Heads will roll — that’s my prediction of the political fallout after the disclosure of Fed bailout decisions, which I believe is on its way after a federal appeals court decision today. The decision paved the way for the release of Fed documents related to bank and other bailouts, starting in 2007. I am confident that the release of information will show that the bailouts had little or nothing to do with protecting the global financial system, which could have been accomplished with a much smaller sum of money, and everything to do with protecting Wall Street profits. I do not think this will be the end of the Fed as we know it, but there will at least have to be a serious discussion of that after the Fed actions are out on the table. None of this will happen immediately, though. There are months of legal maneuvering ahead, and the Supreme Court or Congress could still intervene to protect the Fed.
There has been another arrest of a banking executive. The former president of The Park Avenue Bank in New York City was arrested Monday and indicted on a list of charges related to the bank’s decline and eventual failure. According to the indictment, there was a scheme to use the bank’s own money to buy shares of stock in the bank, in connection with an attempt to defraud the TARP program. This is similar to the cases brought against executives of some banks that failed at the end of 2009 in Venezuela. When executives take a bank’s money and use it to buy stock in the bank, it is not just a form of securities manipulation, although that is serious enough. It is mostly a way to make the bank appear to have more capital than it has by counting some of the capital two or three times. This can make a bank that is on the verge of financial collapse appear to be financially stable, at least for a short time.
Tonight was the end of the line for Advanta Bank, the bank that was left behind when Advanta wound down its credit card operations a year ago, leading the holding company to file for bankruptcy in November. Advanta Bank was not so large in comparison to the scale of the Advanta small-business credit card operations that that was cut off from capital last year after its investment trust failed, in an early version of what is likely to happen to much of the credit card industry later this year. Advanta Bank was in litigation with its bankrupt parent company over tax credits, credits that probably would have returned the bank to a positive capital position, but which the parent company refused to take. The FDIC may want to take up that dispute in bankruptcy court, now that the bank has been closed and liquidated. Advanta Bank had also sued the FDIC, in a case that would appear to be moot now.
Advanta Bank, chartered and based in Utah, in a suburb of Salt Lake City, had $1.5 billion in deposits at the end of last quarter. It had taken about $200 million in losses on bad loans last year, with more losses sure to come, and regulators had ordered the bank to reduce the scale of its business last summer (the focus of the bank’s suit against the FDIC). The largest part of the bank’s business was collecting payments on the closed Advanta credit card accounts.
Advanta had been the title sponsor of World Team Tennis, and the professional tennis league has been hunting for new sponsors after Advanta’s last sponsorship payment expired December 31.
There is no successor bank. The FDIC will mail checks to depositors starting Monday. Despite the large size of the bank, the FDIC estimates that 99.8 percent of deposits were within the deposit insurance limits. The cost to the FDIC is estimated at $636 million.
There were three unrelated bank failures in Georgia:
- Appalachian Community Bank, based in Ellijay, Georgia, with 10 offices in the area of the Georgia-Tennessee border, some operating under the name Gilmer County Bank. The failed bank should not be confused with a related bank of a similar name, Appalachian Community Bank FSB, based nearby in McCaysville, Georgia, near the Georgia-North Carolina border, which is not affected by the closure. The failed bank had nearly $1 billion in deposits. The deposits are being transferred to Community & Southern Bank, which is also purchasing the assets.
- Bank of Hiawassee, with three offices along the border with North Carolina, plus one operating under the name Bank of Blue Ridge and another operating under the name Bank of Blairsville. The failed bank had $340 million in deposits. The successor is North Carolina-based Citizens South Bank, which paid a 1 percent premium for the deposits and is purchasing the assets. The holding company of Citizens South raised $15 million in a recent stock issue.
- Century Security Bank, with two locations in the greater Atlanta area. The failed bank had $94 million in deposits. Bank of Upson is taking over the deposits and purchasing the assets.
The three Georgia closings are expected to cost the FDIC $587 million.
Alabama banking regulators closed First Lowndes Bank, which had four locations in the south central part of the state and $131 million in deposits. First Citizens Bank, also based in Alabama, is taking over the deposits and purchasing the assets. The failed bank had used its web site to announce its foreclosed property for sale.
The first bank failure of the year in Ohio, at closing time tonight, was American National Bank, with $67 million in deposits and one office in Parma, Ohio. The successor is The National Bank and Trust Company, also based in Ohio, which purchased the assets and took over the deposits.
Finally, in Minnesota, state banking regulators closed State Bank of Aurora. It had one location and $28 million in deposits. The office is becoming a branch of Northern State Bank, which paid a 0.5 percent premium for the deposits and is also purchasing the assets.