts from excessive handling of 100-dollar bills.
Angry Black Man
July 14th, 2009
8:35 am
DB, that’s funny… Which post is that under?
USinUK
July 14th, 2009
8:37 am
gah – in trying to find the woman’s name, I stumbled upon this …
http://www.nytimes.com/1994/05/11/business/panel-is-told-derivatives-are-no-cause-for-alarm.html
oy. it hurts to read something like this, knowing what we know now.
USinUK
July 14th, 2009
8:39 am
Brooksley Born!!! that’s it!!
http://www.thedailybeast.com/blogs-and-stories/2008-12-14/women-scorned/full/
(that would have driven me mad the rest of the day)
Trust me
July 14th, 2009
8:39 am
The exact opposite of a low capital gains/ business operating tax environment is the fear of investing hard earned capital and exposing it to confiscatory tax rates, which the democrats have all but promised to do, and if they haven’t promised it, then they are lying, said the Exxon executive as he slithered away in his well-oiled boots.