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9 bank closures brings the 2009 total to 115
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Regulators shut down nine more banks last Friday, bringing the total for the year to 115. Nine subsidiaries of FBOP Corp., a multistate holding company that included California National Bank of Los Angeles, are the latest casualties of the banking crisis.
The FDIC announced that U.S. Bancorp of Minneapolis has agreed to assume the deposits and assets of the failed banks. The FDIC and U.S. Bank agreed to share losses on about $14.4 billion of the combined purchased assets.
This year's bank failures have already reduced the FDIC's insurance fund to below $10 billion, from $45 billion a year ago. Friday's closures will cost the FDIC an estimated $2.5 billion. Over the next four years, the agency expects bank closures will cost over $100 billion.
There are about 8,000 banks in the nation. The bank failure count for 2009 is below 1989's record high of 534 bank closures, which occurred during the savings and loan crisis.
From Bloomberg (excerpt):
The Federal Deposit Insurance Corp., replenishing funds after the worst financial crisis since the Great Depression, faces additional strains on its resources after spending $2.5 billion to shut nine banks last week.
Failures will peak next year, FDIC Chairman Sheila Bair said Oct. 14 during testimony before a Senate subcommittee. The agency had 416 banks on its confidential problem list of lenders deemed at heightened risk of failure as of June 30. Most banks on the list don’t fail, Bair has said.
The FDIC also carried a negative balance during the savings in loan crisis.
In September, the FDIC discussed how to raise money to restock the fund last and proposed that banks prepay their deposit insurance premiums for the next three years.
I have several concerns:
1) Increasing loan losses on commercial real estate are expected to cause hundreds more bank failures in the next few years. How will the banking system, and the FDIC, handle the potential increase in commercial loan defaults if economic recovery continues to be sluggish? How many banks are at risk if another wave of foreclosures hits the books?
2) Many economists are predicting slow recovery in the employment sector, with most estimating that unemployment will peak between 2012 and 2013. Whereas the initial spike in residential foreclosures was a result of risky loans, tightening credit guidelines and plunging home values, unemployment has traditionally been a primary cause of foreclosure. If the foreclosures continue to mount, then the stimulus packages will need to be extended. Is the current political furor over executive compensation packages and financial fraud an attempt to placate the American taxpayer prior to informing us that another stimulus package is needed?
3) As larger financial institutions assume smaller banks with FDIC assistance, there may be a tendency to overextend expansion. Bank of America absorbed Countrywide Home Loans and still seems to be struggling to find stability. How many of the failed banks will be absorbed by banks that received bailout funds or that receive aid from the Treasury or FDIC to execute the purchase?
From the Economist (excerpt):
Both Goldman Sachs and Morgan Stanley, which reported a third-quarter profit of $498m on Wednesday October 21st, continue to take high levels of trading risk.
The accounts of big, troubled banks—in particular Bank of America (BofA) and Citigroup—are awash with exceptional items, including tax gains and changes in the value of their own debt. After adjusting for the funny stuff, those two firms’ common shareholders still made losses in the third quarter. Transparency did at least take a small step forwards at Wells Fargo, America’s fourth-biggest bank by assets and its most taciturn. As well as unveiling a $2.6 billion profit, it announced this week (by press release) that it would start conducting conference calls for investors and stockmarket analysts from January.
Still, as a policymaker or a taxpayer, it is hard to view the banking system with anything other than mild nausea. Most of the queasiness stems from the continued accumulation of bumper compensation packages. The Treasury’s pay tsar is thought to be considering imposing deep pay cuts on the 25 most senior executives at firms it still owns shares in, including Citigroup and BofA. But since the bigwigs probably account for under 1% of the total compensation at those banks this would be a largely symbolic move.
The chances of a more severe government response is nevertheless growing. Now the emergency is over, the full horror of a banking system that is too big to fail is becoming ever more apparent. Both Goldman’s and Morgan Stanley’s value-at-risk numbers, a statistical measure of worst-case-scenario losses, remain high. Neither bank’s balance-sheet is shrinking, although they do both have more safe assets like government bonds than a year ago.
At the remaining two big banks with state ownership, things still look very messy. Citigroup has stuck its nastiest bits, including consumer loans and toxic securities, into a separate division, but the hard part lies ahead. At $617 billion this unit’s assets are about a third of Citi’s total, and winding it down will be difficult. At BofA, too, the residual pong of empire-building is hard to ignore. It continues to book more bad debts from Countrywide, a mortgage lender it bought last year.
Yet if the investment banks and the two giant conglomerates present a big regulatory headache, as much concern should focus on those banks further down the scale. In the second quarter of this year America’s banking system overall slipped into the red as bad-debt provisions mounted. There is likely to have been more pain in the third quarter. CreditSights, a research firm, reckons 600 to 1,100 of America’s 8,200 banks may need help from, or winding down by, the Federal Deposit Insurance Corporation, compared with the 118 that have failed since the beginning of 2008.
Right now America’s banking system resembles a pyramid. At the top, two or three firms are doing well. But beneath them are a handful of giant conglomerates that are struggling towards profits, a tier of middling banks with overexposure to risky assets, and a vast base of small banks in deep, deep trouble.
4) As large financial institutions, propped up by taxpayer funded bailout funds recover, what is being done to protect the public from future excesses or financial misconduct? How does allowing these companies to assimilate other companies with Federal assistance benefit the American taxpayer? What impact will further consolidation of the banking sector have on future attempts at banking reform? Considering the power of the banking lobby, I would not be surprised if all regulatory efforts are declawed in the process of becoming law, becoming fodder for political debates during campaign season rather than advocating on behalf of the consumer. Other than a risk adverse credit market, what has truly changed in the financial markets to prevent a relapse or repeat performance?
5) What is being done to address the derivatives market? There is little public outcry over this unregulated profit center, but that is because the average American doesn’t understand derivatives or the risk they pose to the economy.
Harper’s Magazine (excerpt):
If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it. On that day, the House Financial Services Committee hosted a panel on reform of the market for derivatives, the financial instrument which played such a notable role in the country’s economic meltdown.
Everyone rational knows that there is an enormous need to seriously reform the derivatives market, but the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions. They included Jon Hixson of Cargill, James Hill of Morgan Stanley (on behalf of the Securities Industry and Financial Markets Association), Stuart Kaswell of the Managed Funds Association (which, through one of its lobbyists, has delivered significant “bundled” donations to Frank) and Christopher Ferreri of the Wholesale Markets Brokers Association.
In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation—the night before the hearing was held — to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson — a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee — apparently constituted sufficient balance.
Johnson, who came last, offered the only serious critical viewpoint, saying that the American public had been “quite demoralized by…the bailouts that we experienced last fall.” After about five minutes of his testimony, Congresswoman Melissa Bean—another industry-funded committee member who chaired the hearing because Frank was absent—had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.
6) What impact does consolidation have on banking products, fees and services in the future? Less competition in the market, based on government bailout of the big players over the small players, does not constitute healthy competition in the marketplace.
7) The early data on loan modification programs indicates that existing modification terms offered do little to keep consumers in their homes for anything other than the short term. That benefits the bank in that they are allowed to spread the losses over several quarters or several years.
The banks are not forced to recognize the loss on the loan if they are receiving income. If the consumer does not have a change in circumstance, income, home value, credit score, etc. prior to the end of the negotiated loan terms, then they will be at risk of foreclosure again. There is no assurance that the credit markets will be thawed, that home values will have recovered or that the job market will have improved.
What does that do for the American homeowner who perceives the promise of aid today with optimism and hope only to lose their home tomorrow? What impact does that have on consumer confidence if economic recovery takes an additional 12-36 months to filter down to Main Street?
8) If the FDIC runs out of funds, they can access a taxpayer funded line of credit with the U.S. Treasury. This insures that depositors are protected, but leaves American taxpayers on the hook for future bailouts if bank failures continue to mount at a rapid pace. The FDIC anticipates the bank failures to cost about $100 billion over the next four years.
9) What impact will the bank failures and ongoing foreclosures have on access to credit? With both consumers and small businesses under duress financially, and credit markets frozen, which industry has the potential to lead us out of this economic slowdown? With CIT’s bankruptcy filing yesterday, access to credit is only becoming more difficult for the small business owner.
From the Economist (excerpt):
CIT, a lender to small and medium-sized businesses, from clothing retailers to Dunkin’ Donuts franchisees, filed for bankruptcy on Sunday November 1st after failing to garner enough support for a debt-restructuring plan. With $71 billion in assets, the century-old firm is only one-ninth the size of Lehman Brothers, which collapsed in September 2008. Nevertheless, its Chapter 11 filing augurs ill for America’s corporate minnows, whose financing options have narrowed dramatically over the past year.
The pain will be widely felt. Bondholders will be handed new CIT debt worth about 70% of the face value of their old paper.
Even Goldman Sachs, Wall Street’s savviest and best-connected firm, is taking a hit of sorts. Perhaps mindful that it could do without more bad publicity of the “vampire squid” sort, it renegotiated the terms of a loan facility that would have triggered a $1 billion payment if CIT went bust. Goldman will now get only $535m, half of that in collateral.
The biggest losers, of course, are shareholders, who will be wiped out as creditors take the equity in the new company. Also likely to lose their shirts are preferred shareholders, including the hapless taxpayer, who handed over $2.3 billion of funds from the Troubled Asset Relief Programme last December. After that bail-out, the Obama administration refused to inject more capital into CIT, or to guarantee its new debt issues, after concluding that the firm’s failure would not further destabilise the financial system. This raised the hackles of some in Congress who accused the White House of being more concerned with aiding big banks and their multinational clients than businesses on Main Street.
Whether pouring more money into CIT would ultimately have provided a better deal for taxpayers will never be known, but the politicians probably did the right thing. The market paralysis last year exposed serious flaws in CIT’s business model. Not only had it expanded rapidly in subprime mortgages and student loans but it relied on bond markets for most of its funding. When these seized up, it was soon left scrambling for cash.
10) Is the American public being told the truth about the economy or being provided information on a need to know basis to avoid panic? Market dynamics are fickle. Perception drives trading. It often seems like business decisions are reactive rather than proactive.
Statements are carefully worded to avoid market reaction. Actions are carefully measured to appease the public. Strategies presented in Washington must be crafted based on catering to public opinion, appeasing big business to cultivate campaign contributions, encouraging speculation, managing perception and influencing the conjecture, rather than based on a viable long term plan or clearly defined long term goals.
Customers who have questions about the recent bank closures can contact the FDIC as follows:
Bank USA, National Association 1-800-913-3062
California National Bank 1-800-913-5861
San Diego National Bank 1-800-517-1839
Pacific National Bank 1-800-508-8289
Park National Bank 1-800-450-5668
Community Bank of Lemont 1-800-528-6357
North Houston Bank 1-800-501-1872
Madisonville State Bank 1-800-913-3053
Citizens National Bank 1-800-517-1843
These telephone numbers will be from 8:00 a.m. to 8:00 p.m. The operating hours will follow the local time zone for each bank.
P. 866.626.4565, ext. 239
E: solardiva@comcast.net
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