In These New Times

US bank closures done quietly; eye to a sale
Reuters

John Poirier
video link to latest bank closure

WASHINGTON, Aug 22 (Reuters) – When a U.S. bank fails it doesn’t die alone. Months earlier, Federal Deposit Insurance Corp experts have usually slipped into town to see if they can save the institution or at least find an eager buyer.

Current and former FDIC officials describe a tightly choreographed routine for dealing with a failing bank, even making sure cleaners have the branch offices sparkling once they reopen to wary customers after a federal takeover.

Working stealthily to prevent a self-fulfilling run on the bank by customers, an equally quiet effort takes place to solicit buyers for the deposits, loan portfolios and physical assets in case the bank is beyond saving.

“You go through a sale process not unlike an investment bank would handle for companies in the private sector,” said Robert Hartheimer, who headed the FDIC’s bank failure division from 1991 to 1995. “You conduct an auction.”

The FDIC, keeper of a $53 billion fund that insures up to $100,000 per account and $250,000 per individual retirement account at member banks, is by law focused on protecting depositors at the least cost.

That sometimes means trying to sell some unusual items.

The FDIC once owned a 12 percent stake in the Dallas Cowboys football team. Other assets pledged against loans have ranged from casinos and art works to race horses.

“We don’t like to repossess collateral that eats,” said Greg Coyle, a 25-year veteran of the FDIC who retired in 2006 but is back to help with rising bank failures precipitated by a weak economy and falling home prices.

Coyle, a native of Kentucky, was originally hired by the FDIC to round up dozens of horses when banks failed in the state known for its horse racing and breeding.

So far this year, nine banks have failed after only three banks in 2007 and no failures in 2006 and 2005.

BANK FAILURES RISING

This year’s biggest bust so far was IndyMac IDMC.PK, seized July 11 with $32 billion in assets and $19 billion in deposits, the third-largest bank insolvency in U.S. history.

The FDIC is still running IndyMac, looking to enhance its $184 billion mortgage portfolio for eventual sale by modifying thousands of loans that are in default or seriously delinquent.

IndyMac’s hit to the deposit insurance fund has been estimated by the FDIC at $4 billion to $8 billion.

Ideally, when a bank fails, the FDIC has lined up another bank which has agreed to assume the deposits, preferably at a premium, and perhaps buy other assets as well.

That was the case when regulators closed two banks July 25 owned by an Arizona holding company. The deposits and some of the assets were acquired by Mutual of Omaha Bank.

On Aug. 1, regulators closed a small Florida-based bank and SunTrust Banks Inc (STI.N: Quote, Profile, Research, Stock Buzz) agreed to assume the insured deposits.

In this matchmaker role, the FDIC keeps a database of banks that have expressed interest in another bank and it sometimes contacts nearby banks to gauge their interest.

Potential buyers sign a confidentiality agreement to get information about the bank and bids are submitted via the Web.

“We’ve got a very sophisticated way of contacting potential bidders and transferring the insured deposits and as many assets as possible,” said Mitchell Glassman, director of the FDIC division that prepares bank closing teams.

The FDIC keeps a running tally of banks that run into trouble. At the end of March, 90 banks were on that list which is expected to be updated next week.

FDIC Chairman Sheila Bair has warned of an “uptick” in bank failures going well into next year. But she has also said that only about 13 percent of those troubled institutions typically fail, as many are nursed back to health.

LIQUIDATION

If it becomes clear a bank must be liquidated, the FDIC kicks into high gear with sometimes hundreds of its employees involved.

Closures typically occur after business Friday, giving FDIC lawyers and accountants time to determine the final balance and income sheet at the day of closing and establish any legal liabilities.

Customers in the failed bank can usually still draw their money over the weekend via check, debit cards and teller machines until the bank reopens the following Monday.

With more bank insolvencies expected, the FDIC is hiring workers, reactivating retired employees and engaging contractors.

Job vacancies listed on the FDIC’s website include financial examiners, risk analysts, lawyers, and “resolutions and receivership” technicians.

When IndyMac failed, more than 130 FDIC employees swooped in on the California-based mortgage lender to prepare it to reopen under government management. Another 120 employees took part remotely via computer links.

For a small institution, with under $1 billion in assets, the FDIC more typically uses 40 to 60 people, that’s still sometimes more than the bank’s actual staff.

Glassman said ideally his teams get three months warning from a bank’s primary regulator that an institution may fail. “It allows us to get as much due diligence done quietly without stirring any interest.” (Reporting by John Poirier; Editing by Tim Dobbyn)

© Thomson Reuters 2008. All rights reserved. Users may download and print extracts of content from this website for their own personal and non-commercial use only. Republication or redistribution of Thomson Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.

Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.