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Foreclosures & Bank Failures

  Graph of bank failures 1934 to 1995  
The boom and bust cycle in agriculture was one factor that contributed to a boom and bust in banks during the 70s and 80s. Farmers in the 70s were told to increase production. Many went to their bankers and asked for loans to buy more land or equipment or seed, fertilizer and pesticides. Many bankers approved the loans based on their reading that the farm economy was still headed up. When the farm prices and incomes dropped and export markets seemed to dry up, many of those farmers couldn't make their payments. The banks tried to foreclose on the assets. When the assets weren't enough to cover the loans, many banks failed.

Between 1980 and 1994, more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed. While that was the highest number of failures since the FDIC was established in 1934, it was much less than the failures that lead to the establishment of the FDIC. At the height of the Great Depression in 1933, it's estimated that more than 4,000 banks failed. That was the year the Franklin Delano Roosevelt took office as president, and his first official act was to declare a "bank holiday" to stop runs on banks – angry depositors descending on banks to demand all of their savings immediately. In all, 9,000 banks failed during the 30s.

While the bank crisis of the 80s didn't reach the level of the 30s, it was still a severe shock to the agricultural system. In 1983 and '84, protestors targeted several foreclosure auctions, made ridiculously low bids – a nickel for a tractor – and intimidated legitimate bidders. In Springfield, Colorado, sheriff's deputies used tear gas to break up a court-ordered sale of a farm.

In 1985, Iowa Governor Terry Branstad declared a state of "economic emergency" and imposed a year-long moratorium on foreclosures in his state. There were attempts in other farm states to impose moratoriums there.

In August 1984, the Farmers Home Administration began their own moratorium on foreclosures in nine Midwestern states where the agency had acquired failed farms. They extended the moratorium in December, but only for certain counties. Out of nearly 3,000 counties in the nation, the agency said that farm sales would be prohibited in only 79 of them – 24 of those counties were in Nebraska.

But moratoriums often only delayed the inevitable. By the end of the decade, farmers who had been turned down for new or restructured loans by commercial banks had turned to the Farmer's Home Administration (FmHA), the government's "lender of last resort." By 1990, even the FmHA had initiated foreclosure proceedings against an estimated 8,000 farmers, up from 5,000 in '89 and 1,500 in '88. The agency insisted that it was trying to restructure or write off much of the debt for many of its borrowers, but thousands were still forced to leave farming.

Of the 1,617 commercial banks that failed between 1980 and 1995, nearly 60 percent were in only five states that have large agricultural economies – California, Kansas, Louisiana, Oklahoma and Texas. Nebraska lost 33 banks during that period, almost 7 percent of the total number of banks before 1980.

Texas alone lost 599 banks, almost 30 percent of the total number of banks in the state before 1980. That figure is inflated a little by the fact that Texas did not allow "branch banking" at the time, so if a bank owner wanted to expand he or she had to charter a new bank rather than open a branch.

What happened in Texas illustrates that several factors came together to create the bank crisis of the 80s. In addition to the slow down in agriculture, Texas, Oklahoma, Louisiana, Wyoming and Alaska were all hit hard by a collapse in energy prices that happened the same time as the farming crisis. There was also a downturn in commercial real estate activity that contributed to bank problems in California, the Northeast and the Southwest.

Mark Kaliff InterviewHank Kobza InterviewMark Kaliff (left) was in college in the mid-80s and found himself in classes with older farmers who were studying for new careers. "Times were tough, and they were looking at other options that they could go in to," Mark says.

Hank Kobza (right) was one of those forced into a new occupation, auctioneering. In the 80s, he lost his farm when the David City Nebraska bank went under and found himself auctioning off his neighbors' possessions when they went under. Hank says he tried (and still does) to get the best prices he could for his clients. "To me, one of the things we pride ourselves in is honesty. Be honest with the people you're dealing with. In a small community, if you aren't honest they'll sort you out in a hurry."

While a number of factors contributed to banking collapse of the 80s, the government's solution to those problems may have planted the seeds for credit crisis of the late 2000s. In the 80s, the Republicans controlled Congress and the White House, and they deregulated the financial industry in a number of significant ways. In 2009, those measures were singled out as a major cause of the financial collapse.

In comparison with the 80s, the FDIC closed 124 banks through the first 11 months of 2009. Analysts said they expected hundreds more to collapse in the months ahead, and they suggested that all of the nation's 8,100 lenders were in fragile condition.

Written by Bill Ganzel, the Ganzel Group. First published in 2009. A partial bibliography of sources is here.


 

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