Sherman Has Nothing On Banking

As Dave has shown us, while Florida may take home the gold prize in real-estate market myopia (and then sell that gold prize to a Cuban scrap dealer for Oxy-cash), its neighbor to the north is the undisputed national champion of bank failure.

The state is home to just 4% of all U.S. banks, but 20% of the nation's bank failures since August. More banks have collapsed in Georgia than in any other U.S. state, even foreclosure-racked California and Florida. Six Georgia banks have been seized by regulators this year, burned by too much expansion in the past decade and bad real-estate bets
...
Georgia had 334 banks at the end of 2008, not counting branches of banks based elsewhere, such as Bank of America Corp., of Charlotte, N.C., and Wells Fargo & Co., of San Francisco. Since 2000, 112 banks and thrifts were started in Georgia, the third-highest total in the U.S., after California and Florida. (source: WSJ)

Just to point out the obvious:

• California: 36.7 million people
  
• Florida: 18.3 million people
  
• Georgia: 9.6 million people
  

While it's difficult to point to one overarching cause that so successfully rendered the state of Georgia "the Chernobyl of banking," as the head of a state-level industry-lobby said, it seems to be a combination of three factors.

First, the regulatory system within the state is, from what I can tell, particularly idiotic. And to take a look at the barren wasteland that is smart financial regulation across these United States, that is one hell of a condemnation. As I understand things, Georgia regulations prevent state-chartered banks from operating over county lines. This rule was written to ensure that every county has its own bank. But with Georgia as one of the most sliced-and-diced states in the Union, this allowed large out-of-state and Federally chartered banks to run train on every tiny mom-and-pop financial shop in Georgia.

Second, during the boom years, Atlanta boomed more than most. With soaring demand for real-estate loans, residential and commercial, and a dearth of local lenders, state-level banking regulators began handing out charters like banks were handing out mortgages (see: imprudently, hotcakes).

And this is very closely related to the third issue: a massive inflow of speculative cash during the boom years. The new class of banks needed to find deposits to support their loans. Sadly for them, most of the local savers had their money with the out-of-state and national branches. And so, partially to get the locals to save locally, but more than anything, to get large whole-sale level out of state deposits, these new banks raised their interest rates on deposits. In short, Georgia tried the Iceland approach to banking and was met with less than...peachy (I'm sorry)...consequences.

Atlanta is one of the fastest growing areas of the country, and there has been great demand for real estate development. Many new banks sprang up and needed deposits to make loans. So they got what's known as "hot money" — large deposits from brokers who search for banks paying the highest interest rates. The problem is that money can leave the bank as fast as it comes in.

"The bankers aren't stupid," says Walter Moeling, a veteran banking attorney in Atlanta. "They knew that there was risk."(source: NPR)

No, they're probably stupid too. Stupid and criminal.

A more pointed Material Loss Review was issued about another Georgia bank --Haven Trust of Duluth GA --back in August. That one cost the FDIC deposit insurance fund $207 million. Among the interesting items in the FDIC OIG's Material Loss Review for $576 million Haven are dubious multi-million dollar loans to the school age children of one of the bank's owners. The review also contains a photo of a planned 238 townhouse project that the bank financed for $5.6 million in 2007 even as the real estate market was softening. By September 2008 about three quarters of the loan had been disbursed. The photo taken in 2009 shows an empty lot with no construction on it. The FDIC now appraises the property's value at $1 million. (Business Week)