Friday, April 17, 2009

This Week in Bank Failures

It has been a trying week in the U.S. banking system. The Treasury, after saying it would not be releasing results of its stress tests on the 19 largest banks, now says it will release some information, but it has not decided what yet. This increases pressure on these large banks to pay back their TARP money, which among bankers carries a greater stigma than the other bailout money they are getting. But there are contradictions in the banks’ statements, leading me to doubt whether they will really be doing anything.

JPMorgan Chase, for example, claims it never needed and did not use the $25 billion it got from the Treasury’s TARP program — yet it has borrowed $40 billion since using temporary guarantees provided by the FDIC. So the story about repaying TARP could just be a bit of misdirection. A bank can tell investors it is raising money to repay TARP, then go on to use the money to cover loan losses instead.

No one is looking for strength in banks’ first-quarter earnings reports. Anything resembling a profit is considered a hopeful sign, and many banks will be reporting a profit, or at least a smaller loss, thanks to a change in accounting rules that allows some assets to be valued above what they could be sold for. Wells Fargo pre-announced its largest quarterly profit ever, yet the profit came entirely from a reduction in write-downs following the accounting rule changes. At other banks, according to reports, payments from the U.S. Treasury by way of AIG may be providing most of the profit.

Banking regulators had problems of their own this week. On Wednesday, posts on political blogs magnified earlier comments from Washington about an imagined banking panic and led to something of a lunch-hour run on the banks. This appeared to be intentional and coordinated on the bloggers’ part, though I haven’t seen anything to confirm this. Fortunately, cooler heads prevailed and nothing carried over into the next day, but it is a sign of how tense the situation still is half a year after the crisis on Wall Street. The Fed, in an effort to promote a kind of transparency that would keep rumors like this from gaining traction, said it might start holding regular press conferences.

In Europe, earlier efforts to stabilize the banking system have given way to political posturing and finger-pointing. One of the more colorful stories comes from an Audit Commission report in the United Kingdom. The report inexplicably asserts that local governments should have known of the Iceland banking collapse 7 months in advance. They did not, of course, and one local council had the misfortune of placing a deposit with an Iceland bank 20 minutes before it went under. About 3 percent of U.K. local government funds are tied up as a result of Iceland’s collapse, totaling more than $1 billion.

Two small banks failed tonight: American Sterling Bank of Sugar Creek, Missouri, near Kansas City, and a thousand miles to the west, in the northeast corner of Nevada, Great Basin Bank. Each bank had five offices and roughly $200 million in deposits. American Sterling Bank’s offices included one each in California and Arizona. In each case, the deposits were transferred and more than 90 percent of assets were sold to an acquiring bank, with the FDIC providing partial loss protection on most of the assets. The FDIC estimates the same cost for each closure, $42 million.

Metcalf Bank, which is also based in the Kansas City metro area, is taking over the deposits and offices of American Sterling Bank. Metcalf Bank has offices across the Kansas City area, including one three blocks away from the headquarters of American Sterling Bank in Sugar Creek. An insurance company had been trying since the beginning of the year to negotiate a purchase of American Sterling Bank, but ultimately did not get the U.S. Treasury assistance it had been seeking.

The deposits and offices of Great Basin Bank of Nevada are being transferred to Nevada State Bank, which has offices throughout Nevada. The failure was blamed on loan losses, but with bank branches about every two blocks, Elko may simply have had too much banking for a city of 17,000.