CIT Group spent last weekend searching for a lifeline, and ended up Sunday night with $3 billion in rescue financing. It’s not clear how far that will take the company, but it doesn’t look like enough to keep CIT going through the fall, so it is still looking for additional funding. Meanwhile, even if CIT finds a way to avoid bankruptcy, the sobering reality of what CIT’s limited financial means will imply for the rest of the economy is starting to sink in. As just one example, it could be a depressing Christmas season. With limited financing for manufacturers and retailers, we could see sparse merchandise on store shelves, most of it selling at full price. Some are saying Christmas season sales could be 10 to 15 percent below last year’s levels and could prompt another round of retail closings.
The problems at retail end up affecting the banks, of course, and this week some experts said that the financial fallout from commercial real estate, which includes retail, office, and industrial buildings, will ultimately be larger than the ongoing problems with residential real estate.
Problems in the housing market keep getting worse, as the number of vacant homes has hit a new record, mainly as the result of bank foreclosures. The huge inventory of vacant homes assures that real estate values will continue to fall. Many vacant homes are being kept off the market because of low real estate values, and there seem to be enough of these to prevent prices from recovering after they stop declining. Banks have about a 54 percent ownership share in all U.S. houses combined, so their balance sheets are very much affected by changes in real estate values.
Interest rates on savings accounts are so low that savers have little incentive to keep their money in a bank. As people take their money elsewhere, often just keeping it at home, it is draining the deposit base of the banking system. To address this, an FDIC advisory committee is looking into the possibility of lottery-based interest payments. In one version of this scheme, every dollar kept in a savings account acts like a lottery ticket. It’s an interesting idea, but one that would have to be done carefully. It would also appear to be illegal under current laws. Still, with the right approach and enabling legislation, I think the chance of winning a prize could persuade many people to put money in the bank. Of course, a better solution would be if the Fed would raise its interest rates to a more sustainable level around 4 percent. Then, banks could reward every depositor, and not just the lucky winners.
Iceland has announced a plan to put its economy back together. The government will put in $2 billion to restart the banks, and will turn over ownership in the banks to creditors. Parliament is still working on a way to pay back the rest of the overseas depositors. It’s an uncomfortable issue because of the amount of money the government will have to spend, but is seen as a necessary step in paving the way for the country’s application for European Union membership.
The problems in banking are now being felt even in Chile, which by some measures is the most stable economy in the Americas. Banks in Chile tightened lending requirements in the first half of the year and have cut back on the amount of new loans.
If you want to see the kind of austerity that can result from a faltering financial system, the country to look at is Lithuania, which like neighboring Latvia has seen its economy fall off about 18 percent since last year. The compromises in the Lithuanian government’s budget make California’s (where a budget agreement was finally passed this afternoon) look like a walk in the park. Across the Baltic Sea, banks in Sweden are busy denying and minimizing whatever exposure they have in Lithuania, Latvia, and Estonia. It sounds eerily reminiscent of American banks’ comments about subprime mortgages and mortgage-backed securities two years ago.
Speaking of California, Guaranty Bank, which operates in that state and its home state of Texas, said yesterday in a regulatory filing that it does not have enough money to keep going for long. The bank said it has no capital cushion left. Its stock has fallen by 99 percent since it was spun off from its former parent company two years ago. Even after recent losses, Guaranty Bank has about $16 billion in assets, which puts it in the same class as last year’s failed IndyMac Bank. It is safe to assume that the Office of Thrift Supervision (OTS) and FDIC have been looking for a buyer for Guaranty Bank, but the chances of finding a buyer for such a large bank in California seem remote, so they may mainly be looking for a buyer for the Texas locations.
Georgia had already seen 10 banks fail this year, and you can add 6 more to that list tonight, as Georgia closed the six subsidiary banks of Security Bank Corporation. The Security Bank subsidiaries of Bibb, Jones, and Houston counties, all three in the Macon area, had a combined $1.7 billion in deposits. The other three Security Bank subsidiaries were in the Atlanta metro area and had a combined $700 million in deposits.
The banks’ offices and deposits are being taken over by State Bank and Trust Company, a much smaller bank with its two offices in Pinehurst and Unadilla, along Interstate 75 south of Macon. State Bank and Trust Company is also buying an amount of assets to match the amount of deposits. That will leave the FDIC with about $400 million in other assets to sell. The FDIC estimates costs of $807 million on this group of bank failures.
It is a Disney-quality story for State Bank and Trust Company. Until today, it was the well-managed bank of a central Georgia village. When it opens tomorrow, it will be the fourth largest bank in the state. State Bank and Trust Company did not have the money to buy the six Security Bank subsidiaries, so as part of the transaction, it collected $300 million in capital from a group of 26 investors. The investment group was organized by Joe Evans, a Georgia banker who in 2006 started putting together a fund to buy a distressed bank in the state. According to reports, Evans will become the president of the bank.
Security Bank was historically based in the Macon area, but gambled that it could expand into the Atlanta metro. Its timing was unfortunate, though, and loan losses on residential real estate loans in the Atlanta metro area, some made by its Fairfield Financial subsidiary, appeared to be the main factor in its failure. Loan losses took away two thirds of its capital last year, and the losses continued into this year.
Earlier, at closing time tonight, New York State closed Waterford Village Bank in the Buffalo area. The bank was as small as its name suggested, with one office and $58 million in deposits. The office, deposits, and assets are being taken over by Evans Bank, which has ten offices all along the Lake Erie coast of New York.
Waterford Village Bank spent most of its short existence in litigation with its original president, who the bank accuses of ignoring federal banking regulations. It had just laid off ten workers and was in such financial distress that it had not issued a financial statement for the last four quarters. A series of deals to rescue the bank had fallen through, and stockholders this month objected to a proposed acquisition by a foreign investor, saying any such action should be delayed until proper financial disclosures were made. The would-be buyer had offered to buy the bank for $9 million. About $200,000 of that would go to stockholders who had invested about $10 million to start the bank in 2007. It was not clear, however, that the buyer would be adding enough capital to meet regulatory approval for the purchase.
The FDIC expects to spend about $6 million to clean up this mess. Its estimated costs are smaller than usual, largely because this bank was too new to have loans that originated in the very problematic period of 2005–2006.
So far this year, the FDIC has recorded 64 bank failures, with a fourth of them in Georgia. The Georgia economy went into decline more than a year before the national recession hit, so the experience there may be an indication of what other states might expect a year or two from now.