On banks failing: Why Banks Fail After many years of working to counter the effects of financial crises, we have developed a point of view about why banks fail. The simple causes, in our opinion, are traceable to errors made while underwriting loans. However, this answer is not very satisfying in itself and it leads to more questions, such as: Why were these underwriting errors made in the first place? What impacts do special conditions that are generally not present in more developed and stable markets have in these bank failures? Do these banks operate in dangerous markets? Bankers operating in economies hit by financial crisis recognize that corporate sector underperformance places enormous pressure on banks. They can trace the effects of real sector underperformance on their loan portfolios. Since loan portfolios in most countries are kept on the balance sheet, without being marked-to-market, it is nearly impossible for bankers (or regulators) to fully and fairly assess the value of their portfoliosâand the state of health of their banks. Moreover, because the banks themselves provide the lionâs share of financial intermediation in these countries, the capital market trading that would force visible repricing in a more advanced economy generally does not exist. In crisis conditions, many banks simply will not recognize the extent to which their asset values have declined, since they fear a collapse of confidence. Even those who knew before the crisis that they were on perilous ground, and who could have possibly reshaped their portfolios, generally did not. As we showed in Figure 3.7 above, Colombian bankers deepened their commitments to the very companies whose declining performance was threatening them. This phenomenon is common in many developed economies as well. from DANGEROUS MARKETS Managing in Financial Crises Wiley Press
Any type of business failure is a result of one thing and one thing only......stupidity. Don't waste you time intellectualizing it nor removing blame from those who deserve it most.
In other words, they were averaging down..... Maybe the nice, fat bonuses should be delayed a few years until it's apparent they weren't garnered by fraud. The company/screwed-shareholders could try and get them back after-the-fact, but we know that never happens.....
I'm no closet commie, but these greedy overconfident bastards really need to be reigned in by even more oversight. The real problem is too many gamblers with opm and not enough skin in the game. The compensation game is a scam. That clown Mozillo took the money and ran. I say take it back as reparations for running CFC into the ground.