It might well be asked why anyone should bother reading both the Wall Street Journal and the New York Times business pages. After all, both usually cover the same stories. Indeed, on Friday, both ran stories discussing the fact that year-to-date bank failures are at the highest level since 1992.
However these same-day articles about the number of bank failures in fact were a great illustration of the value of reading both publications, because the two newspapers presented very different explanations for the run of failed banks, particularly with respect to the latest round of bank closures. Each article has its points, though, and both raise interesting questions.
First, the context for the two articles. With the addition of four bank closures this past Friday night, there have now been 81 bank failures this year, compared to 25 during all of 2008, and just three in 2007. Not since June 12 has there been a Friday without a bank closure (Friday being the FDIC’s preferred day to take control of banks.) The FDIC’s complete list of banks that have failed since October 2000 can be found here.
The addition of two more failed banks in Georgia among this Friday’s round of bank closures brings that state’s nation-leading year to date total number of failed banks to 18. Friday’s closures also included Austin, Texas-based Guaranty Bank, the tenth largest bank failure in U.S. history. For more about Guaranty’s closure, refer here.
Though this year’s round of bank failures includes behemoths like Guaranty, and Colonial Bank of Birmingham, Alabama which closed last Friday, the bank failures generally involve much smaller banks, many of them so-called community banks having assets of less than $1 billion. Of the 81 year-to-date bank failures, 68 of them have involved community banks.
Now – why are the banks failing? The Journal and the Times disagree on that point, particularly with respect to the most recent closures.
In an August 21, 2009 article written by Floyd Norris, the Times reported (here) that "banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid." The Times article notes further with respect to the bank failures that "it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government."
There were, Norris writes, "no C.D.O’s or S.I.V.’s or AAA-rated ‘super-senior tranches.’" He added that "certainly, there were not ‘C.D.O.’s-squared.’"
The WSJ sees things quite differently. In a front-page article (published the same day as the Times article) entitled "In New Phase of Crisis, Securities Sink Banks" (here), the Journal asserts that "the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks." Guaranty’s woes and ultimate failure were, for example, due to its "investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worse lenders."
The Journal article notes that Guaranty "is one of the thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry." The securities fell into two categories, those "carved out of loans originated by mortgage companies, packaged by Wall Street firms, and then sold to investors," and "trust preferred securities" which are hybrid securities banks issue through special purpose trusts and that have certain advantages for purposes of measuring regulatory capital (for further background regarding trust preferred securities and the problems they are causing banks, refer here).
Banks themselves issued trust preferred securities, which "Wall Street brokerage firms bought" and packaged into "so-called collateralized-debt obligations" for which "many of the buyers were small and regional banks." The outcome of what one commentator called "this wonderful chain of stupidity" is that the "consequences are cascading down on the banks that bought these securities." Indeed, trust preferred securities holdings "doomed six family-controlled Illinois banks that collapsed last month." (My post about these six banks’ failure can be found here.)
It hardly seems as if the two newspapers were discussing the same topic, with the Times saying the bank failures had nothing to do with these exotic investment securities, and the Journal directly pinning the blame for numerous recent bank failures on the banks’ investment in precisely these kinds of investment instruments. Certainly, the examples the Journal cites suggest that the structured investments has had a lot more to do with at least some of the most recent banks failures than the Times article implies.
But as different as the two articles’ analyses may appear, the articles do agree that the fundamental problem for banks is that too many loans are not performing. The Journal article specifically notes that "delinquency rates and losses are at all-time highs," and the investment portfolio problems are hitting banks "already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession."
The one topic on which the two articles unquestionably agree is that the banks’ problems are likely to continue to get worse for some time to come. The Times article specifically notes that "the losses on current failures stem mostly from construction loans," but that commercial real estate could be "the next problem area." Commercial real estate loans typically must be refinanced every few years, and with rents down and vacancies up, "some owners are just walking away from their buildings."
Finally, an August 23, 2009 New York Times article entitled "What the Stress Tests Didn’t Predict" (here) confirms, based on a comprehensive review of over 7,000 banks (but excluding the 19 money center banks), that there was "more stress in the banking industry in the second quarter of 2009 than in the immediately preceding periods" and that "even the best run banks are having trouble escaping the impact of a sluggish economy and high unemployment."