The FDIC tried to find a buyer for Silverton Bank, the correspondent bank it took over May 1, but to no one’s surprise, it decided today that there were no buyers out there. Silverton is a correspondent bank, so it could not be shut down abruptly without causing unnecessary distress to the hundreds of banks who were its customers. At the same time, Silverton had no reputation with the general public, so there was little reason for any investor to buy it. The FDIC now says that it hopes to wind down Silverton’s business over the next two months.
I am not sure it will go quite that quickly. As an intermediary in loan participations, Silverton has a management role in a whole portfolio of shared loans, which will now have to be managed directly by the originating banks. Getting Silverton out from the middle of that pile of loans is an administrative challenge with little recent precedent. Some banks may need to hire an extra staffer to keep up with their loan-sharing agreements. It seems safe to say no one knows exactly how the transition will go. But the other pieces of Silverton’s business can be shut down more easily.
One change that may reach consumers is the discontinuation of Silverton’s credit card servicing business. Some consumers will be mailing credit card payments to a different address, some may be receiving new cards issued by a different bank, and some may lose their credit card accounts if the issuing banks are unable to quickly work out a transition to a different credit card service.
There was at least one bid for Silverton, but the FDIC turned it down. The FDIC is obliged to minimize its costs when it resolves a failed bank, and it must have concluded that selling the bank under the terms proposed by the bidder would have cost it more than shutting down the bank and selling off its assets.
The peak of the credit bubble three years ago offered unprecedented opportunities for fraud, and prosecutors and regulators are starting to charge people they believe were involved. This week alone:
- Real estate developer Thomas Kontogiannis and eight others were indicted in a $92 million scheme, which prosecutors said centered on fraudulent appraisals for buildings that had not yet been built.
- The Securities and Exchange Commission (SEC) charged three Countrywide Financial executives with making misleading statements about the financial state of that company. One was also charged with insider trading.
- Two investment managers and a lawyer were charged in a $1.3 billion tax shelter built on phony trades by a shell company on the Isle of Man.
- The U.S. Supreme Court is thinking of reviewing a case to decide whether U.S. courts might have jurisdiction over accounting fraud at a Florida-based mortgage company, even though the company was owned by Australian stockholders.
Many of the smaller cases around the country involve fraudulent real estate transactions, often involving agents buying a property and obtaining mortgage loans for a straw buyer, a fictional or uninvolved person named as the buyer. Other cases involve a person obtaining multiple mortgage loans for the same real estate. The latter scheme has become such a problem in India that the government there is setting up a centralized database to detect the fraudulent applications.
Bank of Lincolnwood was in court today trying to persuade a judge to order the state of Illinois not to shut it down. But the bank offered scant legal justification for its request, and the court ruled against it. At closing time, the Division of Banking lost little time in seizing the bank and turning it over to the FDIC, which then turned the $200 million in deposits, the two offices, and most of the assets over to Republic Bank of Chicago, also based in the Chicago area. The FDIC is estimating a cost of $83 million for this bank closing.
Bank of Lincolnwood was known to be in financial trouble at least since its first quarter earnings report, which showed a $13 million loss for the quarter. Regulators at that point ordered the bank to raise capital, not to involve its chairman in any lending or money management decisions, and not to accept any deposits above the FDIC insurance limits. The bank lost money on real estate development loans, and several other banks in the Chicago suburbs are said to be facing similar difficulties.