Critically Under-Capitalized Banks Direct Result Of “Wonderful Chain Of Stupidity”

Last week the Wall Street Journal ran an article about how exactly trust securities sank Guaranty Financial Group and six family-controlled Illinois banking institutions in early July. Please consider In New Phase of Crisis, Securities Sink Banks. On Thursday were poised to seize Guaranty Financial Group Inc Federal officials., in what would be the 10th-largest bank failure in U.S.

Guaranty’s woes were triggered by its investment stock portfolio, filled with deteriorating securities produced from pools of mortgages originated by a few of the nation’s worst lenders. Delinquency rates on the holdings have soared up to 40%, forcing write-downs last month that consumed all of the bank’s capital. Guaranty is one of a large number of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions. Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, bank cards, commercial real-estate and other assets imperiled by the recession.

Thousands of banks and thrifts scooped up securities tied to the housing market or other financial institutions before decade. Such investments were appealing because they appeared certain to outperform Treasury bonds, municipal bonds and other humdrum holdings that dominated the securities portfolios for the most part banks for generations. Robert R. Hill Jr., chief executive of SCBT Financial Corp, a Columbia, S.C., bank or investment company with 49 branches.

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The bank or investment company has less publicity than various other small organizations, with the crippled securities representing about 10% of its investment collection. The overall effect on the U.S. Some obscure their troubled holdings in a vague line item titled “other” in financial claims. Jim Reber, president of the ICBA Securities, the brokerage device of the Independent Community Bankers of America, a trade group of 5,000 small thrifts and banking institutions. The sickened securities get into two categories. Guaranty is among 1 nearly,400 banking institutions that own mortgage-backed securities that aren’t supported by government-related entities such as Fannie Mae and Freddie Mac.

Such “private issuer” and “private label” securities are carved out of loans originated by mortgage companies, packaged by Wall Street companies and sold to investors then. 37.2 billion of private-issuer and private-label securities, Red Pine quotes. But regulators are pressuring banking institutions to write down the worthiness of their mortgage-backed securities, now being downgraded as more borrowers fall in back of on obligations for the underlying loans.

50 billion of trust preferred securities, financial devices that are a hybrid between equity and debt. From 2000 to 2008, more than 1,500 regional and small banks issued trust preferred securities, according to Red Pine data. Many of the buyers were local and small banks, which were self-confident they could assess other banks and attracted to the interest guaranteed by the issuing financial institution.