Seven more banks were closed last Friday (10/23/09) as the avalanche of bank failures this year reached 106, the most in any year since 181 collapsed in all of 1992, during the savings and loan crisis.
Last fall, it was the nation’s biggest banks that faltered, like Citibank and Bank of America, who had made bad bets on complicated, high-risk investments. Now, smaller banks are being undone by something more conventional – real estate, construction and industrial loans – that have gone upside down as developers abandon failing projects, and landlords can’t meet their loan payments. Small and mid-sized banks hold many of these loans and have been hurt more than big banks by the sinking commercial real estate market.
So why is this good for everyday investors? We’ll get to that in a moment.
Hundreds of these banks remain open even though they are as troubled as those that have been closed. The FDIC is closing banks slowly – partly to avoid panic and partly because finding buyers for bad banks is tough. Bank failures have cost the FDIC about $25 billion this year and are expected to cost $100 billion before all is over.
It’s Different than Last time
Compared to the last financial melt down during the savings and loan crisis, this cycle of bank failures has played out very differently. First, the raw numbers of failed banks is lower in this cycle but the asset sizes are much larger and the losses in bad debt are a significantly larger percentage of assets (about 25% in this cycle compared to 11% in the previous cycle).
So far, the bulk of the failed banks have been dealt with by the FDIC selling the entire bank to another bank (a merger, so to speak). In a merger by sale, the FDIC never takes ownership of the assets but merely pays the acquiring bank to take the bad assets since that is the less expensive way to deal with the problem.
So, again you’re thinking, why is this good for everyday investors? Answer: The Legacy loan program, known as PPIP.
The Legacy Securities Public-Private Investment Program. (PPIP)
In July of this year, the US Treasury confirmed the launch of the Legacy Securities Public-Private Investment Program (PPIP). Under this program, the Treasury Dept will invest up to $30 billion of equity and debt to match funds established through private sector fund managers and private investors for the purpose of purchasing “legacy” real estate backed securities; in other words, the mortgage debt inherited from failed banks.
In Sept and Oct, the FDIC put together 2 large deals totaling $5.8 Billion in value based on residential mortgage and construction loans, which we believe to be the first of many such deals. We predict as many as 850 more of the smaller to mid-sized banks will fail and thus, there will be many more assets that the FDIC will have to deal with.
The Good News in the Bad News for Everyday Investors
The good news is that individual investors are being presented with a very unique opportunity – one which may not last long. That opportunity is to partner with eligible fund managers who are getting matching funds from the US Treasury to leverage their investment dollars. Through the PPIP, they can now buy the securities backed by commercial and residential real estate – that were originally rated as AAA – for pennies on the dollar. In other words, these are solid investments with potentially huge ROI. Through investor partnership programs, such as one offered by self-made Billionaire entrepreneur, Bill Bartmann, even smaller investors can capitalize on this unique opportunity.
Watch the free webinar now for further information from an interview with Bill Bartmann and Dave Stech.
