FDIC, Banking & Real-Estate Deja Vu Two

click on graphics to enlarge

It took eight years from the start of the Savings & Loan crisis in the 80's and 90's to reach a peak in bank failures from the last real-estate boom turned bust. Let's hope we are not in for 6 more years of large quantities of bank failures. Mr. Bill Isaac JD who headed the Federal Deposit Insurance Corporation during the banking crisis of the 1980s said he doubts we'll come close to the volume of failures of the S&L crisis. Still, history is repeating its self. It's like a domino effect. First it effects the largest financial institutions leveraged to real-estate sales through the mortgage securitization and derivatives markets. Next came large Insurance companies and regional banks with large investments in real-estate and related loans. Now it's smaller state banks effect by commercial real-estate construction loans.

One single common denominator jumps out...real-estate. Yes, REAL-ESTATE SPECULATION fueled by historic low interest rates, easy credit, little money down and excessive value appraisals.

Real-Estate Implodes, Banks Fall and FDIC Funds Nose Dive

At the tail end of the Savings & Loan (S&L) debacle L. William Seidman, former chairman of both the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation, stated,"The banking problems of the '80s and '90s came primarily, but not exclusively, from unsound real estate lending".

In May of 1991 the Los Angeles Times reported, "The FDIC faces problems with the bank insurance fund expected to be insolvent by the end of the fiscal year. The House and Senate banking committees have passed separate bills providing $70 billion in temporary borrowing authority for the fund, with the money to be repaid by premiums from the banking industry. Seidman's replacement at the FDIC will run the fund at a time of great uncertainty for the banking industry, during a depression in commercial real estate that threatens the solvency of many banks".

For years after the 80's and 90's Savings & Loan financial crisis had ended hundreds to thousands of Articles, Whitepapers and Books were written on what created the problem and what was needed to prevent a future meltdown. To insure we learn from our past mistakes the FDIC has web pages listing FDIC reference books deticated to the S&L crisis memory.

Congress Passed the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in 1991.

This legislation authorized the Federal Deposit Insurance Corporation (FDIC), for the first time in its history, to charge higher deposit insurance premiums to S&Ls and Banks posing greater risk to the FDIC Insurance Fund. This historic piece of legislation empowered the FDIC to charge members premiums linked to risk.

A 1996 report by accomplished economist Frederic Mishkin a longtime friend and research partner of Fed Chairman Ben Bernanke reaffirms the need for the FDICIA stating the provisions were designed to serve two basic purposes: 1) to recapitalize the Bank Insurance Fund of the FDIC and 2) to reform the deposit insurance and bank regulatory system so that taxpayer losses would be minimized.

The United States General Accounting Office (GOA) issued a report in November 1996 entitled Bank and Thrift Regulation. The very first sentence of the executive summary states, "The thrift and banking crisis of the 1980s caused deposit insurance fund losses estimated at over $125 billion. One of the many factors contributing to the size of the federal losses was weakness in federal regulatory oversight".