Friday, July 20, 2012

This Week in Bank Failures

The outline of a European bailout for banks in Spain has been agreed to. The specific sums of money are not yet determined and will depend on the results of a subsequent examination of each bank.

The city of Baltimore figures to be the lead plaintiff in municipalities’ claims against banks for manipulating Libor. Baltimore filed its suit against the banks a year ago, imagining at the time that it would be a small and highly technical case. With the recent revelations, the Libor class action is turning into something much larger that will hinge on subpoenas and the credibility of testimony from bank employees, many of whom, given the prevailing rate of turnover in banking, no longer work for the banks in question.

One of the big questions in Libor litigation is whether banks’ actions meet the definition of a conspiracy to fix prices. This is not a terribly difficult legal standard to meet. The facts would have to show agreement among employees of multiple businesses on actions taken in recognition of a particular pricing outcome, which might involve interest rates or the prices of securities. If this is shown, plaintiffs might be entitled to triple damages under U.S. law. This law would appear to apply even to parties that are located outside the United States, if they were operating in concert with people in the United States. This possibility may make it particularly important for banks to settle these cases out of court. Talks of settlement are premature, however, until it becomes more clear how many plaintiffs and defendants there might be.

Capital One will pay $210 million in fines and restitution to settle charges of deceptive and fraudulent credit card marketing tactics. The bank fraudulently enrolled some customers in add-on subscriptions such as “credit monitoring” for new credit card accounts, and improperly pressured or misled other customers to enroll in these services. The bank will refund $150 million to customers and pay $60 million in fines to regulators to settle the case. It must also stop offering the add-ons in question until it changes its marketing practices and adds internal controls.

The city of San Bernardino, California, has declared a fiscal emergency, a preparatory step required for a California municipality that will be declaring bankruptcy in less than 60 days. San Bernardino’s bankruptcy filing will probably come early next month. Also in California, Compton is expected to be insolvent and could file for bankruptcy within the next two months.

Student loans have a great deal in common with subprime mortgages, according to a report released this week. In both cases, the securitization market led lenders to lower underwriting standards and employ deceptive marketing practices to issue huge numbers of loans that borrowers could not possibly repay.

HSBC, already facing U.S. fines and a Congressional investigation for money laundering lapses, now also faces fines and possible criminal prosecutions in Mexico for similar offenses there.

There were five small bank failures tonight, each involving banks with deposits of $200 million or less.

  • First Cherokee State Bank, 3 locations, Woodstock, Georgia, and Georgia Trust Bank, 2 locations, Buford, Georgia. Community & Southern Bank is paying a 1/2 percent premium for the deposits of both failed banks and is also purchasing the assets.
  • Second Federal Savings and Loan Association of Chicago, 3 locations. Hinsdale Bank & Trust Company is paying a $10 million premium for the deposits, but will not be purchasing the assets.
  • Two banks owned by Mercantile Bancorp. One is Heartland Bank, 2 locations, Leawood, Kansas. Missouri-based Metcalf Bank is paying a 1.1 percent premium for the deposits and is also purchasing the assets. The other is The Royal Palm Bank of Florida, 3 locations, Naples. First National Bank of the Gulf Coast is assuming the deposits and purchasing the assets. Mercantile Bancorp had purchased both failed banks within the last decade, and had sold other banks it owned to raise capital to keep the two banks operating. The bank holding company says its local operations in the Quincy, Illinois, area will not be affected.