Friday, January 8, 2010

This Week in Bank Failures

Greed. Executive bonuses. Thirty percent interest on credit cards and zero percent on savings accounts. The fastest pace of home foreclosures in history. Fine print. Hidden fees. Accounts canceled without explanation. There were a lot of reasons for customers to dislike banks in 2008 and 2009, and they may like them even less when 2010 is over. That’s because the practices that have made banks so unpopular are being given fresh emphasis as the new year gets going. Some of the Wall Street banks, even as they struggle to show a profit, are announcing a return to bubble-era bonuses. The large nationwide banks especially are planning new service charges and new hidden fees, and are accelerating their efforts to cancel credit card accounts that might be risky. Bank executives, in planning these moves, assume that customers ultimately can’t go anywhere else, and they might be right. But if they are wrong, some of the major banks could lose their retail customers and deposit bases this year, and could be forced into some form of government receivership.

Treasury Secretary Tim Geithner has been called to appear before a House committee after e-mail messages from his previous job at the Fed suggest that he instructed AIG not to disclose information about its credit default swap (CDS) payments, which at the time were being funded with public money. The White House and Fed issued statements supporting Geithner today, but the statements raised more questions than answers and seemed to offer very limited support to Geithner, suggesting that he may be on his own on this matter.

Bank of America starts the year with a new CEO, insider Brian Moynihan. The bank has the unenviable task of restoring what may be the most tarnished brand in banking while fighting off legal difficulties, retaining customers while figuring out new ways to get money from them, and keeping the company from falling apart financially without the degree of government help that it leaned on all last year. With multiple disasters happening all at once, the bank really had no choice but to hire one of its current executives. There was no time to train someone new on how things work inside that crazy-quilt of a bank. Moynihan’s experience in bank operations may help him rationalize some of the more inexplicable acquisitions the bank has made in recent years, so that they go together in a businesslike way.

The FDIC today completed an auction for $1 billion in failed bank assets. A real estate investment company bought a 40 percent share in the portfolio of 1,200 commercial real estate loans from 22 failed banks, mostly in Georgia, California, Nevada, and Florida. Most of the loans are delinquent and all are distressed, according to the FDIC. The FDIC will retain a 60 percent share in the portfolio.

The global banking system entered 2010 looking no more healthy than it had at the beginning of 2009. I mentioned some of the issues yesterday. Iceland’s referendum on adding a sovereign guarantee to its deposit guarantees on the failed IceSave accounts, belonging to depositors mostly in the United Kingdom and the Netherlands, will probably be held in the second half of February. There is trouble also in Argentina, where the president’s plan to raid the central bank for money to pay back foreign debts was halted by the courts today. Courts issued an injunction against the planned partial liquidation of the central bank and ordered a review of the president’s attempt to fire the head of the central bank.

There were several actions on credit unions at the end of the year.

  • On New Year’s Eve, the NCUA liquidated HeritageWest Federal Credit Union, which had 40,000 members and was based in Tooele, Utah. Member accounts were moved to Chartway Federal Credit Union, which otherwise operates in East Coast states, Arkansas, and Texas. There were a total of 15 credit union liquidations in 2009.
  • Also on New Year’s Eve, First Service Credit Union, which had 6,000 members in eastern Wisconsin, announced that it was merging into Marine Credit Union, a larger credit union also based in eastern Wisconsin. First Service Credit Union had been losing money in 2009.
  • The previous day, the NCUA, in its capacity as conservator of WesCorp, asked a federal court to make it the plaintiff in a lawsuit against former officers of the corporate credit union. The suit claims the officers took inappropriate risks in investing the credit union’s money in derivatives.

Tonight the NCUA recorded the first credit union failure of 2010. It liquidated Kern Central Credit Union, in Kern County, California. The failed credit union had 8,000 members and $35 million in assets. Its member accounts have been transferred to Self-Help Federal Credit Union, which is twice as large and based in North Carolina.

Banks are now preparing their December 31 balance sheets. For banks that don’t have a high proportion of recent commercial real estate loans or a large exposure to securities markets, this year-end balance sheet should give a pretty good indication of whether the bank will survive the recent credit bubble or not. Banks that have a significant dependence on securities and commercial real estate may have to wait another 5 to 10 quarters to find out whether they will get through intact.

The first bank failure of the new year was a billion-dollar bank, Horizon Bank, based in Bellingham, Washington. It had 18 offices mostly on the outskirts of the Seattle-Tacoma metropolitan area, and $1.1 billion in deposits. It is not related to the many other banks elsewhere in the country that use the same name.

State banking regulators pointed to losses in the bank’s real estate development and construction loans. Those categories accounted for about 90 percent of the bank’s loan portfolio. Many other banks that focused on the high-growth areas at the outer edges of metropolitan areas have had similar trouble.

Horizon Bank had reported losses of more than $100 million last year. Its stock value had fallen from a peak of $25 at the beginning of 2007 to around 20¢ at the end of 2009, and two weeks ago, it received a delisting notice from Nasdaq. The bank had been operating under a cease and desist order since March, and received a prompt corrective action order in the middle of December.

Washington Federal Savings and Loan Association, which is based in Seattle, but has more than 150 locations extending from Washington to Texas, is assuming the deposits and purchasing the assets of the failed bank.