Friday, February 13, 2009

This Week in Bank Failures

The deepening financial troubles of the United States seem complex and bewildering from the American perspective. You can see this is the curious omission of the “bad bank” discussion when Treasury Secretary Tim Geithner pre-announced his bailout plan this week. Everyone seems to agree that it will be necessary to separate some of the largest banks from some of their most untenable phantom assets for the banks to stay solvent. The “bad bank” concept is supposed to provide a mechanism for this.

Yet Geithner gives little assurance that this can happen on a significant scale. The reason is that people can think of only two ways such a thing could happen. One involves a massive giveaway of public money, trillions of dollars of it, to the banks. The banks do not have enough political capital to get such a large handout, and the Treasury does not seem to have that much money to spend. The other would have the government taking control of the banks and firing the executives and managers whose mistakes caused the banks’ problems. Washington does not have the political will to do this either. Reading between the lines in reports of administration discussions, it appears that Geithner talked some of the president’s economic advisors out of taking a tougher stance with the banks, but as part of that process, Geithner conceded any additional funding for the bank bailout.

From a European perspective, though, the situation is very simple. The solution is a combination of nationalizing and closing banks. Consider this interview question and answer published today in Deutsche Welle:

[Q] Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?

[Joseph Stiglitz] The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster.

Nationalization is the only answer. These banks are effectively bankrupt.

The term “zombie bank” has gained a foothold in the discussion of this issue, referring to the many large U.S. banks that appear not to have the financial strength to ever work their way out of the financial holes they are in now. Some economists say this is probably almost all of the 50 largest banks in the country, though they are not able to tell specifically which ones.

On the other side of the discussion, there is a call to relax the financial requirements for banks, leaving it to account holders to force the closure of the most illiquid banks by trying to take their money out. I don’t think the FDIC will permit this, however, for the simple reason that once people get in the habit of making runs on banks, it is hard to get them to stop, and perfectly sound banks can be taken down in the process.

Tonight four more banks went beyond the “zombie” realm into receivership. The largest was in Florida, where Riverside Bank of the Gulf Coast was closed. This bank was based in Cape Coral, and had nine offices in that metropolitan area, including Fort Myers. It has no connection to the banks elsewhere in Florida that share the Riverside name. It had $424 million in deposits. TIB Bank, one of the largest banks in southwest Florida, is paying a 1.3 percent premium for the deposits and is also buying a fifth of the assets. This closing is expected to cost the FDIC $200 million.

According to the FDIC, Riverside Bank of the Gulf Coast closed because of sloppy real estate lending.

The three other bank failures tonight may cost the FDIC about $140 million, according to its estimates.

In central Nebraska, Sherman County Bank and Howard County Bank, the same bank operating under two names, was closed. Its deposits and four offices are being assumed by Heritage Bank, which is paying a six percent premium for the deposits and is also buying $22 million in liquid assets. Sherman County Bank is the first bank to fail in Nebraska in 19 years.

Sherman County Bank had $130 million in assets, compared to $85 million in deposits.

Heritage Bank is a larger bank based in Wood River. It has multiple offices in Grand Island, the nearest city, which is the county seat of the next county south of Howard County.

A bank in Pittsfield, Illinois, Corn Belt Bank and Trust Company, closed. This was a small bank that operated mainly from its headquarters, but it had $234 million in deposits. The Carlinville National Bank, a small bank located 75 miles away, is acquiring the deposits and some of the liquid assets of the bank.

Pinnacle Bank had its office in Beaverton, Oregon, a suburb of Portland. It closed tonight and all its deposits and nearly all its assets are being transferred to Washington Trust Bank. Pinnacle Bank recently had $73 million in assets and $64 million in deposits.

Washington Trust Bank is based in Spokane, Washington, and has about half of its offices in that area. It already had one Oregon office, in Portland, and this acquisition gives it a second office in the Portland area. It is acquiring the assets of Pinnacle Bank at a 12 percent discount. The FDIC is providing partial loss protection to Washington Trust Bank as part of the purchase agreement.

Monday is a banking holiday, so the offices that have been transferred to new banks will reopen on Tuesday.