To what extent did banks create the mortgage crisis by pushing borrowers toward high-risk “subprime” mortgages, even borrowers who were financially qualified for standard mortgages? The Illinois attorney general is accusing Wells Fargo of reverse redlining, targeting minority neighborhoods for mortgages, then fudging the paperwork to prevent borrowers in those neighborhoods from qualifying for the less expensive standard mortgage terms. If true, the borrowers in those neighborhoods who were victims of the mortgage fraud may be entitled to have their mortgages restated based on the terms they should have qualified for. The attorney general asked a court to order that remedy, among others, in a civil suit filed today against Wells Fargo. If the suit is successful, you can be sure that other states will copy Illinois’ approach.
A New York Times review of AIG found alarming signs of financial tension in its insurance subsidiaries. The hundreds of companies, which are supposed to be separate operations, have been “investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good.” Individually, these transactions are not anything improper, but when they are carried on continuously, as the Times says they have been in recent years, it suggests a conglomerate in financial trouble, with barely enough money to squeak by from week to week, the way Enron was in the two years before its collapse. It’s like borrowing money from your mom every week — it shows that you don’t have as much as it looks like from the outside. AIG insists its insurance subsidiaries are sound, but its suggestion that the myriad transactions between companies amount to a form of reinsurance, in which insurance companies share risk with each other, does not fit with the volume of transactions the Times says it is seeing. Even if its insurance companies were sound, AIG would still face financial ruin from its credit default swaps, which also were issued without the financial strength to back them up. The AIG insurance companies have been losing business, though, especially this year, and if they are not as sound as they appear, then there is nothing to hold up the roof at AIG, financially speaking.
There were dueling headlines about Bank of America this week: is it closing hundreds of branches, or opening a new division? It’s not such a contradiction when you realize that Bank of America plans to close branches across the United States, while simultaneously opening new branches as part of a new subsidiary in China. Perhaps realizing that this combination may not be politically popular, the bank has been downplaying both announcements in recent days — the China move is far from certain, and the bank now does not know how many U.S. locations it may be closing in the next few years.
The FDIC thinks it can sell off failed bank assets faster. The plan is to bundle all the worst assets of a bank and sell shares to investors through a Treasury program. This program is the Public-Private Investment Program for Legacy Assets, or PPIP, that we’ve heard so much about, but that until now hasn’t shown any signs of doing anything of importance. The investment vehicle is a corporation that is sometimes called a “bad bank,” but it won’t have a banking license. If enough hedge funds are interested in investing in speculative bank assets, this could allow the FDIC to improve its liquidity. The disadvantage of this is that the FDIC will take larger losses on the assets.
My feeling is that this will involve only a small fraction of the failed bank assets that the FDIC is left with, perhaps 5 to 10 percent, and that it will cost less to operate if the FDIC does it on only selected bank failures where there is specific investor interest. Still, the liquidity that the FDIC could gain from this is not inconsequential. Congress will surely have to act to expand the FDIC’s line of credit from the Treasury at some point next year, but it is better for the Treasury if that day can be postponed. When the FDIC borrows from the Treasury, the Treasury in turn has to borrow money on global financial markets through its bond auctions, and those interest rates are going up because of the large sums that the Treasury is borrowing. The interest payments are one of the largest expenses in the federal budget.
The pace of bank failures continued tonight. With five Fridays in July, all busy, the number of failures this month is nearly as many as the total for all of last year.
The largest bank to fail tonight was Mutual Bank of Harvey, Illinois, which had 12 branches in and around Chicago. It had $1.6 billion in deposits and a similar amount in assets. A Texas bank, United Central Bank, is taking over the deposits, offices, and assets.
A Fed deadline had just passed for Mutual Bank’s holding company to raise capital. As of March, more than a third of the bank’s loans were at least 30 days behind in payments.
The bank rarely sought publicity, but had a colorful recent history, more colorful than you would really want in a bank. It was owned by a direct marketing executive. Its former head was a major political contributor to the state’s former governor, Rod Blagojevich, and the governor’s wife was his real estate agent. Newspapers had reported on strange-looking loans made by the bank to the governor’s supporters and other politicians. Blagojevich was forced out of office after a federal prosecutor accused him of seeking bribes in connection with the appointment of a U.S. senator to fill the seat vacated when then-senator Barack Obama was elected president. One of the bank’s larger borrowers was Tony Rezko, who was a fundraiser for Blagojevich. The bank’s actions were scrutinized when Rezko was indicted (and ultimately convicted) on federal corruption charges.
Banks have to have assets that are larger than the deposits they hold. The fact that Mutual Bank’s assets were about the same size as its deposits tells you how rapidly its assets, especially loans, had been declining in value. The cost to the FDIC for the closing of Mutual Bank is estimated at $696 million.
United Central Bank bills itself as a “local bank,” but has 9 branches in Texas and a similar number spread across the southern part of the United States from Maryland to California. With the addition of 12 offices in Illinois, it can start to take on the look of a nationwide bank.
At closing time in the Cincinnati area, the OTS closed Peoples Community Bank, which had 15 locations in Ohio and 4 in Indiana. The bank had deposits of $600 million and assets of $700 million, though it was much larger than that three years ago. The bank had been trying to sell itself off all last year, but two deals failed to close. After the failure, regional bank First Financial is taking over the deposits, offices, and assets, paying a 1.5 percent premium for the deposits.
First Financial already had 47 locations in Ohio, 29 in Indiana, and 3 in Kentucky. Only a few of the Peoples Community Bank offices were right near First Financial locations, so First Financial will strengthen its branch network with the new locations. First Financial has been trying to make deals to expand regionally. It had already agreed, in May, to acquire about half of Peoples Community Bank, though that deal never closed. In a similar deal, it is planning to acquire three Indiana branches of Irwin Union Bank and Trust.
Peoples Community Bank had a portfolio heavy in real estate development and construction loans and reported losses last year as borrowers fell behind on payments. By the end of the year, it was reporting a negative net worth, a financial condition that a bank almost never recovers from. It continued to lose money and customers this year.
Integra Bancorp, which had thought to acquire Peoples Community Bank last fall, took a loss in the second quarter, largely because of a loan it made to Peoples Community Bank at that time. It wrote off the $17 million loan on its June 30 balance sheet, announcing its results just hours before the Peoples Community Bank closing was announced.
The Peoples Community Bank closing is expected to cost the FDIC $130 million. Three state bank closings in New Jersey, Florida, and Oklahoma may cost the FDIC a combined $86 million.
New Jersey closed First BankAmericano, which had $157 million in deposits at six offices across the New Jersey suburbs of New York City. It had been founded in 1997 with the intention of being multi-cultural in its approach and concentrating mainly on small business customers. It had already agreed to a takeover by Crown Bank, a bank based on the New Jersey shore in Brick, New Jersey, but with most of its operations in the same area where First BankAmericano had operated. Regulators had not approved the deal while First BankAmericano was still operating, possibly because of concerns over the size of the losses at the bank. Now, Crown Bank has taken over the locations, deposits and assets of the bank after its failure.
Florida closed Integrity Bank of Jupiter, Florida, on Florida’s east coast just north of West Palm Beach. It had one office and $102 million in deposits. Its office and deposits are being taken over by Stonegate Bank, a small bank with four offices in South Florida, including one in Jupiter. Stonegate Bank is also buying about half of the assets of Integrity Bank.
Integrity Bank started in 2004, just in time to get hit by the real estate development bubble. It reported a $4 million loss in the first quarter of this year, leaving it with a slim capital margin that worried regulators. Integrity Bank was not related to the Integrity Bank that failed last year in Georgia.
Oklahoma closed First State Bank of Altus, which had just under $100 million in deposits. It apparently had one standalone branch and one located in a store. The bank had been operating under a cease-and-desist order since February. While First State Bank of Altus had its share of difficulties with real estate developers, its biggest borrower was Quartz Mountain Aerospace, a local aircraft manufacturer that started up in 2007 but ran out of money by the time the FAA approved the design for its first aircraft late in 2008, and then went into bankruptcy. The offices and deposits have been turned over to Herring Bank of Amarillo, Texas, which is also buying about half of the assets. Herring Bank is a community bank with offices mostly in the Texas panhandle, but extending south to Dallas-Fort Worth and north to Colorado Springs.
Elsewhere in Texas, we continue to watch Guaranty Bank, along with Fortune, which this afternoon described its plight under the headline, “Big Texas bank on verge of failure.” It was not put into receivership tonight, and that is probably a sign that the FDIC continues to try to find a buyer, or perhaps multiple buyers, for its California branches.