Last weekend brought a new European huddle to try to address the rapidly deteriorating banking conditions there. Leaders decided the European Union could not put together a special fund to support the banks, but the separate countries are alert to opportunities to act in a coordinated way, as several did midweek in a simultaneous interest rate cut (which the United States also participated in). There was a hint that executives may be held responsible when banks fail — though that may be little more than an admonition to bank executives to be sure they are making responsible decisions.
I learned how bad the Iceland situation is: banks there have borrowed 6 times the nation’s annual GDP, and now it is hard to imagine how this can be paid back. The country began negotiating for help from its trade unions. On Monday, trading was halted in shares of Iceland’s major banks, while the government guaranteed all deposits and the banks sought to sell off overseas holdings. ING Direct UK quickly offered to purchase £3 billion of UK deposits from two Icelandic banks. The government took over the third largest bank, Landsbanki, after it failed Tuesday. Wednesday, the larger bank Glitnir, already nationalized two weeks ago, was put into receivership. A day later, Iceland nationalized its largest bank, Kaupthing, and shut down its stock market for the rest of the week.
On the continent last weekend, Germany’s chancellor tried to reassure depositors after a 35 billion euro bailout package for Hypo fell apart. The message was, please continue to put your trust in the banks, and, we promise to hold things together. By Sunday night, a new bailout plan, valued at 50 billion euros, was on the way.
Germany’s promises to depositors seemed to fall short of the blanket deposit guarantees put forward a week ago by Greece and Ireland. There was some concern that deposits would flow to those countries, emptying out the banks in other countries, but that did not seem to materialize. On Tuesday, the European Union raised its minimum deposit guarantee to 50,000 euros.
Benelux banking giant Fortis, after being propped up for a week, was nationalized in the Netherlands and sold off to a French bank in Belgium and Luxembourg.
Russia, whose stock market has suffered the worst, put a trillion rubles into its banking system to keep it liquid.
Another stock market in crisis is Brazil’s, yet that country is in a strong financial position and took further steps to protect its banking system from the global crisis.
In the United States, the Treasury Department took its Wall Street bailout plan back to the drawing board to try to figure out how to morph it into a bank liquidity fund within the limits of the legislation that was passed a week ago. The original plan would have done little or nothing to slow down bank failures, a concern that has become a higher priority in the weeks since the plan was proposed. The Federal Reserve, though, cautioned that bank failures would continue regardless of anything the Treasury might do.
Citigroup spent the week disputing the deal between Wells Fargo and Wachovia before finally relenting Friday morning. In court papers from one of the many lawsuits Citi filed, we learned how close to the edge Wachovia has been. It had been advised by an FDIC official that it could be taken over within a day if it could not find a buyer. Obviously, an adverse court ruling could leave Wachovia in receivership. One resolution that was floated would transfer hundreds of Wachovia branches to Citi, but this idea fell apart when Wells Fargo and Citi could not agree on a division of the Mid-Atlantic offices. An arrangement along those lines could still be negotiated and would leave Wells Fargo less top-heavy while providing Citi the geographical expansion it is seeking.
Citi’s aggressive posture in this dispute has resembled that of a wounded animal, and this raises questions about Citi’s own financial health. We now have to take seriously the scenario that Citi could fall before the year is over, rather than next year as observers had previously worried. If the wrangling between Citi and Wells Fargo over Wachovia had led to all three banks collapsing, that would have been the worst possible outcome, so the FDIC was reviewing all the proposed deals carefully to try to minimize the risks.
It was in some ways the worst week ever in the stock market, setting new records day after day for volatility. U.S. banking stocks fell roughly in line with the rest of the market, that is to say, down roughly 16%. The market turmoil reportedly led the White House to consider more drastic actions to intervene in the economy, but President Bush read a statement from the Rose Garden today that seemed to say that the actions taken so far would be sufficient.
On Friday night the FDIC closed two banks. It was the first simultaneous closure of two unaffiliated banks this year. These are small banks. Main Street Bank of Northville, Michigan, had $98 million in assets earlier this week. It had two offices in the outer suburbs of Detroit, in Northville and three miles south in Plymouth.
Meridian Bank of Eldred, Illinois, had offices in five Illinois towns near Saint Louis, Missouri. It last month had total assets of $39 million.
Main Street Bank was hurt by late payments on mortgages and construction loans, but most of all by the decline in manufacturing in eastern Michigan. Monroe Bank & Trust is taking over the deposits of Main Street Bank along with $17 million in assets. The FDIC is giving it 90 days to decide whether to purchase any of the Main Street Bank offices.
Meridian Bank had operated since 2003 as a successor to the troubled State Bank of Eldred. It had been cited in July by regulators in Illinois for sloppy lending practices and other procedural and financial problems. One problem was a $2.5 million loan to local travel agency YTB, whose web site emphasizes franchise and investment opportunities rather than travel destinations. That loan was due to be repaid in 2007, but nothing was paid until January 2008, when YTB repaid a fifth of the amount due. National Bank of Hillsboro, Illinois, is taking over the deposits and a small part of the assets of Meridian Bank. This represents a geographical expansion for National Bank, whose previous locations are all in south central Illinois.
Customers of both banks have had uninterrupted access to their accounts.
