Bank Failures in the U.S.
How the Old BankUnited Fell Apart
July 13, 2009Miami Herald - It took 25 years for BankUnited Financial Corp. to blossom into Florida's largest homegrown financial institution. But it took just one type of loan to sink its Coral Gables-based bank and trigger its May seizure by federal regulators: the payment option adjustable rate mortgage, or option ARM...
lfred R. Camner, the founder and biggest shareholder as well the chairman and chief executive until October 2008, led the bank in an ambitious foray into option ARMs -- a product many consider the riskiest mortgage ever created...
Option ARMs, now discredited, give borrowers choices each month: Make a full payment of principal and interest, something in between, or a minimum payment that results in negative amortization, meaning the loan balance actually grows each month instead of shrinking.
It was just the sort of easy credit that speculators flocked to, fueling the rise in home prices between 2003 and 2006. Borrowers figured on making minimal installments for a little while and reselling a home at a quick profit or refinancing to avoid onerous terms that kicked in later...
Regulators Shut Down Five More Banks, Bringing U.S. Total for 2009 to 57
July 17, 2009AP - ...Friday's move brings the number of bank closings in California this year to eight. With First Piedmont, 15 Georgia banks have failed since the beginning of 2008, more than in any other state. Most of the failures have involved banks in the Atlanta area, where the collapse of the real estate market brought economic dislocation. Until Friday, however, no federally insured bank had been closed in South Dakota since 1992, when First Federal Savings Bank of South Dakota, based in Rapid City, was shut down during the savings and loan crisis.
The 57 bank failures nationwide this year compare with 25 last year and three in 2007.
The FDIC estimates that the cost to the deposit insurance fund from the failure of Temecula will be $391 million and $579 million for Vineyard Bank. For First Piedmont Bank, the cost is put at $29 million. The cost to the fund from BankFirst's failure is estimated at $91 million.
As the economy has soured -- with unemployment rising, home prices tumbling and loan defaults soaring -- bank failures have cascaded and sapped billions out of the deposit insurance fund. It now stands at its lowest level since 1993, $13 billion as of the first quarter.
While losses on home mortgages may be leveling off, delinquencies on commercial real estate loans remain a hot spot of potential trouble, FDIC officials say. If the recession deepens, defaults on the high-risk loans could spike. Many regional banks hold large numbers of them.
The Treasury Department has launched a program in which financial firms will buy as much as $40 billion worth of banks' soured, mortgage-linked investments. That amount is far below the potential $1 trillion in assets that the government originally hoped to take off the banks' books through the program and another that would have targeted bad loans.
The problem assets helped spark the financial crisis as they lost value and banks became unable to sell them. They have been weighing down banks' balance sheets -- one reason the industry has had trouble providing the credit necessary to support an economic recovery.
The number of banks on the FDIC's list of problem institutions leaped to 305 in the first quarter -- the highest number since 1994 during the savings and loan crisis -- from 252 in the fourth quarter. The FDIC expects U.S. bank failures to cost the insurance fund around $70 billion through 2013.
The May closing of struggling Florida thrift BankUnited FSB is expected to cost the insurance fund $4.9 billion, the second-largest hit since the financial crisis began. The costliest was the July 2008 seizure of big California lender IndyMac Bank, on which the insurance fund is estimated to have lost $10.7 billion.
The largest U.S. bank failure ever also came last year: Seattle-based thrift Washington Mutual Inc. fell in September, with about $307 billion in assets. It was acquired by JPMorgan Chase & Co. for $1.9 billion in a deal brokered by the FDIC.
FDIC Insurance Fund: It Doesn’t Actually Exist
Originally Published on September 12, 2008Seeking Alpha - When FDIC head Shelia Bair says her agency might have to bolster the FDIC's insurance fund with Treasury borrowings to pay for the new spate of bank failures, a lot of us, this 40-year banking veteran included, assumed there's an actual FDIC fund in need of bolstering.
We were wrong.
As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government's general coffers for "spending . . . on missiles, school lunches, water projects, and the like."
The insurance premiums aren't really premiums at all, therefore. They're a tax by another name. Actually, it's worse than that. The FDIC, persisting in the myth that its fund really is an insurance pool, now proposes to raise the "premiums" it charges banks to make up for the "fund's" coming shortfall.
The financially weakest banks will be hit with the biggest tax hikes. Which makes absolutely no sense.
You don't need me to tell you the banking industry is on the ropes. The last thing it needs (or the economy needs, for that matter) is an expense hike that will inhibit banks' ability to rebuild capital, extend new loans, or both.
If the FDIC wants to raise its bank tax once the industry has recovered, I suppose that's fine. But to raise taxes on the industry now is perhaps the dumbest thing the agency can possibly do.
At the margin, the FDIC will be helping bring about more of the failures it says it wants to prevent.
But this is the government we're talking about, so logic goes out the window. First, the FDIC insists its mythical bank insurance fund exists, when it really doesn't. Then the agency does what it can to run the imaginary fund's finances straight into the ground. Your tax dollars (sorry, "premiums") at work.
FDIC Gearing Up for Bank Closures
July 8, 2009Washington Business Journal - The Federal Deposit Insurance Corp. is gearing up to handle a large number of bank failures expected as a result of bad mortgages, both in residential and commercial real estate, an economist said Tuesday.
“They know they’re going to take down a large number of banks and they can’t do it until they’re staffed up,” said Mark Dotzour, chief economist and director of research for the Real Estate Center at Texas A&M University. Dotzour expects federal regulators to establish an agency, similar to the Resolution Trust Corp. that disposed of assets belonging to insolvent S&Ls in the late 1980s and early 1990s.
“Once they start to sell [foreclosed real estate], we’ll find out what the market really is,” Dotzour told attendees at an economic summit hosted by a handful of real estate groups in Tampa, Fla.
Dotzour blamed federal intervention for the lack of commercial real estate investment activity in recent months, as well as the failure of businesses to make major decisions. “Nobody knows what to do so they’re doing nothing,” Dotzour said at the luncheon meeting at the Intercontinental Tampa.
Government, in its quest to help the economy, is causing harm by propping up failing companies and regularly changing rules, he said.
“No one can predict what the government will do,” Dotzour said. “People are frozen. It’s not that they don’t want to invest in the future, the rules are unclear,” he said.
He jokingly called the Federal Reserve “inksters” for routinely printing money to bail out big business, including banks that are still not making many loans. The government’s role in a capitalistic society, he said, “is to make the rules and get off the dance floor.”
Businesses and individuals that can’t pay their bills should resolve their problems in bankruptcy court, not with money from the government, he said. It’s a process that has worked for decades, for generations. “Everyone has a lesson to learn here, including you and me,” he said. “We have to live within our means.”
Dotzour expects foreclosure rates to continue to climb, real estate prices to fall more, and cap rates to rise to at least 9 percent before leveling off. In 2010 and 2011, interest rates will begin to rise, as will inflation. Once investors realize the market is at bottom, deals will begin to flow again, he said.
In the meantime, he compared the bad loans that remain on banks’ books to a smelly cat litter box and the feds keep throwing more litter on top to mask the smell. But they’ll eventually have to remove the organic material to fix the problem.
Seven More Banks Fail, Bringing U.S. Total for 2009 to 52
July 2, 2009Associated Press - Six Illinois banks and one bank in Texas were shuttered Thursday as government regulators proposed new rules for private equity firms seeking to take over failed banks.
This brings the U.S. total for 2009 to 52, which is more than double the 25 that failed in all of 2008 and the three closed in 2007.
The Federal Deposit Insurance Corp. was appointed receiver of all seven. The total cost to the Deposit Insurance Fund from the seven closings will be $314.3 million, the FDIC said.
The failure of the six Illinois banks, which are all controlled by one family, resulted primarily from losses on investments in risky instruments known as collateralized debt obligations and other loan losses, the FDIC said. The closings bring to 12 the number of Illinois banks closed this year...
Under new rules proposed Thursday by the FDIC, private equity firms seeking to buy failed banks would face strict capitalization and disclosure requirements, but some regulators already warn the proposal may go too far.
The FDIC is seeking to expand the number of potential buyers for the growing number of banks it has closed during the financial crisis. With mounting interest from private equity firms, whose methods and motives aren't always clear, the FDIC is trying to set requirements to ensure the banks won't fail again.
One of the new proposals under discussion would require investors to maintain a healthy amount of cash in the banks they acquire, keeping them at about a 15-percent leverage ratio for three years. Most banks have lower leverage ratios, which measure capital divided by assets. Investors also would have to own the banks for at least three years and face limits on their ability to lend to any of the owners' affiliates.
Regulators said their intent was to tap into the potentially deep source of private equity, while ensuring that banks remain well capitalized once they are sold. "We want nontraditional investors," FDIC Chairman Sheila Bair said at the board meeting. "There is a significant need for capital and there is capital out there."
Still, some regulators worried that the rules could stifle a potentially valuable new source of investment. Bair said the proposal was "solid," but acknowledged that some details, including the high capital requirements, could be controversial. Comptroller of the Currency John Dugan said that the rules, which will now be subject to public comment, may be too restrictive.
The Private Equity Council, a Washington-based advocacy group for firms, criticized the proposed FDIC guidelines. In a statement, the group's president, Douglas Lowenstein, said the proposals would "deter future private investments in banks that need fresh capital."
The proposals will be subject to a 30-day public comment period, after which the bank regulators likely will meet again to finalize the rules, said FDIC spokesman David Barr.
The FDIC monitors the health of banks to ensure that they have enough capital to stay afloat and cover their deposits. When banks get in trouble, the FDIC can seize and sell them. Prior to Thursday, the FDIC already had closed 45 banks this year, many of them community or regional institutions. That compares with 25 failures last year and three in 2007.
The FDIC already has brokered two sales this year to entities controlled by private equity firms. In March, the government sold IndyMac Federal Bank for $13.9 billion to a bank formed by investors that included billionaire George Soros and Dell Inc. founder Michael Dell.
But the business practices and ownership of the lightly regulated pools of investor funds often can be difficult to penetrate. The FDIC proposals include requirements meant to pry some information out of the investors, including disclosing the owners of private equity groups. The FDIC rules also would prevent the groups from using overseas secrecy laws to shield details of their operations. Under the regulations, banks also would not be sold to investors with so-called "silo" structures that make it hard to determine who is behind a private equity group.
The FDIC had 305 banks with $220 billion of assets on its list of problem institutions at the end of the first quarter, the highest number since the 1994 savings and loan crisis.
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