First, Colonial received a major investment from a now bankrupt business, Taylor, Bean, and Whitaker.  This company funded and facilitated a huge number of mortgages, particularly in the southeast region.  But that’s old news.

Second, Colonial’s failure was leaked prior to its actually being shut down and placed into receivorship.  This is a huge issue.  There are two schools of thought on this.  The first is the most simple: somebody leaked the information at BB&T, Colonial, or the FDIC out of pure stupidity.  There’s a good reason that the public isn’t notified when a bank is going to close.  It saves that bank, usually, from having a run and costing the FDIC even more money.  The second reason is a little more complex and underhanded.  Somebody might have purposely leaked the news that the extremely strong BB&T was going to buy the deposits of the very weak Colonial, because Colonial was already seeing a run on deposits.  The first instance is extremely problematic; the second, extremely smart.  We’ll have to wait and see what really happened.

Third, Colonial bank received TARP money after getting a similarly large amount of private investment.  It received $550 million tax payer dollars, to be exact.  Recently, the TARP inspector general (aka TARP czar) raided offices of the bank alleging fraud that probably would have kept the bank from receiving funds.  As an FYI, a number of bankers and investment professionals that I have spoken with agreed with me when I was astounded and angered that Colonial received funds in the first place.  They’ve been failing for quite some time.  There goes $550 million down the tubes that was only supposed to be invested in the strongest and/or most systemically important financial institutions.  There’s a scandal brewing here, just wait.

Finally, and this is the biggest future news of all, the FDIC is going to run out of its self-funded reserve for losses.  This means that it’s likely that it will tap its line of credit at the Treasury.  This isn’t the first time this has happened, and you shouldn’t panic, but it’s one more bit of shocking fall out from the financial disaster that we’re desperately trying to get behind us.  Let me repeat, the FDIC is about to run out of its own money and start relying on taxpayers.  Can the government handle it? Absolutely.  Does this highlight how bad our situation was and continues to be? Absolutely.  Most importantly- Are your deposits still safe? Absolutely.

Anyone in the Metro-Atlanta area who hasn’t been out of the country for a year has seen numerous negative and extremely ominous headlines related to our local financial institutions.  As a recent article in the Wall Street Journal points out, Georgia is one of the hot beds of bank failures in the country (“Failed Banks Dot Georgia Landscape”).  Folks, the sad truth is that this trend will not only continue, but it’s about to accelerate.  Over the next few days, I’ll be explaining a great deal not only about how banks operate, but more specifically about how the Georgia banking industry got so bad so quickly.

Before I go any further, let me reiterate a point I try to constantly hammer home:  If your funds are within FDIC insurance limits, they are 100% safe and you will have almost immediate, if not immediate access to them if your bank fails.  Click the FDIC link to the right to learn more about coverage.

After reading the article mentioned above, you’re probably wondering how Georgia banks got into this position.  We haven’t heard a lot about big “sub-prime implosions” in the Atlanta area; the media has primarily focused on areas in California, Arizona, and Florida for those types stories.  So why, then, are banks in Georgia performing so remarkably poorly?

There were a number of reasons for this and they’re all interconnected like a giant spider web spun from 2001-2006.  I’ll explore each of the reasons in depth over the next few days, but here are the top causes, in my opinion, for why banks have and will continue to fail (in no particular order):

1.        Astronomical growth in number of new banks

2.       “Flipping” Banks (ominously  similar to flipping houses)

3.       Explosive population growth and projections of continued growth

4.       Relatively cheap deposits feeding supposedly “risk free” loans

5.       “Brokered” Deposits

6.       Large profit margins that still weren’t large enough to cover all the downside risk

7.       Unsustainable growth in debt

8.       Excessive concentrations in real estate

9.       Unbelievably high loan-to-collateral value

10.   Loan Policy Exceptions were “normal”

11.   Outright Fraud

12.   Poor underwriting of loans and oversight lending in general coupled with too little regulatory controls

13.   Sub-Prime Mortgages

14.   Too many bank presidents

In future posts, I’ll go into a lot of detail about each of these and really break it down on “Banking for Dummies” level.  Stay tuned.