The Seen and the Unseen (Part 2)

So if you can create something out of nothing, what exactly is that something worth?

In the end, nothing.  And community banks picked up the tab, courtesy of the FDIC.

While everyone was distracted by Wall Street's implosion, the FDIC pounced on community banks' millions of dollars worth of real estate loans.  The loans' value was now frozen up in the housing bust - they were far from worthless, but they had no market.  Given time, however, markets bounce back, and land will always be in demand.

The FDIC trapped community banks in a vicious cycle:  because the market for lots had dried up, banks could no longer count those loans as assets.  The FDIC demanded the banks write down those loans based on an imaginary number of what the lots could possibly maybe be worth today, as decided by their own assessment.  Poof!  There goes a big chunk of capital.  So the banks find themselves undercapitalized, and the FDIC forces them to sell performing loans to increase capital, thus decreasing the banks' income.  When the FDIC decides those lots have decreased in value again, they are written down, and the bank has to raise capital by selling assets.  Over and over until the bank has nothing left - and the FDIC has the gall to blame the banks for mismanaging their capital.

But wait - there's more!  When the FDIC closes down a bank and seizes its assets, many of those lots are sold in the shady world of online foreclosure auctions run by DebtX.  The FDIC really doesn't care what it gets for the lots, it's just getting them off the books.  Suddenly a $30,000 lot is sold for $1,000 - and all the banks must write down their lot loans to this new "fair market value."

How many banks have been shut down just because they were caught in this trap?  FDIC Examiner aims to find out and share their stories.