So far, there is no indication that the financial reform bill currently in Congress will do anything about banks that are considered too big to fail. The bill would seem to make future bailouts more difficult, but would seem to encourage the largest banks to grow to as much twice their current size. Richard Fisher, a Fed president, commented this week on the market distortions that result when any business is so large that the government feels compelled to help it out when it gets in trouble, and urged a limit on bank size that would be smaller than the five largest banks. Economist Nouriel Roubini warned that the largest banks in the United States and Europe have now become “too big to save” — they are so large that there is not enough government money to keep them afloat if they falter badly. Roubini believes a $2 trillion business of any kind is too large for any board of directors and management team to keep track of, virtually ensuring that further financial mishaps will come to light only after it is already too late for the bank to adjust its strategy and avoid disaster.
CitiFinancial is shrinking by more than 10 percent and will be taking on a new name before the end of the year, according to a Citigroup announcement this week. Citigroup hopes to sell or spin off the lending division, and is restructuring it to make it more attractive to possible buyers or investors.
Prudential PLC couldn’t round up the votes to approve the purchase of AIA from AIG, so that deal is off. Now AIG will probably plan a stock offering to sell AIA to the public early next year. The stock offering might raise only $10–15 billion, though, less than half of the amount that AIG was hoping to get from Prudential. In light of the news, some observers are now saying there is no reason to hope that AIG will be able to pay back the money it got from the U.S. Treasury.
Ireland has committed to keeping Anglo Irish Bank going for at least the rest of this year. This is costing the government about $27 billion, but banking officials think it would have cost more than $60 billion to shut the bank down when it became insolvent last year. The bank still may be wound down next year.
One of the largest banks in Nebraska failed tonight. TierOne Bank had 69 locations, most in Nebraska, with a few in Kansas and Iowa. It had $2.2 billion in deposits and $2.8 billion in assets. It opened in 1907 and took on the TierOne name in 2002, only to see its fortunes turn for the worse just three years later. Its problems snowballed this year. A series of deals to sell the bank, or large parts of it, fell through — the last, a deal to sell nearly half the bank’s branch locations and deposits, rejected in April because regulators believed it would leave the bank insolvent. On April 23, the bank’s auditor resigned, complaining that the bank was withholding information about loan losses. This prevented the bank from filing its already delayed financial statements and led to at least 7 investor lawsuits in May and, at the end of the month, a delisting action from Nasdaq. At the same time, it missed a regulatory deadline for raising new capital.
Some in the news media seem to believe, mistakenly, that all bank problems stem from subprime mortgages. TierOne appears to be the rare case where that is actually true. The bank specialized in home mortgages in a region that has been hit hard by defaults on subprime mortgages. In addition, it operated loan offices in other states, notably including Nevada, Arizona, and Florida. Loans originating in these offices had unusually high foreclosure rates, blamed on lapses in underwriting and management supervision. The loan offices were closed only in 2008 after the bank had begun to report a series of quarterly losses. The bank has also had problems with its loans to builders, but the losses on construction loans appear to be fewer and smaller than those seen at other banks.
Regional bank Great Western Bank, based in South Dakota and already one of the largest banks operating in Nebraska, paid a 1.5 percent premium for the deposits and is also purchasing the assets.
These small bank failures also occurred tonight:
- First National Bank, with its one office on Main Street in Rosedale, Mississippi, along the Mississippi River. Deposits have been transferred to local bank Jefferson Bank, which is also purchasing the assets.
- Arcola Homestead Savings Bank, located in Arcola, Illinois. Demand deposits (checking account balances) are being placed temporarily at the First Mid-Illinois Bank & Trust office 6 blocks away. Depositors who want to get these deposits quickly can go there in person next week to claim the deposits. Otherwise, the FDIC will send checks to depositors. The failed bank had been operating since 1883. It lost $3.3 million last year, leaving it in a negative capital position. It reported another loss in the first quarter of this year, and at that point had $1 million more in deposits than it had in assets.