GMAC got a government guarantee for its bond issue this week. Washington wants to keep GMAC going as part of its auto strategy, and the guarantee will save GMAC about $150 million in interest payments over the next three years. There is talk of additional aid for GMAC in the coming days.
Congress is considering a move to freeze credit card interest rates on existing accounts starting December 1. After February, under credit card reform legislation already passed, credit card issuers will need a cardholder’s permission to raise interest rates, so banks have been rushing to raise rates, often drastically, before that deadline. A problem with the higher interest rates is that banks are driving away their best customers, while their more desperate customers may have nowhere else to go.
What should regulators do about banks that are too big to fail? The White House has proposed keeping a secret list of these banks, but Rep. Barney Frank says that secrecy is the heart of the problem. He’s talking about a change in regulation that would prohibit any secret deals between regulators and too-big-to-fail institutions. This would cover everything from the $100 billion giveaway to Citibank a year ago to the secret arrangement with regulators under which Bank of America has apparently agreed to change its management practices. Under the amendment that Frank is putting forward, and that seems likely to be adopted by the House, the too-big-to-fail list and all enforcement actions for companies on the list would be conducted in public.
The Fed, FDIC, and other federal banking regulators today issued a policy statement related to commercial real estate. Commercial real estate is in unfamiliar territory for most of the bankers and regulators working on it because the value of most commercial real estate has declined. The decline in value could make loans based on the real estate look worse than they are. The key point in the policy statement is that a decline in value of the commercial real estate should not by itself reflect on the quality of the loans. In addition, loan modifications made by the banks in response to the declining value of the real estate should also not reflect on the quality of the loans. However, the declining income of borrowers — a significant problem for many commercial real estate owners as stores and offices close — is a factor to consider if it means the borrowers may not be able to repay the loans.
Yesterday, the NCUA liquidated a small credit union in Los Angeles, the Second Baptist Church Credit Union, which had 340 members. The credit union accounts and assets were transferred to the much larger Prosperity Federal Credit Union. The Second Baptist Church Credit Union had become insolvent, according to California banking regulators, which ordered the liquidation.
U.S. Bank added 153 new locations in 4 states tonight as it acquired the assets and deposits of 9 failed banks. The failed banks were the banking subsidiaries of FBOP Corporation and were, from largest to smallest:
- California National Bank, with $6.2 billion in deposits and 68 locations, nearly all in Los Angeles and Orange counties in southern California
- Park National Bank, with $3.7 billion in deposits and 30 locations in Chicago, Illinois, and its suburbs
- San Diego National Bank, with $2.9 billion in deposits and 29 locations in San Diego County in southern California
- Pacific National Bank, with $1.8 billion in deposits and 16 locations in northern California, along with 2 in southern California
- North Houston Bank, in Texas
- Madisonville State Bank, in Texas
- BankUSA, in Phoenix and Scottsdale, Arizona
- Citizens National Bank, in Teague, Texas
- Community Bank of Lemont, in Illinois
The total deposits of the 9 banks were over $15 billion. According to reports, there were several bidders for various of these banks, but U.S. Bank was believed to have the only bid for all of them.
FBOP is a privately held bank holding company, owned by banking tycoon Michael Kelly, which started with First Bank of Oak Park in Illinois. It acquired other banks starting in 1990. Its web site lists 29 acquisitions between 1990 and 2007, though apparently that is not the complete list. FBOP secretly owned shares in Fannie Mae and Freddie Mac, which hurt the holding company’s balance sheet when those institutions were nationalized a year ago. Its loan problems were concentrated most heavily in its three large California banks. After banking regulators ordered it to raise capital, FBOP claimed to have $600 million, then $750 million in commitments from private investors, but was never able to present this plan in writing.
Among the banks FBOP owned, Park National Bank was still solvent, but was closed under the cross guaranty provision of deposit insurance, when it did not have enough capital to pay the costs of closing its affiliated banks. The cross guaranty prevents a bank holding company from hiding its good assets in one banking subsidiary while other subsidiaries fail.
For U.S. Bank, already the 6th largest bank in the United States, the acquisitions give it the Chicago presence it has been seeking, and provide more coverage in California.
These 9 bank closings are estimated to cost the FDIC $2.5 billion and bring the count of bank failures for the year so far to 115. California National Bank was the fourth largest bank failure of the year. If these nine banks had been a single bank, it still would have been smaller than Colonial Bank, the largest bank failure of the year so far.
