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Troubled Securities Threaten to Drown Banks

Feds set to seize Texas' Guaranty

By Matt Cantor, Newser Staff

Posted Aug 21, 2009 10:48 AM CDT

(Newser) – Bad loans have been killing off banks at the fastest rate in 17 years—but now, securities purchased from other banks are a mounting threat, the Wall Street Journal reports. Thousands of banks nabbed securities dependent on mortgages and the financial industry. “Under most scenarios, they were good and prudent investments—as long as we didn't have a housing or banking crisis,” says one banking insider.

“There is no question that these securities will be ... for some of these banks the straw that breaks the camel's back,” notes another. For Texas bank Guaranty, that already appears to be the case: The government stands ready to seize the institution, plagued by $3.5 billion in mortgage-backed securities—two-thirds of which are in states reeling from foreclosure.

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The Wall Street sign hangs in front of the American flag on the facade of the New York Stock Exchange Thursday, July 23, 2009 in New York. (AP Photo/Mary Altaffer)

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Some of these banks that made these investments didn't know what they were buying. Others just bought too much. - Wade Vandegrift, Red Pine Advisors LLC

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Troubled Securities Threaten to Drown Banks