Bank Failures Is It A Reason For Concern?

In the past few days, we have seen the second largest bank failure in history. Prompting the FDIC, an arm of the federal government to step in and take over Indy Mac Bank. In large part, the problems at Indy Mac were created by two issues. One was the writing of to many bad mortgage loans and second, when their stock started to tank, depositors started pulling out their funds in June and through the first couple of weeks of July.

Because of the troubles at this bank, we have been seeing all bank stocks taking a huge dive. Prompting listeners to the Dave Ramsey Show to email Dave, wondering if they should withdraw their deposits from their local banks. Ramsey's response is that we are not in a crisis, despite what you hear on TV. According to Ramsey, he is not going to remove his money from his bank. His advice is to remain calm and stay the course. Everything will shake out and rebound in the long run.

Still, in the wake of the Fed takeover of the Indy Mac Bank, Nightline, plays up that fear mongering, by reporting that many bank stocks were falling. Most of my accounts are at credit unions, but one bank (Washington Mutual) that Nightline mentioned, is one that I have my ATM/Checking account at. The account, that serves as my Food (grocery) budget envelope. On WaMu's part, they told Nightline, that they were not in danger of collapsing. Although that would depend on the depositors and if they decide to make a run on the banking giant. For me though, I will leave my balance (currently $6) in the account and continue making my bi-weekly deposits to do my grocery shopping.

WaMu problems is in part by being another bank that wily-nilly handed out option-ARM's, to people who couldn't afford a mortgage at all.

Downey Savings, based in Newport Beach, and First Federal Bank of California, based near Playa Vista, were specialists in so-called option-ARM loans -- the adjustable-rate mortgages that let borrowers pay so little that their loan balances would rise instead of going down. Washington Mutual was a major option-ARM lender as well.

Most option-ARM borrowers had passable credit scores, but Downey and WaMu also made loans to borrowers with blemished credit. Those subprime mortgages began defaulting in large numbers in late 2006, and option-ARM delinquencies have risen sharply in the last year.
- LA Times

These banks as well as the borrowers, who were not really qualified, are to blame for the current mortgage mess. I don't believe there should be any federal bailout for these banks and mortgage holders. I don't have any problems with the FDIC insurance program doing their job, but those mortgages should not be bailed off. If you can't afford the loan, you have no business borrowing the money. Then again, I really don't think anyone should be borrowing, instead they should save their money up and pay cash.
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