Saturday, January 2, 2010

On the brink, pt. 2

Back in November, I wrote a brief post ("On the brink") about the 120 bank failures our financial system had weathered over the previous 11 months. And it did not stop there. The last seven closures reported by the FDIC on December 18 brought the final tally for the year to 140, the highest number in 17 years -- an appreciable contrast to the 30 banks shut down in 2008, but a far cry from the 2,484 closed between 1985-1992.

Although I'm no financial maven like Warren Buffett, Dave Ramsey, or former Wall Street Journal columnist Jonathan Clements, my five years in banking ('96-'01) has allowed some clique insight into the collective handling of loans, which is possibly foremost among the issues that engendered the present economic crunch.

Being pressed almost daily to make cross-selling for loan apps our main focus ultimately presented a system-wide conundrum, especially for one branch in particular that had suffered through a 93% decline rate for about 15 years. I know because I was assigned to that outpost (just down the street from Graceland) for 13 grueling months, and I'll never forget it. In short, the hindrances at hand were predominantly socioeconomic, creating a "chain of blame" that yielded more platitudes from management than answers.

My story is not unique. In fact workplace circumstances such as mine became the industry norm with tragic results despite lessons of the past that scream out to us still, and all because financial institutions nationwide overlooked sub-600 credit ratings and debt-to-income ratios that exceeded 36%. Indeed the circumvention of these two basic criteria (combined with out-of-control consumer debt-fueled spending) is asking for serious trouble, as any half-honest banker will tell you, and now we've got it.

Shenanigans from Lehman Brothers and Bear Stearns notwithstanding, you can say what you want about compromised economic forecasts, sub-prime lending, deregulation, over-leveraging and collateralized debt. But it all starts with the conspicuous abuse of banking regulations (Regs D, G, T, & Z primarily) by instituting feebly justified alternatives -- adjustable-rate mortgages, for instance -- that merely amount to another form of predatory lending.

Until this culture of impropriety changes, we can expect the bad to get worse.

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