Friday, December 4, 2009

This Week in Bank Failures

Bank failure hit Venezuela in a big way this week. Four banks that were seized two weeks ago during a criminal investigation were shut down Monday, and three more banks were seized today.

While the government’s statements about the four banks on Monday emphasized that the banks were violating banking regulations, it appears to be a simple matter of banks running out of money. Two apparently were broke, and two more were dangerously low on funds. The owner of the four banks, a business tycoon with close ties to the government, has been indicted for lending money to himself in ways that violated banking laws. If true, it is basically the same as stealing money from the banks, as the loans to the bank owner weren’t paid back. In addition, 16 executives have been ordered not to leave the country as the investigation continues.

The two banks that appear to be broke, Banpro and Banco Canarias, are being liquidated. Regulators are still looking at the other two banks, Bolivar Banco and Banco Confederado, to decide whether to reopen them or liquidate them also. The regulators are probably hoping to find buyers for them, but that is a difficult prospect in Venezuela, where the government has already nationalized 20 percent of the banking system. In any case, depositors are mostly protected by national deposit insurance. The deposit insurance limit in Venezuela is $4,667, but that is high enough to cover more than 90 percent of depositors.

Three more banks were seized by Venezuelan banking authorities today: Banco Central Universal, Banco Real, and Banivest. Regulators closed the banks and say they are likely to rehabilitate them, although they also have the option of liquidating them if they turn out to be in worse financial condition than they appear.

The four Venezuelan banks closed on Monday held 5 to 6 percent of bank deposits in Venezuela, making that day larger in proportion than any day of bank closings in the United States. By comparison, the Washington Mutual failure, the largest in U.S. banking history, was barely 2 percent of the U.S. banking system. The three banks closed today in Venezuela were also large, holding 2 percent of the country’s deposits.

There is understandable concern over the banking system in Venezuela. Most Venezuelans remember the banking crisis of 1994, in which half of the country’s banks went under, and they might worry about a repeat of that. Also, some worry that the government may intend to nationalize the whole banking sector. The government, for its part, has accused its political enemies of organizing runs on the banks. So far, though, there isn’t much evidence to back up any of these worries. Analysts say that the Venezuela banking sector is generally pretty strong, and that the government wouldn’t want the distractions of running the banks. However, there is reason to imagine cases of corruption within the banks, as has been seen in many other businesses in Venezuela.

Other developments this week: Mortgage fraud was instrumental in creating many of the current credit problems, yet efforts to reduce it have been unsuccessful, and now, observers say, banks may be involved in mortgage fraud as sellers of foreclosed properties. More than half of home sales this year have involved foreclosures, and these sales often occur under rules that are more lax than other home sales. ◾ Mortgage defaults often occur after mortgage rate resets, and real estate analysts are warning that the largest group of these is ready to hit next year. Continuing high unemployment will also be a problem, so the rate of mortgage defaults and foreclosures could go twice as high as anything we have seen so far. ◾ The CIT Group bankruptcy may be affecting the National Hockey League (NHL). The Nashville Predators team owes an estimated $85 million to CIT, and the CIT bankruptcy has created a liquidity problem for the team’s majority owner, who was already dealing with the problem of a minority owner who is in jail and in bankruptcy. It sounds messy, but the majority owner is confident he will be able to raise the money he needs soon enough by selling other assets. If that doesn’t work out by summer, though, it’s possible that the team could be sold and moved to another city. ◾ Bank of America is preparing for a stock issue to raise money to repay its TARP funds. It’s a move the bank says will make it easier for it to hire a new CEO. ◾ An auction the U.S. Treasury held to sell warrants it purchased from Capital One went well today. The securities, which resemble stock options, sold for a net of $175 million. The government also earned interest on the $3.56 billion that it lent to Capital One last year, money that was repaid earlier this year. Other warrant auctions will follow, probably next month.

A small credit union was liquidated on Monday. The NCUA sent checks to the 747 members of Fairfield County Ohio Federal Employees Federal Credit Union after determining that it was insolvent.

Anchor BanCorp Wisconsin, parent of AnchorBank, appears to have worked out a deal to avoid a collapse. An investor group will put in $400 million to acquire a 95 percent share in the bank holding company. A month ago, AnchorBank had sold off 11 branches that it decided were outside its core territory.

Bank failures, which took a week off last week, returned with a vengeance tonight with the failure of AmTrust Bank, which had 66 locations in northeast Ohio, south Florida, and Arizona. It had $12 billion in assets and $8 billion in deposits in October, but the deposits may have been barely $7 billion as of today. It was founded in 1889 and was known as Ohio Savings Bank until 2007.

The writing was on the wall for AmTrust Bank when its holding company, AmTrust Financial Corp., filed for bankruptcy on Tuesday after a board meeting on Monday. The holding company is bankrupt because of declines in the value of assets in its real estate and insurance subsidiaries, a situation that was aggravated by a loss of revenue from the slowdown in real estate. AmTrust Bank was not directly affected by the bankruptcy — U.S. banking law prevents that — but the bank’s real estate loan portfolio was affected by the same problems. It is possible that the parent company anticipated regulatory action to close the bank, and filed for bankruptcy preemptively as a way to protect its creditors.

AmTrust Bank knew it had too much real estate exposure, and it was one of the banks that, around April this year, began paying its customers to close their home equity lines of credit. But by then, it was probably already too late for AmTrust. It had missed a December 31, 2008, deadline from the OTS to improve its financial condition, and its finances did not improve this year.

New York Community Bank is assuming all the deposits and purchasing 75 percent of the assets of AmTrust Bank, including all of the branch offices. New York Community Bank, also known as NYCB, is a large regional bank with 124 offices in New York and 53 in New Jersey. Its holding company also owns New York Commercial Bank, with another 35 locations.

The FDIC estimates its costs for the AmTrust closing at $2 billion.

State Bank and Trust Company, which until July had only two offices, in villages in south Georgia, grew larger tonight with the acquisition of two more failed banks in the Atlanta metro area. The larger of the two failed banks had $838 million in deposits and used a separate name for each location:

  • Buckhead Community Bank, Midtown Community Bank, and Cobb Community Bank, in different neighborhoods of Atlanta, Georgia
  • Sandy Springs Community Bank, in Sandy Springs, Georgia
  • Alpharetta Community Bank, in Alpharetta, Georgia
  • Forsyth Community Bank, in Cumming, Georgia
  • Hall Community Bank, in Gainesville, Georgia

Buckhead Community Bank was created in 1998 specifically to lend to Atlanta-area real estate developers. It’s one of those business plans that must have looked like a good idea at the time. The bank lost $60 billion in the first three quarters of this year and may have had no capital left by the time it was closed.

The smaller failed bank, First Security National Bank, had four locations in the northern suburbs and $123 million in deposits. State Bank and Trust Company is assuming the deposits and purchasing 99 percent of the assets of the two banks, and says it plans to keep all the locations open. The combined cost to the FDIC for these two closings is estimated at $272 million.

These other small banks, with deposits between $47 and $181 million each, also failed tonight (from largest to smallest):

  • Benchmark Bank, 5 offices in and near the suburbs of Chicago. Successor: MB Financial Bank.
  • Greater Atlantic Bank, 4 offices in the Washington, DC, metro area. The bank had had two additional locations that it sold off in the last two years. It had worked out a deal in June to be merged into MidAtlantic Bancorp, but a financial snag had prevented that deal from closing. Successor: Sonabank.
  • The Tattnall Bank, 2 offices in Tattnall County, Georgia. Successor: HeritageBank of the South.

The estimated cost to the FDIC for these three closings is $113 million. Tonight’s 6 bank failures bring the total for the year so far to 130.