In 2009 the FDIC and state regulators closed 140 banks. So far this year the government has closed 37 banks, including five in Oregon and Washington, and the first quarter's not over yet -- we have one more bank closing day yet to go before March ends. At this pace we'll get to 160 failed banks by the end of the year, beating 2009 by about 15%.
As I read about these institutions and look over their balance sheets, I note how many were done in by residential construction loans. It's as if a herd of bankers, lemming-like, rushed over the same cliff, reassuring themselves that there was safety in numbers.
A banker friend who chose not to swim with the lemmings once explained to me his policy on making loans. "Every loan must have two sources of repayment, no exceptions," was his rule. Usually one source was the borrower's income and the other source was the collateral. On commercial real estate loans, one source was the rental income from the property and the other source was the borrower's outside assets.
One of the many errors that many banks made was to imagine that they had identified two sources of repayment when in fact they were identifying the same source twice under different names. For instance, the two sources of repayment for a loan to a homebuilder might be the homebuilder's income and the real estate collateral. Overlooked by the lender was the fact that the homebuilder's income depended on the value of the collateral, and when the market for large houses on tiny lots dried up, not only did the builder's income do the same, but so did the value of the collateral. The two sources of repayment were really only one source of repayment.
In my friend's last 10 years of banking, I think he had only two loans go bad. I know a few banks that could have used his expertise in the last five years, but for most of them the fox has already overleveraged the henhouse.