Friday, November 4, 2011

This Week in Bank Failures

Among the other developments this week in the financial situation in Greece, we learned that Greece is now a de facto European colony. Politicians in Germany and a newspaper in London called for the cancellation of a referendum in Greece and the removal of the prime minister, and tonight, indications are that Greece will be complying.

But it is not as if Europe has won a victory over Greece. If EU leaders took a hard line from the beginning in their dealings with Greece to try to strengthen their central control of Europe, the strategy has backfired. A series of increasingly clumsy interventions has turned an awkward situation into a disaster, and the European Union and IMF are to blame for most of the damage: a depression gripping Greece while half of Europe’s giant banks face insolvency. That’s a fate that this week claimed MF Global, a Wall Street hedge fund (confusingly, and perhaps improperly, organized as a brokerage) after it took losses on European bonds that declined in value as a result of European mishandling of the situation in Greece. Some of the banks in Europe could be in equally dire condition for the same reason. Now having a history as agents of disaster, the EU is left with a very small platform from which to manage the European economy. For the next 20 years at least, the EU will be hearing from member states and bank executives, “We can’t go along with that — look what happened to Greece.”

There was talk this week of expelling Greece from the euro zone. That is something that, legally speaking, can’t be done, but if Greece is now a colony with only shreds of democracy and sovereignty remaining, the law will not be an obstacle. Extricating Greece from the euro, if that has to be done, will precipitate the biggest banking crisis in the history of the euro, if not the history of Europe.

AIG slipped farther from profitability in the latest quarter with big losses in its insurance businesses on top of its usual losses from unwinding and restructuring. AIG opted to retain a 33 percent share of AIA, the east Asian life insurance unit it spun off a year ago, and that’s a decision it may be regretting now. The AIA shares have declined 20 percent from their summer peak, and AIG must now raise $7 billion to repay a note it used to retain the AIA shares. In its airplane leasing business, AIG is forced to recognize losses as it retires more of its airplanes, which have a book value that is far higher than their commercial value. All this noise obscured dismal results in AIG’s core U.S. insurance operations. There, losses were not awful, but revenue growth is unlikely and the prospects for profitability are not particularly strong. AIG remains mostly owned by the U.S. Treasury, which stands to record a huge loss as the company fades.

Bank Transfer Day is tomorrow, but most supporters have already moved accounts from Wall Street banks to credit unions and local community banks. The campaign is a big deal for credit unions. The Credit Union National Association (CUNA) is telling us that credit unions gained 650,000 new customers in October — a year’s worth of new customers in one month. Similar numbers are possible again this month. Bank Transfer Day is a social-media movement specifically promoting credit unions over Wall Street banks, but a larger number of consumers are moving their banking to local community banks. All this consumer action is motivated mainly by the fear of new fees from the larger banks, and it is being supported by both industry groups and political groups.

Almost half the accounts Wall Street has lost so far were at Bank of America. Its CEO on September 29 announced a crackdown on its debit card customers, who he characterized as freeloaders mooching off of the banking network without paying their share of the costs. A follow-up “p.r. offensive” in October failed to convince anyone that consumers are being unfair to Bank of America. In surveys, only a small fraction of the bank’s customers said they would pay the new fees. About two thirds said they would move their accounts or turn in their debit cards. Bank of America was emphatic this week when it announced it had had a change of heart about debit cards, but not all of its customers are convinced, and the outflow of deposits from Bank of America shows every sign of continuing.

Reclaim the Dream is also asking supporters to take the additional step of closing credit card accounts at Wall Street banks. Credit cards haven’t had nearly the level of public discussion this year that they had last year, but indications are that hundreds of thousands of supporters are closing credit card accounts this week at Wall Street banks, mostly at Bank of America and JPMorgan Chase.

Tonight at closing time state banking regulators closed two small banks, each with less than $200 million in deposits.

The more interesting and complicated case is SunFirst Bank, with three branches in Utah. Cache Valley Bank is acquiring 91 percent of the deposits and 88 percent of the assets. The FDIC is retaining 9 percent of the deposits, in accounts that are frozen by litigation. The bank was either mixed up in or a victim of two criminal cases that federal authorities are pursuing. One group was operating online gambling sites. Gambling sites are illegal in the United States anyway, and to make matters worse, some sites may also have been stealing money from their customers. A vice chairman at the bank had already been indicted for his alleged involvement in disguising illegal credit card transactions for gambling sites. The indicted vice chairman is also said to be associated with the defendant in the other case, involving a fraudulent payment-processing operation that the Federal Trade Commission says fabricated credit card transactions in order to steal money from cardholders and their banks. The frozen accounts are probably related to these two cases.

The problems at SunFirst prompted the FDIC in January to issue a warning about the risks to banks that process money-laundering transactions, something that can occur whenever banks fail to determine the identities of their customers. Around the same time, the FDIC issued an order barring SunFirst from processing most kinds of third-party payments. The FDIC’s warning to other banks carries more weight tonight now that SunFirst has failed.

The smaller bank closing tonight is Mid City Bank, with five branches in Nebraska. Purdum State Bank is acquiring the deposits and assets. There is a twist here too. Tomorrow when the acquired branches reopen, Purdum State Bank is changing its name to Premier Bank.