Friday, January 22, 2010

This Week in Bank Failures

If there has been a surprise in this month’s earnings reports from the banking conglomerates, it is how much their income depends on playing in the stock market. Wall Street would not have made a profit at all last year if it weren’t for an unprecedented stock market run between March and December, but that couldn’t possibly repeat this year.

It is probably not a coincidence, then, that President Obama introduced a proposal to restrict banks’ securities trading yesterday. Coming at a high point in the stock market, these restrictions could save three or four giant banks from collapse this year if the stock market falls to levels below its lows of last year, as some market watchers have predicted.

The proposed rules also address some of the more grievous conflicts of interest that banks face when they compete against their customers in the stock market.

More importantly, Obama’s proposal shows that he is starting to listen to his economics team, who last year were largely shut out of White House policy discussions. The reason this is so important right now is that some of the economists on the White House team have ideas for stabilizing the financial system, so that the meltdown of 2010 does not have to be as bad as the one in 2008.

That, of course, does not mean that bank failures will slow down. As I mentioned yesterday, huge numbers of mortgages are likely to remain underwater for the next five to ten years, and that means that banks will continue to take losses on foreclosures and short sales. With the continuing losses, banks will be slow to recover their financial strength, and many will not be prepared for the next crisis that hits, whatever form that takes.

A Senate vote on confirming Fed chair Ben Bernanke for a second term has been postponed amid word that there probably are not 50 senators prepared to vote in favor, never mind the 60 needed to bring the matter to a vote. Politically, it is hard to explain Obama’s decision in nominating Bernanke — he is obviously in over his head at the Fed, and to the voting public, the nomination seems a lot like the usual corruption in Washington. Where else can an office holder whose incompetence turned a serious problem into a catastrophe be rewarded by being appointed for a second term? If Obama wanted to appoint a weak Fed chair as part of a plan to gut the Fed, he could easily have found someone more competent in economic matters and more acceptable to the voting public. Bernanke had only 21 percent approval in one December poll of voters, compared to 41 percent disapproval. Apparently, reports at the time that said he was more popular in the Senate were exaggerated. He is popular on Wall Street, but it now appears that may not be enough to get his reappointment confirmed.

There is also speculation that Treasury Secretary Tim Geithner may be on the way out. The policy changes at the White House in the last two weeks are a direct reversal of Geithner’s upside-down approach of saving Wall Street institutions at any cost while letting the banks and lenders that actually keep the economy working go down. Geithner’s approach created a stock market bubble in 2009 but allowed the economy to continue to decline, and he seemed to be caught off guard by the White House’s change of direction this month. As soon as a new Fed chief is in place, people will be watching to see if Geithner’s resignation follows.

What happens when banks that operate in multiple countries fail? The FDIC faced this question recently when a California bank with an office in China failed. That particular failed bank was resolved without creating an international incident, but future bank failures might not be so clear-cut. Some clarity on this might come from a memorandum of understanding released today by the FDIC and the Bank of England. The memorandum of understanding does not have the legal implications of a treaty, but it outlines in general terms the course of action that is expected if a bank that operates in both the United States and the United Kingdom were to fail, and as one official document in a subject area where there is very little written policy, it may serve as a model for banks that fail in any two countries.

The FDIC has signed a lease for a new satellite office, this one in Schaumburg, Illinois, near Chicago. The office will open around March and may, at its peak, house about 500 temporary employees and contractors.

The larger bank failures tonight were far away from Chicago, in the corners of the country. In the northwest, the banks that failed tonight were Columbia River Bank, with $1 billion in deposits and 21 locations in Oregon and Washington, and Evergreen Bank, with $439 million in deposits and 7 locations in western Washington.

Tacoma-based Columbia Bank (also known as Columbia State Bank) is purchasing the deposits and assets of Columbia River Bank. Columbia Bank has a more coastal territory, so the acquisition will give it a greater presence inland.

Columbia River Bank started to show losses in 2008. It closed its mortgage operations, sold off its credit card business, replaced its CEO, and instituted drastic cost-cutting measures that year, but failed to return to profitability. IN 2009, the FDIC ordered it to raise capital and reduce its commercial real estate exposure. It appears that losses from commercial real estate lending caused most of the bank’s financial difficulties.

Evergreen Bank had “severe loan losses” according to a statement by state regulators when they closed the bank today. Umpqua Bank, already a major banking presence in the region, is acquiring the deposits and assets.

Evergreen Bank is not associated with the larger Evergreen Federal Bank in Oregon.

In New Mexico, Charter Bank was closed, but some customers might not notice. The deposits and assets are being transferred to Beal Financial Corporation, through a new banking subsidiary created tonight for this purpose. The new bank is keeping the Charter Bank name.

The failed bank had $850 million in deposits and $1.2 billion in assets. It was based in Santa Fe, though most of its 8 offices were around Albuquerque. The new bank will have its headquarters in Albuquerque.

Charter Bank had reported glowing financial results through 2007, and was expanding to become New Mexico’s largest mortgage lender. Three of its branches had opened since October 2007. At its peak, it had more than $1.4 billion in assets. It mainly emphasized fixed-rate mortgages, which bankers usually consider to have lower risk than adjustable-rate mortgages. However, its determination to write as many mortgages as possible in New Mexico may have left it with too much real estate exposure to manage.

Beal Financial Corporation is the holding company of Beal Bank, a Texas-based lender that was previously about twice the size of Charter Bank. Beal Financial Corporation was founded in 1988 by real estate investor Andy Beal, who is still the majority owner. Five weeks ago, Beal Bank acquired the assets of New South Federal Savings Bank, a mortgage lender that failed in Alabama.

In Florida, also, a new bank was created to buy the assets of a failed bank. State regulators closed Premier American Bank in Miami. The deposits and assets are being transferred to Bond Street Holdings, through its new bank created tonight, which will keep the Premier American Bank name. Bond Street Holdings is apparently owned by a Wall Street investment fund set up last year to invest in failed banks.

The failed bank had four offices in the Miami area, plus a lending office in Coral Gables, and about $326 million in deposits. It had been operating since 2001. It had at least $20 million tied up in foreclosures on failed South Florida real estate development projects.

A small bank in Missouri failed tonight. Bank of Leeton had $20 million in deposits and a similar amount in assets, and a single location. Kansas-based Sunflower Bank is purchasing the deposits of Bank of Leeton, paying a slight premium to the FDIC. The FDIC is retaining most of the assets from the failed bank.

The FDIC estimates costs of $533 million for tonight’s bank closings.