WSJ v. NYT: Securitization Smackdown

If you picked up both The Wall Street Journal and The New York Times this morning, your head may be spinning. The papers have banking stories that contradict each other.

Here’s the Journal’s lede:

U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks.

And the Times’s:

Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid.

As the number of banks closed by the Federal Deposit Insurance Corporation has grown rapidly this year, it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government.

There were no C.D.O’s, or S.I.V.’s or AAA-rated “supersenior tranches” that turned out to have little value. Certainly there were no “C.D.O.-squareds.”

So which is it?

The Journal, which clearly details how numerous banks are being sunk by securitized loans they bought. The Times, even with its “most” hedge, goes down for not stepping back to see why these regular loans are going bad.

Here’s the Journal on one of the latest banks to wipe out:

Guaranty’s woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation’s worst lenders…

Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions….

As of March 31, the 8,246 financial institutions backed by the FDIC held $2.21 trillion in securities — or 16% of their total assets of $13.54 trillion…

Last month, dozens of small and regional banks said their financial results were bruised by a deterioration in their securities portfolios…

Huge holdings of trust-preferred securities doomed six family-controlled Illinois banks that collapsed last month.

So there you go.

The Times’s Norris is just not looking at the bigger picture here. For example:

The severity of the current string of bank failures shows that many of the proposed remedies batted about since the financial crisis erupted would have done nothing to stem this wave of closures. These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid.

What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never thought possible.

But these regular loans didn’t happen in a vacuum.

The excess lending enabled by shadow banking, which allowed for much more leverage, was the rocket fuel that turned your typical end-of-cycle excess into something much more disastrous and spread crushing losses throughout the system. It in large part created the conditions that sent the economy into the worst funk since the Depression, which is the primary reason non-securitized loans are going bad.

And anyway, these instruments are killing banks—or helping to. See the Journal excerpts above.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.