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What led to the financial crisis — and what banking stories to do now

This word cloud by Flickr user Ricardo Carreon is drawn from the law that set up the Troubled Assets Relief Program.

By Jodi Schneider   

In the fall of 2008, a credit squeeze that had been lingering for years ballooned into the biggest crisis that Wall Street and the U.S. economy had faced since the Great Depression, which kicked off in 1929 and lasted throughout the 1930s. As hundreds of billions of dollars in mortgage-related investments became “toxic,” investment banking firms that once led the world of high finance went under, were merged into other institutions or reinvented themselves as commercial banks. AIG – the nation’s largest insurance company – was taken over by the government. Fannie Mae and Freddie Mac, the mortgage finance giants known as “government-sponsored enterprises,” were put into conservatorship, and their stock tumbled overnight. Congress passed a $700 billion bailout plan in October 2008, which led to many institutions – large and small – receiving investments from the Treasury Department through the Troubled Asset Relief Program (TARP). The Federal Reserve also pumped money into the banking system and a full-scale meltdown was averted. Though the economy went into a year-plus-long recession – and unemployment flirted with 10 percent – economists agreed that a much larger and longer – financial crisis had been averted in the United States. 

However, the pain was very deep for many homeowners, consumers, workers and many financial institutions themselves. Though by the spring of 2010, the largest banks and most sizable regional banks had repaid their investments under TARP, many smaller banks still had not repaid the TARP money and face large penalties if they fail to do so soon. Also, the ripples from the financial crisis and the ensuring recession left many community banks – especially those with $1 billion or less in assets – undercapitalized and with large losses; their once-reliable profit centers of loans and deposits can no longer be counted upon to buffer the balance sheet. Hundreds of banks – typically smaller ones – failed in 2008 and 2009, and the Federal Deposit Insurance Corp., in concert with state regulators, had shuttered 90 institutions through July 9 of this year. Georgia and Florida lead the failure list – with those two states accounting for more than half of the bank failures over the past year and a half – with Illinois coming in a close third. Major consolidation is expected in the banking industry over the next several years.  

Though a complete financial meltdown was avoided in the United States, the financial crisis spread around the globe, toppling banks across Europe and driving countries from Iceland to Pakistan to seek emergency aid from the International Monetary Fund. A vicious circle of tightening credit, reduced demand and rapid job cuts took hold, and the world fell into recession. 

Meanwhile, the crisis gained a second wind in 2010 as revelations about the size of Greece’s debts rippled slowly across Europe and shook markets in the rest of the world. A new government there discovered that its deficits were three times the amount that had been acknowledged, leading investors to demand higher and higher interest rates, which in turn raised the likelihood that Greece would not be able to pay its debts. The euro fell, and Europe may end up with a prolonged recession.  

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, stifling economic growth. At the same time, seemingly safe institutions in more solid economies such as France and Germany hold vast amounts of bonds from their more shaky neighbors, such as Spain, Portugal and Greece.  

Investors fear that with many governments pressured by the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard and may ricochet through the global banking system – including into the United States — where some large financial services companies have direct and indirect ties to the European institutions.  BANKING STORY ANGLES/IDEAS
 
For local publications, community banks are a good source of stories and a way to localize the financial services story playing out on the national and world stage. Here are some possible story angles involving community banks to cover in your area:
 
1) Talk to local bankers about how the recently passed financial services reform law could affect their institutions. Many smaller banks – and their lobbying groups, especially the Independent Community Bankers of America – have criticized the legislation for requiring banks to raise capital quickly, and for new regulatory requirements. Determine the health of your local bank via capital and earnings and then look at whether this would pass muster under the new regulation. Another change – not under this legislation but under other regulations taking effect Aug. 13 – requires banks to ask existing customers to opt in to overdraft protection, or they will automatically be opted out. What effect could this have on local institutions?
 
2) How has your local economy affected the health of banks and credit unions in your community? When the local economy gets a cold, the saying goes, the banks and other community financial institutions catch the flu. One of the reasons that so many banks in Georgia have failed, for instance, is that they invested in commercial real estate that went bad, and the institutions had to write down (sometimes very quickly) large loans – and they didn’t have enough other business to make up the difference. Look at the local industries in your coverage area and then determine how tied they are to the banks there. In Texas, for instance, there were few bank failures because the oil and gas industry was not particularly affected during much of the recession. Talk to economic leaders in your community and then bankers, and determine whether there is a cause-effect relationship for the banks.
 
3) Capital is king – or is it? With heightened regulatory requirement and tougher scrutiny by state and federal regulators, banks of all stripes – but especially community banks – must raise capital to survive. Most publicly traded banking companies go to existing shareholders through stock offerings to raise money; some also go to the open markets to do so. Privately held banking companies are more limited in their ability to raise capital – some seek funds from private-equity investors or even local investors, who often get a piece of the company in return. Meanwhile, if they can’t raise money, they often sell off a piece of the company – such as banking offices in some areas – to another firm, or may be acquired outright. Look at the institutions in your area to see how their capital levels measure up, and whether they are in danger of regulatory action as a result of being undercapitalized. If they have healthy capital levels, might they be in acquisition mode – and who are they eyeing? (Often, they are looking at nearby institutions.) What effects would the acquisition of a local community bank have on the community and especially small businesses?  

The BankTracker database, put together with FDIC data by the Investigative Reporting Workshop at American University, calculates a “troubled asset ratio” for individual banks and credit unions nationwide. It also allows you to look up TARP recipients.
  
WHAT TO INCLUDE IN BANKING STORIES:
 
Banking stories should contain the following information:
 
*Size of the institution, in assets (the FDIC site under the “Database” section has information by institution name and bank holding company for assets of the nearly 8,000 banks in the country)
 
*Where the institution or its parent company is based, and how many offices it has (and where they are located).
 
*The name of the bank holding company that likely owns it (a bank and its parent company are different animals) Whether it is publicly traded or privately held.
 
*Recent earnings, compared to earnings a year earlier, and its year-end earnings for the most recent year. (Don’t presume that all banking companies are on a calendar year.)
 
*Capital standings, whether it meets regulatory requirements for capital or whether it is undercapitalized, and by which measures. (Again, the FDIC site explains this well.) Banks are required to set aside capital in proportion to loans and investments. The rules shape behavior because banks must hold more capital against assets or loans that regulators consider more likely to lose value. Among the capital ratios are Tier 1 capital ratios and total capital ratios.
 
*Percentage of delinquent (in banking parlance, “non-performing assets,” or NPAs) loans, which shows what percentage of a bank’s total assets are delinquent.. A large – and growing percentage – spells trouble for an institution, while a declining percentage shows an institution has improved its health. The percentage of such assets connected with commercial real estate is also an interesting fact to include, especially in markets with significant commercial real estate (also known as CRE) problems.
 
*Recent regulatory actions. Regulators start with more limited action against a bank and then move to tougher requirements. At the low end of the scale are consent orders with regulators (often to improve capital), then written agreements (the Federal Reserve often gets involved at this stage) until a bank receives a “prompt-corrective-action” directive from regulators – usually the last step before a bank is failed. These orders typically give banks a certain amount of time to correct problems. A story should note what they were and whether the problems were corrected by the deadline.   

 Jodi Schneider joined the Washington bureau of the American Banker, a newspaper covering the nation’s banking industry, as a senior editor in December. Previously, she was director of training and recruiting for Congressional Quarterly’s newsroom. She gave this presentation to the Maynard Institute Multimedia Editing Program at the University of Nevada, Reno, in June.

In Best Practices, Economy, Featured, Investing | Banking, Story ideas.

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