What will happen to creditors, other than bank depositors, when the FDIC has to dismantle a collapsed bank holding company or other complex financial institution? According to Reuters, the FDIC will shortly propose rules for that situation. The rules will treat all creditors the same, with narrow exceptions that may apply for contractors who are actually involved in operating the banks, especially if the FDIC creates a bridge institution to continue operations for a short time. This means that the electric bill might get paid, but bondholders will not be paid in full, if at all. This is similar to the rules that govern bankruptcies. Unlike bankruptcy, however, bondholders cannot become owners of an insolvent institution in FDIC liquidation. Speculators often buy distressed bonds in the hope of gaining an ownership share in a corporation in bankruptcy, causing distortions in the bankruptcy process, but this won’t happen with an FDIC liquidation.
The problems of foreclosure error have led major banks to stop foreclosures temporarily. Today Bank of America became the first large bank to stop foreclosure sales in all 50 states. It had suspended sales of foreclosed houses in 23 states last week, and said today it uncovered enough potential for trouble in its review to extend that to the rest of the country.
There was a guilty plea this week from Charles Antonucci, who was president of The Park Avenue Bank in New York City, which failed in March. Antonucci pleaded guilty to TARP fraud. He was accused of using a loan from his own bank to invest in the bank, along with a complex scheme to disguise it as his own money in an attempt to qualify for TARP funds. This form of fraud is not as common as it was in the past, when it was frequently used as a mechanism to make a bank appear bigger than it actually was. The judge in the case ordered Antonucci to surrender the money in question, along with related assets.