Friday, July 6, 2012

This Week in Bank Failures

The three top executives at Barclays have resigned in the aftermath of the bank’s involvement in manipulating base rates. Staff at Barclays believed that officials at Bank of England were encouraging the bank to misuse the base rate mechanisms, so investigators are trying to find who among the bank’s management might have spread that information, or misinformation, within the company. Some of the email messages that implicate Barclays have been released to the public, and they paint a picture of an organization in which base rate manipulation was a routinely discussed strategy. Investigations of base rate fixing have popped up left and right. The Barclays board of directors, the Bank of England, and the British Parliament have each started their own separate investigations.

Base rate fraud is obviously not limited to Barclays. This week, Royal Bank of Scotland fired several traders who were tied to the scheme to manipulate base rates.

The European Commission proposed tighter rules for custodians of investment funds. The new rules, if ratified, will make it difficult for a large-scale ponzi scheme to sell investment plans in the European market.

Finland has floated the possibility of exiting the euro zone to avoid the high costs of bailing out banks in Spain and elsewhere.

In the United States, we shouldn’t expect bank failures to be prominent or frequent during the next seven months because of the risk of political wrangling over bank regulation during the political season. The one bank failure reported tonight was small but costly.

State regulators closed Montgomery Bank & Trust, based in Ailey, Georgia. It had two branches, $164 million in deposits, and $174 million in assets. Ameris Bank is taking over the deposits but will not be purchasing the assets, aside from $12 million in cash and other highly liquid assets. The FDIC estimates costs of $75 million from the closing, an extraordinarily high cost compared to the amount of insured deposits.

One member of the bank’s board of directors has been charged with fraud and embezzlement of $17 million in bank funds and $40 million in funds from more than 100 investors. The director has been missing for several days and it is speculated that he may be in Venezuela.

Montgomery Bank & Trust attempted to expand into the shore town of St. Simon’s Island about seven years ago around the peak of the real estate boom in Georgia. It was an ill-conceived and ill-timed plan that the bank never recovered from.