Bank Failures in the U.S.

Nine U.S. Banks Seized in Largest One-Day Haul

October 31, 2009

Reuters - U.S. authorities seized nine failed banks on Friday, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation's banking industry are being crippled by bad loans.

The move brought the total number of failed banks in 2009 to 115 -- their highest annual level since 1992 -- with analysts expecting more to come. Among the lenders seized Friday was Los Angeles-based California National Bank, in what was the fourth-largest U.S. bank failure this year.

The largest institution to fail in the current financial crisis was Washington Mutual, which boasted $307 billion in assets when it was shuttered in September 2008.

U.S. Bancorp on Friday acquired the nine banks that had been held by FBOP Corp, picking up $18.4 billion in assets and $15.4 billion of deposits.

Visibly worried employees lined up to file into Cal National's head offices in the heart of a deserted downtown Los Angeles on a chilly Friday evening, where they had their employers' fate explained to them, regulators said.

"We're getting ready to turn everything over to U.S. Bank," said Roberta Valdez, a spokeswoman for the Federal Deposit Insurance Corp, which helped supervise the transfer of FBOP's assets. "They will continue to operate as normal in the interim," she added, referring to lenders acquired from FBOP.

U.S. Bancorp -- which has been buying up distressed assets this year -- is picking up the lenders once owned by FBOP, a private Illinois group with over $18 billion in assets that owned banks in Texas, Illinois, Arizona and California...

Cal National operates 68 branches across Southern California with more than $7 billion in assets. As of June 30, the lender maintained five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier, according to the Los Angeles Times, which first reported news of its evening takeover on Friday.

Cal National lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, the newspaper added, referring to securities rendered nearly worthless by the government takeover of the mortgage firms last year.

According to FDIC data, Cal National was the fourth biggest bank failure this year in terms of assets, just edging out Corus Bank, seized Sept 11 with a flat $7 billion of assets.

A bank official who answered the main number at Cal National's headquarters said they could not talk at the time.

Banks are still cleaning up their balance sheets from the recent credit boom that fueled banks' appetite to extend loans, many with poor underwriting and triggers that caused borrowers' payments to spike to unaffordable levels.

More lenders are expected to go under this year as the industry tries to get a handle on commercial real estate loans that will continue to worsen, as more strip malls go vacant and residential developments stall.

Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks were better diversified...

U.S. Bank Failures Pass 100 Mark for 2009

October 23, 2009

Reuters - The number of U.S. bank failures this year reached 106 on Friday, when regulators closed seven more small banks, marking the highest annual level of failed institutions since 1992 during the savings and loan crisis.

The number is expected to continue rising as the industry tries to get a handle on commercial real estate loans that will continue to deteriorate as more strip malls go vacant and condo developments remain stalled.

The seven banks that were shuttered on Friday all had assets under $350 million. The largest bank failure in the current crisis was Washington Mutual, which had assets of $307 billion when it was shuttered in September 2008...

Thee failures brought the number of closings past 100 for the year, and is the first time the annual number of closures has reached that level since 1992 when 181 banks failed. There were 25 bank failures in 2008, up from three in 2007.

Banks are still cleaning up their balance sheets from the recent credit boom that fueled banks' appetite to extend loans, many with poor underwriting and triggers that caused borrowers' payments to spike to unaffordable levels.

Community banks, especially, built up high concentrations of commercial real estate loans for developments that have failed to attract tenants or have become vacant.

FDIC Chairman Sheila Bair has said the banking industry's recovery is expected to lag the improvement in the overall economy.

"Some banks continue to face serious challenges but the overwhelming majority will weather this economic storm," Bair said in a video message posted on the agency's website on Friday evening.

She emphasized that bank customers' money is safe and that the FDIC has never lost a penny on insured deposits. The agency insures accounts up to $250,000.

Bair told Reuters Washington Summit this week:

"Obviously, the pace of bank failures has picked up and it's going to continue into and through next year. But I think it's not nearly where we were during the S&L days."

At the peak of the S&L crisis in 1989, regulators closed 534 banks.

The seven failures are expected to cost the FDIC's fund that safeguards bank deposits $365.7 million, and come as the agency is asking banks to prepay three years of assessments.

Bank failures have drained the fund's balance, which turned negative at the end of the third quarter. However, the FDIC has additional money already set aside to handle more closings...

Bank of America Swings to $1 Billion Loss

October 16, 2009

Reuters - Bank of America Corp posted a $1 billion quarterly loss on Friday as consumer credit woes eclipsed investment banking earnings, underlining why the bank remains on a government respirator.

The nation's largest bank received two taxpayer bailouts totaling $45 billion after acquiring broker Merrill Lynch & Co and mortgage lender Countrywide Financial Corp at the height of the financial crisis last year. It says it wants to start repaying the money but has not yet done so.

Bank of America's results further dampened the euphoria kicked off by JPMorgan Chase & Co's stellar earnings report on Wednesday and indicated a steep climb ahead for banks before they can declare the worst of the financial crisis is over.

"Investors are getting reminded that we have a ways to go to get through the credit cycle," said John McDonald, an analyst at Sanford C Bernstein in New York. "There's still much room for improvement."

Credit losses on its consumer loans are eating into Bank of America's results as it tries to raise capital. It suffered $9.6 billion in credit losses in the third quarter, up from $4.4 billion a year earlier.

"Bank of America is not going to fail. It's eventually going to turn this around -- but it will take time," said Gary Townsend, chief executive of asset manager Hill-Townsend Capital.

In an ironic twist, Merrill's investment banking operations -- where massive losses in the 2008 fourth quarter triggered strong criticism of Chief Executive Kenneth Lewis -- injected a shot of adrenaline into Bank of America's results. The unit produced $2.2 billion in profits.

Lewis, 62, has said he will retire at the end of the year. He faces multiple investigations into whether he disclosed enough information to shareholders before they approved the Merrill acquisition.

"Forty years with the same company and eight years as the CEO is enough," Lewis said on the bank's earnings conference call. A board committee is currently searching for a successor.

Charlotte, North Carolina-based Bank of America reported a net loss of $1 billion, or 26 cents per share, for the third quarter, compared with net income of $1.18 billion, or 15 cents per share, in the same period last year. Analysts on average expected a loss of 21 cents per share, according to Thomson Reuters.

The bank's shares slid as much as 5.7 percent to $17.06 in morning trading before recovering to $17.37 in afternoon trade, down 4 percent. The shares are off more than 20 percent over the past 12 months...

The bank set aside $11.7 billion during the third quarter for credit losses, $1.7 billion less than in the second quarter but $5.3 billion more than in the third quarter of 2008.

Losses from home equity loans and residential and commercial mortgages soared, but the business hit hardest was the credit card unit. The unit's chargeoff rate -- the proportion of loans it does not expect to be repaid -- is the highest in the nation at 14.25 percent.

Like rival JPMorgan, Bank of America said that while loan-loss reserves and credit losses are still high, the rate of increase is slowing. "We believe we may have peaked in total credit losses this quarter," Lewis said.

Bank of America loses $2.2 billion in third quarter

U.S. Bank Failure Tally Hits 99 for 2009

October 16, 2009

Reuters — One more U.S. bank was shuttered on Friday, as the tally of failures so far this year inched closer to 100. The pace of bank failures has picked up sharply this year as the industry continues to work through bad loans that were made during the credit boom...

U.S. bank failures have not reached the 100 mark since 1992 during the savings and loan crisis when 181 institutions were closed. In 1989, during the height of the savings and loan crisis, 534 banks failed.

Bank failures have drained the fund's balance, which turned negative at the end of the third quarter.

The FDIC, which insures accounts up to $250,000, has proposed a plan to boost its liquidity by having banks prepay three years of regular assessments.

The agency is expecting bank failures to cost the insurance fund about $100 billion from 2009-2013, and said failures will remain elevated this year and next.

The pace of bank failures is expected to remain rapid as banks' woes migrate from deteriorating subprime loans to commercial real estate loans.

The size of the failures, however, has dramatically decreased from last year, when panic in the financial markets caused many firms to topple or receive government bailouts... The largest bank failure of the current crisis was Washington Mutual, which was closed in September 2008, and had assets of $307 billion. Other large banks, such as Wachovia, were sold when they ran into severe distress, and other financial firms received massive taxpayer bailouts, such as American International Group, which received government commitments of up to $182.5 billion.

Wall Street Lauds FDIC Plan to Replenish Bank Deposit Insurance Fund

October 1, 2009

WSWS - The US Federal Deposit Insurance Corporation (FDIC) announced Tuesday that its deposit insurance fund, which guarantees the bank deposits of millions of American consumers up to $250,000, would fall into the red this week.

The agency proposed that its insurance fund, which has effectively gone broke as a result of 115 bank failures since January of 2008, receive a $45 billion cash infusion in the form of prepayments of quarterly fees that banks are required to pay into the fund.

Following a meeting of the FDIC board, the agency proposed that banks pay their fees for the rest of this year as well as 2010, 2011 and 2012 by December 31. Even with this stopgap cash infusion, the FDIC estimated that its deposit insurance fund would remain technically in the red into 2012 and would not return to “comfortable” levels until 2017.

The insurance fund’s liabilities include $32 billion which the FDIC has set aside to account for expected bank failures in 2010. Government officials on Tuesday projected that bank failures from 2009 through 2013 will cost the FDIC $100 billion, up from an estimate several months ago of $70 billion.

Even these projections are highly optimistic. The International Monetary Fund on Wednesday released its latest “Global Financial Stability Report,” which estimates that losses from the global financial crisis stand at $3.4 trillion for the 2007-10 period, less than half of which has so far been realized.

Banks in the US and internationally are concealing massive losses by refusing to write down bad loans, and a new wave of defaults are anticipated in commercial real estate and consumer credit.

Ninety five US banks have failed so far this year, up from 25 in 2008. In addition, the FDIC had 416 banks on its “problem” list at the end of June, the highest number in 15 years, and the list is certain to grow.

Before the financial crisis erupted last autumn, the FDIC insurance fund had over $50 billion. By the end of June, that figure had fallen to $10.4 billion to back $6.2 trillion in total deposits.

The Wall Street Journal on Wednesday quoted Gerard Cassidy, a bank analyst at RBC Capital, as saying:

“Though some of our largest bank failures have already taken place, there are still hundreds and hundreds of banks that are going to fail in this cycle.”

This is only the second time in the FDIC’s 76-year history that its deposit insurance fund has been depleted. Its net worth turned negative in 1991 during the savings and loan crisis.

The FDIC was established in 1933 to provide a measure of government backing for deposits and arrest a wave of bank runs that had tipped the United States into the Great Depression. The limit on insured deposits was raised at the height of the financial crisis last year from $100,000 to $250,000—a measure chiefly designed to reassure the wealthy and protect the deposits of big investors.

FDIC officials insisted Tuesday that despite the insurance fund’s problems, depositors would not be affected because federally insured bank deposits are backed by the “full faith and credit” of the US government. The FDIC is able at any time to tap into a $100 billion Treasury line of credit, and earlier this year Congress passed legislation allowing it to borrow up to $500 billion from the federal Treasury.

However, the de facto insolvency of the FDIC fund can only fuel international concerns over the credit-worthiness of the United States and further erode confidence in the US dollar, whose value has fallen sharply on global currency markets in recent months. Under conditions of federal budget deficits estimated at $9 trillion over the next decade, a doubling of the potential liabilities of the Federal Reserve in the course of the past year, and a massive rise in the national debt, the FDIC’s troubles raise the specter of state bankruptcy.

One reason the FDIC chose to address its crisis by having banks prepay their insurance fund fees, rather than tap its credit line with the Treasury, is that the government is rapidly approaching the statutory limit on the national debt. Treasury Secretary Timothy Geithner warned last month that the $12.1 trillion cap will likely be reached later this year. The Obama administration has been pressing Congress to raise the debt limit.

An even more decisive consideration was opposition by the major banks. They lobbied fiercely against both the Treasury loan option and the alternative of a special fee being levied by the FDIC on the banks to bolster the insurance fund. Either plan would result in higher premiums being imposed on the banks. The banks fear, moreover, that a Treasury loan could bring with it new attempts to rein in the banks, including limits on executive compensation.

In May, the FDIC imposed a special fee, netting $5.6 billion for the insurance fund. This time the banks—despite receiving trillions of dollars in government cash, cheap loans and debt guarantees backed by the FDIC—dug in their heels.

In a letter sent September 21 to FDIC Chairman Sheila Bair, American Bankers Association CEO Ed Yingling endorsed borrowing from the banks (which would net them handsome profits in interest payments) or collecting regular premiums early as an alternative to charging another fee.

At a hearing last week of the House of Representatives Financial Services Committee, the chairman, Massachusetts Democrat Barney Frank, ever attentive to the interests of Wall Street, told Bair:

“This is not the time to raise assessments on the banks.”

Testifying before the House panel, the comptroller of the currency John Dugan, who oversees national banks and is an FDIC board member, said he was “very concerned” about a second special assessment.

Bank officials pushed for the prepayment plan last week and lauded the FDIC announcement after it was made Tuesday.

In an email to Bloomberg News last week, James Chessen, chief economist at the American Bankers Association, said “The prepayment option provides the FDIC cash up front to easily handle future failures without imposing significant costs on the industry all at once.”

Michael Feroli, an economist at JPMorgan Chase, told Bloomberg, “Pre-paid assessments would allow the FDIC to replenish the deposit insurance fund in a way that does not permanently damage banks’ financial viability.”

And following Tuesday’s announcement, JPMorgan Chase Chief Executive James Dimon, in an interview with the Wall Street Journal, praised the FDIC’s plan as “an elegant way for them to do it.”

The banks are all the more pleased because the FDIC proposal allows them to count their prepayments as assets and not write them off until they would normally come due. In addition, it allows troubled banks to request waivers.

In making the announcement, FDIC Chairman Bair cynically sought to portray the prepayment plan as a boon to taxpayers, saying:

“In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.”

In fact, a major reason for the collapse of the deposit insurance fund is the policy of the FDIC—and the Obama administration—of giving massive subsidies to banks that agree to take over failing institutions seized by the agency. The Wall Street Journal reported last month that the FDIC has been subsidizing the purchase of distressed banks by larger institutions by guaranteeing virtually all of the potential losses of the bigger banks.

The article reported that the FDIC has assumed up to 95 percent of the risk on $80 billion in assets of failed banks bought by other banks. As the Journal noted, the FDIC’s policy of engineering bank takeovers at public expense “amounts to a subsidy for dozens of hand-picked banks.”