How accurate do banks need to be in describing the mortgage-backed securities they sell? Unfortunately for the major banks and mortgage lenders, the rules for mortgage-backed securities are essentially the same as for stocks and bonds. The rules are not particularly forgiving of intentionally misleading statements, or even careless omissions. This is in sharp contrast to banking, where intentionally misleading statements about bank account services and fees are not only tolerated, but actually acceptable under the rules that govern the banking business. But bank executives who think they will get away with some of the defective securities they sold, because they met the rules of the banking business, may be in for a bit of a shock when courts judge their past transactions according to the rules of the securities business.
Lawsuits are particularly piling up against Bank of America subsidiary Countrywide Financial, with dozens of suits claiming that the mortgage lender committed securities fraud by not disclosing that most of its mortgages did not meet the underwriting guidelines described in the descriptions of the securities. Government units and government-owned businesses are among the plaintiffs in the suits, which at first glance appear to be substantial enough to eventually put Countrywide Financial into bankruptcy. The settlement of civil securities fraud charges against former Countrywide Financial executives last year, having to do with the company’s stock, may pave the way for these new suits against the company for essentially the same problems in its other securities.
Tonight’s largest bank failure was First Community Bank, by some measures the third largest bank in New Mexico, with $2 billion in deposits and 38 locations. U.S. Bank is taking over the deposits and purchasing the assets, and establishing a presence in a new state. Three of the failed bank’s locations were in Arizona, with the rest in New Mexico, where it was founded in 1922.
The FDIC estimates this closing will cost it $260 million.
State bank regulators closed each of the failed banks tonight. In Colorado, FirsTier Bank was closed, with $782 million in deposits and 8 locations mostly in central Colorado. FirsTier Bank had struggled for a decade, shrinking substantially from its peak, and looked hapless for more than a year, missing a deadline from regulators early in 2010 to raise capital.
The FDIC was unable to find a successor bank. It has created a bridge bank to allow checks to clear and customers to withdraw funds for the next two weeks. Customers should arrange to open accounts with other banks immediately starting Monday. The FDIC estimates costs for this closing of $243 million.
FirsTier Bank was one of at least 8 Colorado banks victimized by a Ponzi scheme centered in Lafayette, Colorado. A jury in Denver convicted a business owner a week ago of more than 30 counts involving fraudulent bank loans, which were obtained on a wide range of pretexts, but mostly used to repay previous loans. The scheme included buying houses with mortgage loans, then selling the houses and keeping the money.
Banks failed in familiar places tonight. In addition to the failures in New Mexico and Colorado, there were small bank failures in Oklahoma and Wisconsin:
- Evergreen State Bank, with four locations in southern Wisconsin. The successor is McFarland State Bank.
- The First State Bank, with one location in Camargo, Oklahoma. The successor is Bank 7.
If it seems that the bank failures are trending toward smaller banks, part of the reason is that some of the troubled banks have been shrinking, losing customers as their financial fortunes decline. Evergreen State Bank, for example, reported $269 million in deposits in 2008, but this had declined to $195 million at last report, with a corresponding decline in assets.