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2009-12-20 cnn
Not having financial capital is a big reason why more than 130 U.S. banks have failed this year. Many of them ended up in that position because they didn't diversify. That's when a person or a business makes different kinds of investments in order to reduce risk; it's like having backup. David Mattingly talks with the president of one of these failed banks to find out how it happened.
As president and CEO of the Community Bank of West Georgia, Richard Hayden thought he had all the bases covered.
And as long as they are building houses and as long as people were building houses and people were buying them, you were OK?
Absolutely.
He says making loans to developers in metro Atlanta's booming real estate market was a way to double your money in 5 to 10 years. But when the subprime crisis hit, the real estate-heavy formula for success turned into a recipe for disaster.
What percentage of your bank's money was tied up in real estate development?
In the neighborhood of 65 percent to 70 percent.
Isn't that a lot, for one bank to invest in real estate that heavily? Weren't you leaving yourself open for a fall?
Well obviously, in hindsight, with the collapse in the real estate market, it wasn't the right thing to do.
Georgia leads the nation in stories just like this. 24 banks have failed this year, many of them small startups. The popular idea was to build up the bottom line quick, then sell out at a profit to a bigger bank. Construction and commercial real estate was a proven way to go until the bottom suddenly fell out.
