Friday, October 24, 2008

This Week in Bank Failures

The focus in Washington has moved on from banks to money market funds. In a new initiative, JPMorgan Chase is taking $540 billion in funding from the Fed to operate five funds to purchase certificates of deposit, bank notes, and commercial paper from money market funds. This will benefit banks indirectly as banks are managers and shareholders of money market funds.

U.S. economic news shows that problems with jobs and foreclosures are getting worse. RealtyTrac says foreclosure counts are up 71 percent from the already elevated levels of a year ago. U.S. banking authorities are trying to put together a plan to reduce foreclosures, which might include FDIC guarantees of modified mortgages, but they do not yet seem ready to consider the obvious stopgap measure of a moratorium on foreclosures of owner-occupied buildings. Half a million workers lost jobs last week, and economists now expect the U.S. economy to continue to shed at least a quarter of a million jobs every month through next year. Layoffs were announced at Goldman Sachs (3,260), Yahoo (1,500), Merck (7,200 worldwide), Xerox (3,000), across the U.S. auto industry (thousands), and in hospitals (thousands). Layoffs are a concern for banks primarily because they tend to lead to mortgage defaults and foreclosures.

Problems in banking continue on a massive scale worldwide, and moves to shore up banks that would have raised eyebrows just three months ago go practically unnoticed. One example is the 10 billion euro capital package provided to one of my banks, ING Group, by the Netherlands government. The comparatively small size of this bailout has left observers imagining that ING’s problems must not be very serious. This is not the reaction the move would have drawn had it occurred in July or August.

What’s worse than a run on a bank? BBC News business editor Robert Peston writes about runs on countries, as billions of dollars are pulled out from under a growing list of countries: Iceland, Hungary, Pakistan, Ukraine, Belarus, South Africa, Argentina, South Korea. Without international intervention, a run on a country could bring down every bank in the country.

The Lehman Brothers credit default swaps were settled quietly Tuesday with a surprisingly low $5.2 billion changing hands, according to the clearing house. That is less than 2 percent of the total amount issued, as the vast majority were canceled out by subsequent trades. Some observers had worried about billions of dollars in liabilities for AIG. Instead, AIG had to pay just $6 million to settle its share of derivatives on Lehman debt. Nevertheless, AIG continues to burn through more than $1 billion a day in government money, and few observers believe its current $123 billion credit line will be enough to get through the rest of the year.

Wachovia, which is preparing to be acquired by Wells Fargo, reported a $23.9 billion quarterly loss. This is bad, but not as bad as it sounds. Wachovia removed phantom assets so that they do not have to be reported as losses later by Wells Fargo. The accounting adjustments provided most of the losses. In the meantime, a shareholder lawsuit seeks to block the acquisition. If successful, the suit would effectively put Wachovia in liquidation, with little reason to hope that there would be any money left over for the shareholders. Wachovia’s stock value has continued to decline.

National City Bank, which has been a subject of concern all year, agreed this morning to be acquired by nearby PNC Bank in a stock swap. The U.S. Treasury is providing $8 billion in financing for the deal. National City’s stock price had fallen by 92 percent in a little over a year since its financial troubles became known, giving it a market value of $5 billion. The stock swap values the company at a little over $4 billion. Earlier this week National City reported a quarterly loss approaching $1 billion and announced 4,000 job cuts.

PNC, centered in Pittsburgh, has been focusing this year on expanding its reach in the Mid-Atlantic; the National City acquisition gives it a much stronger presence in the states to its west, from Ohio to Missouri. The combination makes it the fourth largest bank in the United States according to the number of locations.

Alpha Bank & Trust of Alpharetta, Georgia, was shut down tonight by Georgia banking officials and the FDIC. Alpha Bank had $346 in deposits at the end of September, and the FDIC estimates that $3 million were uninsured. Regulators said the bank failed to meet requirements for minimum operating capital. Alpha’s business model, based on rapid growth in a niche lending market, may have been its downfall. The Atlanta suburbs where it was located was one of the first areas to be hit by the real estate decline, more than a year before it hit nationwide. Alpha opened in May 2006, after the problems with Georgia’s economy had started to take their toll, and rushed to make loans that other banks in the area were hesitant to make at that point, especially for residential construction and land development. It made almost $200 million in loans in its first year at a time when unprecedented numbers of real estate loans were going bad. Closing after just 29 months, it is apparently the fastest failure ever for a bank with a Georgia charter. It is the second Alpharetta-based bank to fail this year.

Alpha’s deposits are being taken over by Stearns Bank, a commercial lender based in St. Cloud, Minnesota. Stearns is buying a small fraction of Alpha’s assets, but does not plan to buy either of Alpha’s offices. The offices will reopen Monday as Stearns Bank, and Stearns will sort out its plans for a permanent office in Georgia over the coming weeks. Currently, Stearns operates in Minnesota and Arizona.

Unlike previous bank takeovers arranged by the FDIC this year, Stearns does not seem to have a strategic plan in taking over Alpha Bank beyond the thought of setting up an office in the Southeast. Stearns’ CEO suggested in an interview that they would take their time to consider the new opportunities that the acquisition provides.

The FDIC will spend an estimated $158 million in taking over most of the assets of Alpha Bank.