Another $100 – $150 billion needed?

Posted by Ray on November 22, 2010 under Main | Be the First to Comment

The US banking system is still a mess no matter what the regulators and pundits say. From the Volker Rule to Basel III to fraudclosure there are issues that will have to come to ahead at some point in the not so distant future. Specifically, the Financial Times reported that because of the Basel III tier 1 capital requirements the top 35 US banks may be short $100 – $150 billion dollars. This means more capital raises for many of these banks, but don’t worry analysts say this is manageable.

Other parts of the FT’s article states that many of these banks may have to selloff $500B, in total, of assets to avoid the capital raise. The issue is that if all these banks, which the article admittedly says is not equally distributed between the top 35 banks, have to selloff $500B in assets to avoid a capital raise who will buy these assets? If the liability of these assets equals higher capital requirements buyers may be few and far between which means lower prices for the assets being sold or they will have to raise capital. Of note is the shortfall is only because of Basel III and not because of any other issue outstanding.

Remember how so many of these capital requirement issues were supposedly put to rest because of our “stress tests”? Clearly the stress tests, as has been stated time and time again, were worthless. In fact rumors are making their rounds that another round of stress tests are on the way for US banks. What is interesting about this is that the stress tests lack total credibility for 2 reasons. First, look at the EU’s stress tests which passed most banks and look what is happening in Ireland, they were a farce. Second, without good accounting rules, i.e. mark-to-market vs. mark-to-fantasyland, the stress tests are bogus. A loss is a loss and simply pretending it doesn’t exist is the most idiotic thing I have ever heard of and if investors do not do their research it can lead to major losses. In my opinion this is nothing more than state sponsored investor fraud.

What is missing out of all of these bank articles is the whole fraudclosure mess and its impact on the banks. As stated previously there is no remedy for a broken chain of title except to modify the mortgage which starts a new chain of title and eliminates the problem. There are issues with this though. First, doing nothing means that all of those MBS are worthless because there is no cash flow and the creditor cannot collect the collateral, think about that for awhile. Second, if your only option is to modify the mortgage it means that the MBS is worth less than face value. Either way someone somewhere is taking a loss and that means there may be a put back to the originating bank. When the Fed put back bonds to BoA that should concern investors… it’s the Fed telling banks you ripped us off.

If these put backs continue or escalate, which they will because who wants to take a loss on paper that was misrepresented to begin with, that could mean that banks have much larger problems than Basel III capital requirements. If the put back is widely exercised banks will need a lot more money than $100 – $150B. They might need a trillion or more, who really knows anymore? Frankly, Basel III is the last thing anyone should be worried about. People should be worried about what the put back risk is for many of these banks because the put back risk is far greater of an issue than the sub-prime crisis ever was. I believe we will find out if there are indeed “no more bank bailouts” or not. My guess is we will all be shareholders of some big banks in the near future. In the meantime I am waiting for my dividend check from our previously made, wildly profitable, insert sarcasm here, investments into GM, Citi, BoA, Ally…

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Failure Friday: March 5, 2010 – Updated

Posted by Ray on March 5, 2010 under FDIC | Be the First to Comment

Little attention has been given to the main Friday events this year, I am guilt of not reporting on it either, which is bank failures. I guess everyone, me included, has become complacent with the fact that banks are failing at a very scary rate still. I am thinking that the Fed should have left the discount rate along as we are now up to 25 bank closures this year, 3 tonight (see below). At this rate we will see, assuming February is the example of what the rest of the year holds, we will see upwards of 180 bank failures for 2010. I thought the crisis was over?

Clearly there are major structural problems within the banking system still. Although the “too big to fails” will remain, well, too big to fail the smaller banks are up the creek without a paddle. Clearly whatever plan the administration had in mind for these smaller institutions has not worked or the problems are so severe that no one wants to talk about them. I think the latter is probably more likely than the former. Either way, these failures are a major problem especially as the FDIC is technically bankrupt, what else do you call an organization that has a substantial negative net worth? Obviously that lifeline with the Treasury will have to be tapped in order to guarantee the $250,000 per deposit.

Tonight’s winners are:

Bank	State	Assets	Deposits
Waterfield Bank	MD	$155.6M	$156.4M
Bank of Illinois	IL	$211.7M	$198.5M
Sun American Bank	FL	$535.7M	$443.5M
Centennial Bank	UT	$215.2M	$205.1M
Total	4	$ 1118.2M	$ 1003.5M

I guess the losses are not that bad, but given the sorry state of the FDIC I think any loss is bad news. So much for the FDIC’s national savings week push, why save when your bank goes out of business?

Bank	Loss-Share Agreement	Realized or Expected Losses
Waterfield Bank	$0 – No Buyer	$51M
Bank of Illinois	$166.6M	$53.7M
Sun American Bank	$433M	$103.8M
Centennial Bank	$0 – No Buyer	$96.3M
Total	$599.6M	$ 304.8M

Waterfield Bank had no buyer, apparently, but the other 2 banks did have buyers. As you can see the losses are pretty severe given the asset size of the banks. All told losses could hit $808.1M if the FDIC needs to make good on the loss-share agreements, certainly some of the loss-share will be realized if not all of it. Bank of Illinois was purchased by Heartland Bank and Trust Company out of, get this, Normal Illinois and Sun American Bank was acquired by First-Citizens Bank out of Boca Raton FL.

Centennial Bank and Waterfield Bank had deposits of $1.8M and $407,000, respectively, not covered by the FDIC insurance, keep no more than the maximum insured limit at banks, especially smaller banks. There may be more closures later tonight so check back. Below are the press releases.

Waterfield Bank:

Waterfield Bank, Germantown, Maryland, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the insured depositors, the FDIC created Waterfield Bank, FA—a new depository institution chartered by the OTS and insured by the FDIC—to take over the operations of Waterfield Bank. The new institution will remain open until April 5, 2010, to allow depositors access to their insured funds and time to move accounts to other insured institutions.

The bank had one branch location. It also took deposits from customers via the Internet and 38 affinity groups.

At the time of closing, the receiver immediately transferred to Waterfield Bank, FA, all insured deposits of the failed bank, except certificates of deposits (CDs) and individual retirement accounts (IRAs). The FDIC will mail checks directly to customers with CDs and IRAs for the amount of their insured funds, on Monday morning, March 8.

Customers with savings accounts, checking accounts and money market deposit accounts will have access to their insured funds as usual during this transitional period. Banking activities, such as direct deposit, check writing, and ATM and debit card use, will continue as normal for the customers with demand deposit accounts until Waterfield Bank, FA, closes on April 5. At the end of this transition period, the FDIC will mail checks to customers who have not closed their accounts or transferred their funds to another institution.

On-line banking services, including bill pay, will be unavailable for transactions over the weekend; however, these systems will be active by Monday morning, March 8.

As of December 31, 2009, Waterfield Bank had $155.6 million in assets and $156.4 million in deposits. At the time of closing, the amount of deposits exceeding the insurance limits totaled about $407,000. This amount is an estimate and is likely to change as the FDIC works with customers of Waterfield Bank. The uninsured deposits were not transferred to the newly chartered institution.

Depositors with more than $250,000 at Waterfield Bank should call the FDIC at (800) 830-4735 to make an appointment to discuss the status of their funds. The phone number will be operational this evening until 11:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 9:00 p.m., EST; on Sunday from noon to 6:00 p.m., EST; and thereafter from 8:00 a.m. to 8:00 p.m., EST.

Customers who would like more information about today’s transaction can call the toll-free number; send an e-mail to waterfieldbankquestions@fdic.gov.

Under the FDI Act, the FDIC may create a new depository institution to ensure that depositors have continued access to their insured funds where no other bank has agreed to assume the insured deposits. This arrangement allows for uninterrupted direct deposits and automated payments from customers’ accounts and allows them time to find another institution with which to do business.

The FDIC estimates that the cost to its Deposit Insurance Fund will be $51.0 million. Waterfield Bank is the 25th bank to fail in the nation this year and the first in Maryland. The last FDIC-insured institution to fail in the state was Bradford Bank, Baltimore, on August 28, 2009.

Bank of Illinois:

Bank of Illinois, Normal, Illinois, was closed today by the Illinois Department of Financial Professional Regulation – Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Heartland Bank and Trust Company, Bloomington, Illinois, to assume all of the deposits of Bank of Illinois.

The two branches of Bank of Illinois will reopen on Saturday as branches of Heartland Bank and Trust Company. Depositors of Bank of Illinois will automatically become depositors of Heartland Bank and Trust Company. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from Heartland Bank and Trust Company that it has completed systems changes to allow other Heartland Bank and Trust Company branches to process their accounts as well.

This evening and over the weekend, depositors of Bank of Illinois can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Bank of Illinois had approximately $211.7 million in total assets and $198.5 million in total deposits. Heartland Bank and Trust Company will pay the FDIC a premium of 3.61 percent to assume all of the deposits of Bank of Illinois. In addition to assuming all of the deposits of the failed bank, Heartland Bank and Trust Company agreed to purchase essentially all of the assets.

The FDIC and Heartland Bank and Trust Company entered into a loss-share transaction on $166.6 million of Bank of Illinois’s assets. Heartland Bank and Trust Company will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $53.7 million. Heartland Bank and Trust Company’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Bank of Illinois is the 24th FDIC-insured institution to fail in the nation this year, and the third in Illinois. The last FDIC-insured institution closed in the state was George Washington Savings Bank, Orland Park, on February 19, 2010.

Sun American Bank:

Sun American Bank, Boca Raton, Florida, was closed today by the Florida Office of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company, Raleigh, North Carolina, to assume all of the deposits of Sun American Bank.

The 12 branches of Sun American Bank will reopen on Monday as branches of First-Citizens Bank & Trust Company. Depositors of Sun American Bank will automatically become depositors of First-Citizens Bank & Trust Company. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from First-Citizens Bank & Trust Company that it has completed systems changes to allow other First-Citizens Bank & Trust Company branches to process their accounts as well.

This evening and over the weekend, depositors of Sun American Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Sun American Bank had approximately $535.7 million in total assets and $443.5 million in total deposits. First-Citizens Bank & Trust Company did not pay a premium to acquire the deposits of Sun American Bank. In addition to assuming all of the deposits of the failed bank, First-Citizens Bank & Trust Company agreed to purchase essentially all of the assets.

The FDIC and First-Citizens Bank & Trust Company entered into a loss-share transaction on $433.0 million of Sun American Bank’s assets. First-Citizens Bank & Trust Company will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-866-954-9532. The phone number will be operational this evening until 9:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 6:00 p.m., EST; on Sunday from noon to 6:00 p.m., EST; and thereafter from 8:00 a.m. to 8:00 p.m., EST.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $103.8 million. First-Citizens Bank & Trust Company’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Sun American Bank is the 23rd FDIC-insured institution to fail in the nation this year, and the fourth in Florida. The last FDIC-insured institution closed in the state was Marco Community Bank, Marco Island, on February 19, 2010.

Centennial Bank:

The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of Centennial Bank, Ogden, Utah. The bank was closed today by the Utah Department of Financial Institutions, which appointed the FDIC as receiver.

The FDIC entered into an agreement with Zions First National Bank, Salt Lake City, Utah, to accept the failed bank’s direct deposits from the federal government, such as Social Security and Veterans’ payments.

The FDIC was unable to find another financial institution to take over the banking operations of Centennial Bank. As a result, checks to the retail depositors for their insured funds will be mailed on Monday. Brokered deposits will be wired once brokers provide the FDIC with the necessary documents to determine if any of their clients exceed the insurance limits. Customers who placed money with brokers should contact them directly for more information about the status of their funds.

As of December 31, 2009, Centennial Bank had approximately $215.2 million in total assets and $205.1 million in total deposits. At the time of closing, the bank had an estimated $1.8 million in uninsured funds. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-889-4976. Customers with accounts in excess of $250,000 also should contact the toll-free number to set up an appointment to discuss their deposits. The phone number will be operational this evening until 9:00 p.m. Mountain Standard Time (MST); on Saturday from 9:00 a.m. to 6:00 p.m. MST; and on Sunday from noon to 6:00 p.m. MST; and thereafter from 8:00 a.m. to 8:00 p.m. MST.

Beginning on Monday, customers of Centennial Bank with deposits exceeding $250,000 at the bank may visit the FDIC’s Web page “Is My Account Fully Insured?” at https://www2.fdic.gov/drrip/afi/index.asp.

Centennial Bank is the 26th FDIC-insured institution to fail this year and the second in Utah since Barnes Banking Company, Kaysville, was closed on January 15, 2010. The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $96.3 million.

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