August 17, 2007

Bank Runs

Atrios points to this article about Countrywide Bank depositors trying to withdraw their funds because they worried that if they left their money with Countrywide, they might lose their money. Bank runs used to be a common part of the bust cycle of the US economy through the 1800s and a significant part of the Great Depression, but most Americans haven't experienced this type of problem.

Countrywide is the third-largest Savings & Loan in the United States after Washington Mutual and Wachovia. One major problem for them is that because they do a lot of business in California where the loans are large, they are very exposed. And, of course, Option ARM loans were a significant part of California's loan business starting in 2005, which compounds the problem.

Countrywide recently was funding about $40 billion a month in mortgages. Of those, about half qualified to be sold to Freddie Mac or Fannie Mae, and half were "nonconforming" loans the agencies don't buy, including sub-prime mortgages to higher-risk borrowers as well as jumbo loans, which account for 43% of all mortgages issued in Southern California.

Company executives declined to discuss how the heavy withdrawals at Countrywide Bank branches Thursday might interfere with that strategy.

Mortgage industry executives, however, said that although Countrywide Bank was the nation's third-largest savings and loan, after Washington Mutual and Wachovia Bank's World Savings unit, it was far too small to absorb the entire $20 billion a month in nonconforming loans Countrywide Financial produced.

And although the Bank is covered by FDIC, only $100,000 is covered by federal insurance. Depositors with greater balances worried they could lose what was not covered so they rushed to withdraw their funds.

This story is just getting started.

Posted by Mary at August 17, 2007 08:13 AM | Economy | Technorati links |

I'm really glad to see you posting on this. Like you said, I think that that story of how the housing bubble is affecting the US economy as a whole is just getting started. As an almost-historian (no, don't ask about the thesis), I can see startling similarities between the current liquidity crisis in the housing industry and the 1929 financial crisis that led to the Great Depression.

One minor quibble, though: Bank runs aren't as foreign to living experience as you suggested. I can recall a lot of bank runs during the S&L debacle of the late 1980s and early 1990s.

Posted by: Magpie at August 17, 2007 01:01 PM

The fact that our gov. agencies that that are suppose to regulate the banking industries sit back and let the banks make bad mortgages prove that they care more about wall street makeing money than the financial future of the american people and the nation as a whole. Our elected officials in Washington are owned buy the corporations that provided the money for their election.

The name of the United States of America should be changed the United Corporations of America to more reflect the true nature of the american gov..

We complain about the defective products that China sends us but our gov. and wallstreet thinks it is o.k. to send defective financial products to the nations of the world. I would like to see China, Europe and Asia file a law suit against the U.S. gov. and wallstreet for selling these defective products the same way one would file suit for defective toys. This would help prevent some of the abuse that the rich and powerful force on the innocent.

Posted by: charley at August 17, 2007 07:01 PM

Two years ago I sat and watched c-span as the fed. chairman Alan Greenspan explained to congress how our finacial markets were much more stronger today because of all the new financial instruments that banks had created. Our duly elected congress watched on like a small child as they listen to mr. Greenspan's speech, which was given in his usual convaluted way, they sat with a glaze on their face while he explained how selling these defective derivatives to mutual funds and pension funds were going to protect our banking system from failure. Not one elected official had the intelligence or the guts to question mr. Greenspan about the losses the american workers would suffer when these special financial instruments became worthless and their retirements vaporized into thin air.

In China people that are guilty of great fraud are some times put to death for such irresponsible behavior. Since our leaders in washington and wallstreet love China so much maybe it is time for the law in this country to adopt some of the chinese ways. While this may seem extreme today it may not when your dollar is worthless and you children are starving.

Take time to read about the misery suffering of the last great depression. You may look at things with a different view.

Posted by: charley at August 17, 2007 07:33 PM