Good lord! How does a bank loose money like that?
In short, construction and real estate loans that have gone bad. Banks lend money to borrowers for speculative real estate construction, and when the
borrowers don't repay (for whatever reason, be it unemployment, overextended on the debt obligations, etc.), the bank is left holding the bag.
They paid top dollar for real estate assets, expecting a return in the form of repayment of principal and interest, and now these assets are devalued,
the borrowers are bankrupt, and the bank doesn't have enough in reserve to cover these losses.
A lot of the loan portfolios of these banks were heavily concentrated in residential construction loans that turned sour.
Residential homebuilders built speculative residential real estate developments in droves - especially in south Atlanta, and the South in general.
These developments were residential homes - sometimes whole new neighborhoods that were developed. There was a huge building boom - Houses were being
built like crazy just a few years ago, and banks were lending money to just about anyone that wanted to build or purchase a house.
When the real estate market slowed down due to tightened credit for home buyers and less demand, these same residential homebuilders couldn't sell
their lot inventory and home inventory, and many of these builders subsequently filed bankruptcy.
The builders could not afford to pay their residential construction loans, so they defaulted on these loan obligations.
The bank is left with houses - some not even completely built - and vacant lots - all of which have depreciated by sometimes as much as 40-50%.
The bank can't sell the houses in most cases, because the market isn't there - except for "bottom feeder" real estate investors that only want to
buy the houses for pennies on the dollar.
Lots of these houses were also built for speculative investors that intended on flipping the house for a quick profit once the house was built. These
investors have all now skipped town, or are unemployed, and have basically screwed the bank over by not making good on their loan obligations
Layman's example: I purchase a house for you - on your behalf - for $100,000. The house has a market value of $100,000, meaning there is no cushion
or room for devaluation of the house. You put no money down, and you have terrible credit, and spotty work history. You sign a no income
verification loan, and inflate your income on your loan application to persuade me that you are a good, low risk borrower. After about a year, you
default on your loan with me and skip town. Now the house has been devalued due to a slowdown in the market, and the house is now worth only $75,000.
I not only lost my $100,000, but now I have collateral worth less than what I originally paid - a $25,000 shortfall. You might have even trashed the
house before you left, further devaluing the house even further.
New accounting rules called "mark to market" accounting, requires that the bank reflects the actual market value of the real estate asset that they
have on the books. If they loaned $250,000 to a builder to build a home, and now that home is worth $100,000 - and the builder went belly up - then
the bank now owns a piece of collateral (real estate) that is only worth $100,000. Multiply this effect by hundreds for a single bank, and you can
see that they have (practically speaking) worthless assets on their books.
The bank regulators require that a bank keeps capital reserves on hand to mitigate against losses. When the losses mount, and the bank can't acquire
enough deposits to make up for the shortfall, the FDIC steps in and shuts the bank down to protect the depositors.
The short answer is: Loosey-goosey lending, and a rapidly deteriorating real estate market that has spun out of control.
Brace yourself. This is only the beginning. You will see many, many more banks failing in the weeks ahead.
[edit on 23-1-2010 by CookieMonster09]