It was Friday again: 14th and 15th banks closed by regulators

The FDIC Failed Banks List announced yesterday that Meridian Bank, Eldred, IL and Main Street Bank, Northville, MI were closed down yesterday. That's number 14 and 15 failed banks for 2008.

The AOL Money reports

The Federal Deposit Insurance Corp. was appointed receiver of the banks. Main Street Bank, based in Northville, Mich., had $98 million in assets and $86 million in deposits as of Oct. 7. Meridian Bank, based in Eldred, Ill., had assets of $39.2 million and deposits of $36.9 million as of Sept. 25.

The FDIC said all of Main Street Bank's deposits will be assumed by Monroe Bank & Trust of Monroe, Mich. The two offices of Main Street Bank will reopen Saturday as branches of Monroe Bank & Trust.

All of Meridian Bank's deposits will be assumed by National Bank of Hillsboro, Ill. Meridian's four offices in Altamont, Carlyle, and Eldred will reopen for normal hours on Saturday, and its Alton office will reopen Tuesday, as branches of National Bank.

The 15 bank failures so far this year compare with three for all of 2007, and federal banking officials have said that more banks are in danger of collapse.

There is currently no reason given for the failures of the two banks. Bad real estate loans? That's been the prevailing reason for the other 13 bank failures in 2008.

There is also a Meridian Bank in Arizona. There is no connection between this failed Illinois bank and the Meridian Bank in Arizona.

Krugman on what's wrong with the Paulson proposal

Paul Krugman explains what has happened to cause the current financial crisis.

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

Krugman's analysis says that Paulson's proposal isn't going to work. All it does is tax taxpayers to provide a new stake to the same banker gamblers who caused the current problems in the first place.

Why should the taxpayers be expected to pay taxes to let the same bankers go back to the game with no more controls than they had in the first place? In addition, if the gamblers win, the taxpayers get none of the profits. That sounds to me like a good reason to stop paying taxes.

Instead, the government needs to take over the failed banks, replace the executives, regulate all the banks in the industry, and then carefully sell off the loans the banks hold with the profits going to the taxpayers.

In my next post I will show why Nouriel Roubini's analysis suggests that is going to be the inevitable result of the financial crisis anyway.

Normal Friday financial news - Ameribank, Inc., Northfork, WV was taken over by FDIC yesterday

In all the excitement and panic surrounding the largest government action to save failed Wall Street gamblers bankers yesterday, it would be easy to overlook that the FDIC tool over Ameribank, Inc., Northfork, WV.

Ameribank was a small bank with only $102 million in deposits and $115 million in assets as of June 30th. According to the AP article

Ameribank ran into trouble because of "excessive growth" in the construction loans for property rehabilitation, mainly in low- and moderate-income housing markets, according to the federal Office of Thrift Supervision, the bank's primary regulator. [Snip]

Construction and development loans have been the fastest-growing category of troubled loans for U.S. banks, and many banks have heavy concentrations of them in their lending portfolios, according to the FDIC. Some small banks are considered especially vulnerable.

The 12 bank failures so far this year compare with three for all of 2007, and federal banking officials have said that more banks are in danger of collapse.

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Here is the FDIC's Failed Bank List

McCain's son was a director of the bank that failed last Friday

The 11th bank to fail this year, Silver State Bank of Henderson, NV., included as one of its Directors Andrew McCain, John McCain's son. Andrew had resigned from the Board in July 2008 for "personal reasons."

The failure of a bank which had had McCain's son as a Director brings back to mind the Keating Five Scandal. John McCain was himself one of the five Senators who were involved in trying to get the Federal Home Loan Bank Board (FHLBB) regulators not to close the Lincoln Savings and Loan Association owned by the chairman,Charles H. Keating, Jr.

The FDIC said in its press release:

To protect the depositors, the FDIC entered into a Purchase and Assumption Agreement with Nevada State Bank, Las Vegas, Nevada, to assume the Insured Deposits of Silver State Bank.

The branches of Silver State Bank will open on Monday as Nevada State Bank in Nevada and National Bank of Arizona in Arizona. Depositors of the failed bank will automatically become depositors of Nevada State Bank or National Bank of Arizona

The failure was brought on by bad loans in the real estate and construction business in Nevada and Arizona. Reuters writes that "The failure is expected to cost the FDIC deposit insurance fund between $450 million and $550 million."

This will not be the last bank to go under in the near future.

Colombian Bank and Trust of Topeka Kansas Closed yesterday

Another bank has fallen afoul of the conservative movement deregulation of financial institutions. Colombian Bank and Trust of Topeka Kansas was closed yesterday by the FDIC. According to the FDIC's Press Release (PR-69-2008)

To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank and Trust, Chillicothe, Missouri, to assume the insured deposits of The Columbian Bank and Trust Company.

The nine branches of The Columbian Bank and Trust Company will reopen on Monday as branches of Citizens Bank and Trust. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. 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.

Over the weekend, customers of The Columbian Bank and Trust Company 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 June 30, 2008, The Columbian Bank and Trust Company had total assets of $752 million and total deposits of $622 million, of which there were approximately $46 million in uninsured deposits held in approximately 610 accounts that potentially exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

The Columbian Bank and Trust Company also had approximately $268 million in brokered deposits that are not part of today's transaction. The FDIC will pay the brokers directly for the amount of their insured funds.

The International Herald Tribune reports that the problem was "losses on soured real estate loans."

Columbian reported $92 million in delinquent loans in the second quarter, citing a "volatile real estate market." The bank set aside $9.2 million for loan losses in the first quarter, up nearly 30 percent from the $7.1 million it set aside in the first quarter of 2007.

A financial statement for the bank shows $482.3 million in real estate loans in the first quarter, including $439.4 million in construction and development and commercial real estate loans. Columbian has said that five borrowers represented nearly half the $92 million in problem loans.

Construction and development loans are areas that have been under greater scrutiny from federal examiners, the FDIC has said, and a growing number of banks have cited weakness in those areas of their loan portfolios.

If the problem was commercial real estate loans, then this bank failure may have been a result more of the souring economy than of bad mortgages.

Regarding home mortgages, the FDIC has announced a new mortgage program. This should bail out some mortgage holders as well as help the financial institutions holding the mortgages.

On Wednesday, the FDIC announced a program under which thousands of troubled home borrowers with loans from IndyMac will be able to switch into 30-year, fixed-rate mortgages with interest rates capped at around 6.5 percent in what could be an important test case for future bank resolutions.

FDIC officials have said the agency expects to raise insurance premiums paid by banks and thrifts to replenish its reserve fund after paying out billions of dollars to depositors at IndyMac. The fund, currently at $53 billion, is expected to take a hit from IndyMac of $4 billion to $8 billion.

FDIC Chairman Sheila Bair said recently she expects turbulence in the banking industry to continue well into next year, and more banks to appear on the agency's internal list of troubled institutions.

Of the 8,500 or so banks in the country, 90 were considered to be in trouble in the first quarter. The FDIC doesn't disclose the banks' names.

Only 13 percent of banks that make the list fail, on average, and most are nursed back to health or acquired by stronger institutions, according to Bair.

Federally insured banks and thrifts set aside a record $37.1 billion to cover losses from soured mortgages and other loans in the first quarter, when profits were nearly halved.

If 90 banks were considered to be in trouble, that is 1.06% of the 8,500 total banks. That was five months ago, though, and the economy has gotten worse. The suggestion that Colombian went under because of commercial real estate loans suggests that there may be more banks on the troubled list now than just 90, and the declining economy will add even more.

Add to that the number of banks and investment institutions currently trying to rebuild their capital base, thus simultaneously restricting lending along with recent reports that other nations appear to be entering a recession, then hopes that the US economy will turn around even in 2009 are just that - only hopes.

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Bill Moyer's show last night about the collapse of the American middle class strongly suggests that the American economy is not coming back anytime soon. "Soon" would be at a minimum five years. Remember that the American economy produces to meet demand for goods and services, and that 70% of that demand is from mostly middle class consumers. Much of the Investment demand is based on anticipated consumption demand, so adding investment funds is not going to help, either. For there to be real recovery, the American middle class has to recover and at the moment there is not only no sign that it will, instead it appears to be headed even further down.

Here is the transcript of Bill Moyer's show last night.

Here is a video of the August 22nd show.

Another failed bank taken over on Friday.

This list of failed banks maintained by the FDIC will keep you up on the latest bank failures. Expect it to grow in the next months.

Today's failed bank is First Priority Bank, Bradenton, FL.

Here, from Herald Tribune, is a brief explanation for the failure:

First Priority is the eighth U.S. bank to fail this year in the aftermath of the mortgage crisis, and the first Florida bank failure since March 2004. Andrew Gray, spokesman for the FDIC, said the bank had "significant loan losses" in the Florida commercial real estate market that eroded its capital.

And if you are curious why banks seem to all fail on Friday, the Herald Tribune also explains that. The exact date the failure is announced is chosen by the FDIC.

Announcements of bank failures tend to be made after the close of business on a Friday, so the banks can reopen under new ownership the following Monday morning.

First Priority appears to be another casualty from the collapse of the Housing Bubble combined with the banker's poor underwriting procedures as they worked to make every possible loan, sell it to investors and collect the commissions. Banker's bubble mentality, in other words.

The next time someone tells you that professional investors and bankers are so experienced and smart that they don't need regulation, just laugh at them.

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Addendum 11:09 am CDT
This from the Friday Financial Times (Free registration required):

The Federal Deposit Insurance Corporation revealed on Friday that it had issued warnings to four small US banks that lacked sufficient reserves to cover potential loan losses.

The cease-and-desist orders issued in June said the four banks needed to raise more capital, expand their loss allowances and better oversee and diversify their loan portfolios. A fifth bank was cited for violating consumer protection laws. [Snip]

The banks receiving cease-and-desist orders in June were MetroPacific Bank in Irvine, California; Bank Haven in Haven, Kansas; Clarkston State Bank in Clarkston, Michigan; and Hastings State Bank in Hastings, Nebraska. [Snip]

The fifth bank – Columbus Bank and Trust in Columbus, Georgia – received a cease-and-desist order because its credit card program violated consumer protection laws.

No telling how many more there are. It's interesting that the FDIC has publicized and named these banks. Isn't that kind of publicity supposed to be likely to cause runs on the named banks?