Friday, September 2, 2011

This Week in Bank Failures

With the major banks in August pulling out of settlement talks over mortgage fraud, enforcement actions are on the way from regulators, and the first shoe dropped tonight with lawsuits by the Federal Housing Finance Agency (FHFA). The suits reportedly seek tens of billions of dollars for losses from improperly documented mortgages, mortgage-backed securities that were incorrectly described, and securities that included mortgages that the issuers didn’t hold.

Defendants in today’s suits include Bank of America, Barclays, Citigroup, and more than a dozen others. The FHFA could file more suits in the coming weeks. However, the more serious enforcement actions will come from the Fed, other bank regulators, and the SEC, and these may take a few more months to prepare. Banks involved in mortgages and securities fraud may face additional lawsuits from pension funds and investors. Individual officers at banks who signed off on fraudulent transactions could face criminal indictments.

In terms of legal strategy, banks are probably correct in refusing to settle the claims against them, since no counterparty, not even the government, has the authority to offer the blanket immunity they are seeking as part of a settlement. But the result will be that the major banks will be defending these cases for the next 10 to 15 years or the rest of their corporate lives and paying legal judgements that could easily exceed $80 billion.

The NCUA is looking for new ideas after two of its plans fell through. Plans for a new corporate credit union to replace the temporary Western Bridge Corporate Federal Credit Union are on hold after it didn’t reach its capital goal by the end of the month. For now, the NCUA will continue to operate Western Bridge Corporate Federal Credit Union and look for another transition plan. Similarly, the PayNet plan, which would have launched a new correspondent credit union to replace some services provided by U.S. Central Bridge Corporate Federal Credit Union, was called off today by its board. The NCUA will have to keep U.S. Central Bridge going for now. In a statement today, it asked the affected credit unions to look for another approach.

In an unusual personnel move, Bank of New York Mellon fired its CEO for his abrasive style. The board of directors feared the pattern of drama, blame, and denial would drive away top employees, including executives. Journalists who looked into the series of events said, expressing some surprise, that there didn’t appear to be anything more to the story than what was seen on the surface.

Georgia state banking regulators closed two banks tonight, Patriot Bank of Georgia and CreekSide Bank, each located north of Atlanta with about $100 million in deposits. The deposits and assets were acquired by Georgia Commerce Bank. With the purchase, Georgia Commerce Bank is doubling in size. The two failed banks had unusually high levels of troubled assets.