Friday, February 6, 2009

This Week in Bank Failures

President Obama warned Monday that the bank bailout money is not unlimited. Some banks will fail, he said, and banks getting bailout money would have to use the money responsibly.

This cautionary mention came after the spot-the-bailout-money game turned up at the Super Bowl, where troubled bank Bank of America spent $10 million on a lavish party right next to the stadium where the game was held. The bank defended the event as an effective promotional expense and part of its “growth strategy,” but this view only added fuel to the fire, as people asked whether a bank whose near-term survival is not entirely certain should be so focused on growing bigger in the long run.

Bailout money has been in the headlines every day, with people predictably upset at the excesses of corporate living that this spotlight has revealed:

  • Wells Fargo first claimed that taxpayer money wasn’t involved in its lavish Las Vegas casino junket scheduled to run from this weekend to next. Then it canceled the trip. A day earlier, Morgan Stanley had canceled a similar trip to Monte Carlo.
  • AP reported that the largest bailed-out banks have applied for H-1B visas for 22,000 foreign workers for U.S.-based jobs in the last six years, at an average salary of $90,000. And that’s not counting a much larger number of foreign workers who are not employed directly by the banks, but who work in the banks’ offices.
  • By one count, Wall Street bonuses were $18.4 billion, and there were other reports of overblown bonuses and severance payments. Obama on Wednesday proposed a hard compensation limit of $500,000 a year for anyone working at a bank that receives large-scale bailout money. The limit would stay in place until the government is paid back. A similar scheme had already been proposed by Sen. Claire McCaskill.

Obama’s approach to the TARP program approved for the Wall Street bailout last fall will get the government more directly involved in the lending process, but will still include enormous giveaways for large banks, according to reports. Some of the giveaways may come from a government-sponsored “bad bank” which will pay above-market prices for delinquent loans and other distressed bank assets. An announcement spelling out the details of the plan is expected on Monday. If there is a “bad bank” it will be funded with only a fraction of the remaining TARP money. It could buy about 1 percent of the bad assets on banks’ balance sheets, making it not nearly enough to save even a single large bank. On Thursday and Friday, the Obama administration seemed to be floating the idea of adding about half a trillion dollars to TARP, but even that level of funding would leave the vast majority of bad assets on the banks’ books.

Obama has little choice but to change course. The original Wall Street bailout has failed in its original purpose. Far from encouraging banks to lend freely again, it has seen banks get even tighter with money. A Fed survey this week found that most banks have adopted more restrictive lending standards for every kind of loan compared to three months ago.

The parade of bank failures gained momentum tonight with banks closed in California and Georgia. As with many other recent bank failures, tonight’s failures were attributed to high loan losses on real estate development loans as real estate markets tumbled.

Alliance Bank, in the Los Angeles metropolitan area, was closed and its $1 billion in deposits transferred to California Bank & Trust. California Bank & Trust, a large bank with offices across the state, is acquiring 98 percent of Alliance Bank assets along with its five offices. It is paying a 1 percent discount for the assets and is also getting partial protection from losses from the FDIC.

Alliance Bank’s problems were well known, and the bank had said in November that it could be put into receivership if it could not raise capital quickly. The FDIC expects the closure to cost it $206 million.

Another billion-dollar California bank, County Bank, was closed tonight. County Bank had 39 offices, nearly all in the Central Valley of California, along Highway 99 from Stockton to Tulare. All deposits, assets, and offices are being transferred to Westamerica Bank — an unusual arrangement that helps to limit the losses and administrative costs of the FDIC. The FDIC is offering partial loss protection on the assets, and expects to pay $135 million on this closure.

Westamerica Bank is a very large community bank operating in the same territory, which may help to explain its interest in taking over County Bank’s operations. After a transition period, Westamerica will likely close many of County Bank’s offices, in the cases where its own offices are found within the same central business district.

Westamerica had been mentioned in press reports this week as a possible buyer for County Bank. County Bank’s parent company, Capital Corp. of the West, had spent several months trying to line up at least $50 million in additional capital. County Bank had operated since 1977. Last weekend there were rumors that it was closing, prompting it to issue a statement on Monday saying that all of its offices remained open for business. The holding company’s stock price fell that day from 75¢ a share to 19¢ a share, giving it a market capitalization of $2 million.

In Georgia, FirstBank Financial Services, with four offices south of Atlanta, was closed and its deposits and offices turned over to Regions Bank, a large regional bank. Regions Bank already has a strong presence in the Atlanta metropolitan area, with existing offices within blocks of the four FirstBank offices. Regions is also acquiring about 5 percent of FirstBank’s assets. Last year, Regions acquired the deposits of Integrity Bank, a bank failure on the other side of Atlanta.

FirstBank Financial opened in 2002 as First Bank of Henry County, operating under that name through 2006. Its loan portfolio was overwhelmed by loan defaults in the second half of 2008. By the end of 2008, it had over $100 million in problem loans, compared to $300 million in total deposits. The FDIC expects this closure to cost it $111 million.

The FDIC redesigned its home page tonight, separating bank failures from news to make it easier for account holders at failed banks to find bank failure information. With the new design, bank failures will never get buried at the bottom of the page no matter how many bank failures occur on the same day.