Friday, July 3, 2009

Bank Failure Friday – Moved to Thursday, Seven Fall…

Now at 52 bank failures for the year, seven banks were seized by the FDIC, six of which were in Illinois. Pay particular attention to why those banks were seized and the “investments” in which they were participating:
Seven U.S. Banks Seized in Busiest Year for Closures Since 1992
By Ari Levy and Flynn McRoberts

July 3 (Bloomberg) -- Six banks in Illinois and one in Texas were seized by regulators as the deepening financial crisis pushed the toll of failed U.S. lenders this year to 52, the most since 1992.

Twelve banks have failed this year in Illinois, the most of any state. The seven lenders seized yesterday, with total assets of $1.49 billion and deposits of $1.34 billion, were closed by state or federal regulators and the Federal Deposit Insurance Corp. was named receiver, according to statements from the FDIC. Buyers were named for each of the closed institutions.

The Illinois banks are affiliates of Peotone Bank & Trust Co., in Peotone, Illinois, about 45 miles (72 kilometers) south of Chicago. The failures resulted primarily because of soured loans and losses on investments in collateralized debt obligations, the FDIC said. Illinois, with an unemployment rate above the national average, was one of seven states to begin the fiscal year without a spending plan.

“The six failed Illinois banks are all controlled by one family and followed a similar business model that created concentrated exposure in each institution,” the FDIC said. CDOs, which packaged bonds and loans into notes of varying risk and yield, lost money as real estate defaults soared.

Regulators this year have closed the most banks since the savings-and-loan crisis of the 1990s as lenders struggle with mounting losses on mortgages and commercial loans. The total for 2009 is more than double the 25 banks shuttered in 2008 and surpasses the 50 that were closed in 1993. The prior year there were 181 failures or government-assisted transactions.

FDIC Fund

The FDIC estimates yesterday’s seizures will cost its insurance fund $314.3 million. The regulator imposed an emergency fee in May to raise $5.6 billion to rebuild the fund, which has deteriorated in the past 18 months. More assessments are possible, the FDIC said.

Illinois Governor Pat Quinn, a Democrat, refused to sign a budget because lawmakers failed to approve raising the income tax. In his original $53 billion budget proposal in March, the governor sought personal and corporate tax increases to help eliminate an $11.6 billion deficit and maintain state services.

Chicago is 280 miles from Detroit, home to General Motors Corp. and Chrysler LLC, which were forced into bankruptcy. Lear Corp., the Southfield, Michigan-based maker of automotive seats, announced plans yesterday to enter bankruptcy. The unemployment rate in Illinois was 10.1 percent in May, compared with 9.4 percent nationally.
‘A Mess’

“This is a mess,” said Jack Ablin, who oversees $60 billion as chief investment officer at Harris Private Bank in Chicago. “We’re a manufacturing state and in the Midwest, so we’re influenced by the autos.”

In addition to CDOs, the failed banks were plagued by losses on commercial real estate loans. Founders Bank of Worth, the biggest of the Illinois banks seized yesterday, had $374 million in construction and commercial real estate loans as of March, accounting for 63 percent of the bank’s net loans and leases, according to a regulatory report.

Millennium State Bank of Texas, the Dallas-based bank taken over yesterday, had $67.5 million in such loans, or 81 percent of its total loans.

“The common denominator for most of the bank failures so far has been troubled construction loans,” said Matthew Anderson of Foresight Analytics, an Oakland, California-based real estate research firm. “There’s no easy way out with defaulted construction loans in today’s environment.”

The Illinois banks have a combined 29 branches, which will all open under new ownership by July 6, the FDIC said. Millennium’s lone office will open that day as a unit of Irvine- based State Bank of Texas.

The following table lists the banks that were seized yesterday. Asset and deposit figures are in millions of U.S. dollars.

Failed Bank Buyer Assets Deposits

Founders Bank PrivateBank & Trust 962.5 848.9 Worth, IL Chicago
First National First Financial 166 147 Danville, IL Terre Haute, IN
Millennium State State Bank of Texas 118 115 Dallas Irving
Rock River Bank Harvard State Bank 77 75.8 Oregon, IL Harvard, IL
Elizabeth State Bank Galena State Bank 55.5 50.4 Elizabeth, IL Galena, IL
John Warner State Bank of Lincoln 70 64 Clinton, IL Lincoln, IL
First State Bank First National 36 34 Winchester, IL Beardstown, IL

Collateralized Debt Obligations (derivatives) and Commercial Real Estate. This is a situation that is going to get much, much worse over time. The small local and regional banks’ exposure is immense as many funded enterprises that were larger than they should have been invested in, exposing themselves to too much risk. Investing in securitized debt is just silly for a small institution, again, many of them simply did not understand the risk involved.

As these small banks fail, their parts move up the food chain. Eventually those parts will find their way right back to the very institutions that created the derivatives mess in the first place. The debt needs to be cleared, as in defaulted, but so much of it has been moved onto the government roles that the government has now defaulted on her debt – that’s what “quantitative easing” is – when one can no longer finance their debts, and needs to issue more debt to remain cash solvent, then they are bankrupt and by printing money to buy one’s own debt, we have in fact defaulted to those who hold our debts as the money they will be paid back with is being devalued by that process. This creates a negative feedback loop, a death spiral of debt.

The FDIC is as INSOLVENT as the banks that it backstops. They have no real money as all their fees were added to the general fund and SPENT. Even their ledger balance is now wiped out and they are asking Congress to be replenished. The failure of our debt based system is now accelerating. Small bank failures are but one symptom. Hey, that’s what happens when you live life in the credit fast lane!

The Eagles – Life in the Fast Lane: