Friday, May 8, 2009

This Week in Bank Failures

Last weekend, according to published reports, the FDIC and OTS gave BankUnited a two-week extension in the hope of attracting more bids for the bank. There were reportedly two bids, but banking regulators and the Treasury were not expected to chip in enough money to make either offer work. So far there has been no word from regulators, bidders, or the bank itself. BankUnited held what must have been an eerie stockholder’s meeting on Monday morning. Stockholders went to the hastily scheduled meeting at a hotel near the bank’s Coral Gables, Florida, headquarters, hoping to vote on a takeover proposal. Instead, they just elected a board of directors before the meeting was recessed, to reconvene on May 22. Only two new directors were elected, and they were executives of the bank.

Some observers cite the two-week delay as evidence that the FDIC is rapidly running out of money. I am not particularly worried about this, however, as the House of Representatives has signaled its willingness to consider emergency legislation to fund the FDIC if needed. A shutdown of BankUnited could require the FDIC to send out checks for $8 billion in deposits, although most of that money would be recovered later with the sale of the bank’s assets. If a suitable buyer can be found for the bank, though, a structured takeover could save the FDIC as much as $1 billion.

The Supervisory Capital Assessment Program, or stress test, was intended to assess the capital position of the 19 largest banks in the United States, and its results were officially released yesterday. When you get past the back-slapping and high-fiving going on in the banking industry, what the report shows is that if the economy goes downhill, half the banking system is going down with it. It is not really much reassurance to read that most of the major banks will make it through this year provided that the economy improves significantly between now and the fall. But if real estate values fall, unemployment goes higher, and household income continues its decline, at least 12 of the 19 banks will be looking for help. As one banker noted, this was a test that IndyMac and Fannie Mae would have passed. Hours after the stress test report, Fannie Mae reported that it is on its last legs and could collapse within weeks because of loan losses. Also, AIG reported a $4 billion quarterly loss that was almost identical to the company’s remaining market value (though nevertheless its smallest loss in over a year).

Anticipating more bank failures in Georgia and Florida and elsewhere along the east coast, the FDIC announced a satellite office in Jacksonville, Florida. The FDIC says it will set up shop in its new Jacksonville office in September. It might occupy the office for five years or so.

The FDIC had only one bank failure to manage tonight, and on the west coast. Westsound Bank failed, and its nine offices around Bremerton, Washington, and in the area generally west of the Puget Sound, will become branches of Kitsap Bank, a larger bank in the area. Kitsap Bank is taking over the failed bank’s $300 million in deposits and is purchasing 15% of its assets. The FDIC estimates a cost over $100 million on the other assets.

In closing Westsound Bank, the Washington Department of Financial Institutions cited its “very poor lending practices during the past several years.” It praised the bank’s current management team but said it was not enough to overcome the bank’s past mistakes.

Westsound Bank had been operating under a cease-and-desist order since last March, and reported 39 percent of its loan portfolio as nonperforming at the end of last year. Many of the problem loans were for high-end residential construction under a program led by Countrywide Financial, a program that was withdrawn after regulators took a close look at it. Countrywide Financial had losses of its own that led it to be acquired by Bank of America a year ago.