Fast Forward to "It's A Trap!" Part III -Medium to Small Banks

Sorry to by pass "It's A Trap II- Japan", but this is too timely. I want to go on record now as the first to foresee this trend.

I must talk about the oncoming bank trap from the FDIC.

1. The Federal Reserve is starting a trend to approve "self chartered" banks or private equity groups with retired bankers aiming to buy distressed or closed banks in a specific region.

2. The bank closings from Jan 2010 to Feb 2010 (as of 02.19.10)amount to 16. This equals the same trend from 2009 even though many economists/regulators say 2010 will be a record year for bank closures.

3. The FDIC must go through some public channels before actually selling a bank. This is done through orders, agreements, notices, or Prompt Corrective Action Directives (PCAD). A look at recent FDIC actions show concentrations in a few MSA's. These may be spaced over time. My research shows that for the 2010 bank closings, banks had 345 days from agreements, 320 from orders, and 138 from PCADs to bank closure. Admittedly, some bank closing information is incomplete as records are not readily available. The most disturbing trend, is that American Marine Bank had 86 and 70 days from order and PCAD respectively until closure. At the time, AMB had $373 million in assets. That's some nice bank police work Lou!


4. The FDIC has really taken a beating on some of the bank closures and could only find interested capital to purchase them weeks after their closure. This comes after months of marketing by the FDIC to other holding companies even before the FDIC closes a bank (see links in #3). How does the FDIC keep from having to sell a lemon and losing more? Why, you could always try to securitize bad assets! Sounds good, but that may run into a few issues. The FDIC has also tried splitting a failed bank's assets and their deposits with varying degrees of success.

5. The FDIC can, and will, close a bank with efficiency regardless of a distressed bank's efforts.
Voicenews.com says:
"'What irritates me is that we went along with everything the FDIC said and always had a good rating,' longtime (Citizens State Bank) bank president and board member Oscar Socia said from his winter home in Florida recently. 'They didn't seem to want to bend at all.'"
Dailyme.com discloses:
"Charter's management, led since 2001 by bank President Glenn Wertheim, insisted that loans, mostly commercial real estate loans -- which OTS said were troubled -- were, in fact, being paid on time. OTS disagreed and ordered tens of millions of dollars of those loans to be classified as toxic.

That classification, recorded as an entry on the bank's balance sheet, on paper lowered Charter's capital (money regulators require banks to make sure their deposits are safe) to levels well below those regulators regard as sound, even though virtually all of Charter's commercial real estate borrowers continued to pay their bills on time.

'They had one judgment; we had another,' Wertheim said in a Journal interview Saturday. 'The evolution of the Office of Thrift Supervision and the criticism they received early in this cycle, then their reaction to that criticism, affected us,' Wertheim said. 'They had a shift in examination standards. We got caught in that shift. It was not personal. We were sort of at the wrong place at the wrong time.'"

6. The FDIC's quick and ambiguous enforcement of changing regulations has actually lead to their first defeat in court by action filed by a small bank. Obviously, this is not to say the FDIC is not unjustified in many of their actions, but there are more and more gray areas forming within enforcement. This type of legal hurdle may be a continuing trend.




So, what does all of this mean? It means that small to medium banks are enjoying a false sense of security in their efforts to comply with federal regulations and any steps the FDIC initiated with their respective banks right now. The FDIC is approving various private capital groups to become holding companies that would buy packaged portfolio of banks. This move would help the FDIC diversify their risk by grouping lemons with more attractive failed banks in a concentrated geographic area. The piece meal transaction of buying failed individual banks will go away and be replaced with new regional banks formed by these private equity bank holding companies. Of course, a generous loss-sharing agreement will come with each one. These poor banks in the waiting have no idea they are in line for the guillotine.

The Boston Globe reported that Stoneham Savings Bank and Athol-Clinton Co-operative (both within the metro-Boston area) both received FDIC orders in late January 2010:

"Richard Donovan, the Stoneham Savings Bank ’s president, said its operations are steadily improving and that the bank showed a small profit in January. 'We’re settling down,' Donovan said. 'Our goal is to work with regulators' to resolve any remaining issues, he said.

Athol-Clinton Co-operative lost $2 million last year, primarily because of troubled home mortgages. Bank president Wayne Grimes noted the Athol area was hit hard by unemployment. 'Things are looking up,' he said, 'but it’s a gradual process.'’’

It's a gradual process, alright, right up until the blade falls and they are left wondering what the hell happened.