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Message from discussion FDIC's Failure As A Federal Regulator- 6 of 7 Banks Seized Fell Under Its Supervision (Class NM)

matt

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More options Jul 10, 5:28 am

From: matt <m...@matthewmurphy.net>

Date: Fri, 10 Jul 2009 02:28:11 -0700 (PDT)

Local: Fri, Jul 10 2009 5:28 am

Subject: Re: FDIC's Failure As A Federal Regulator- 6 of 7 Banks Seized Fell Under Its Supervision (Class NM)

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On Jul 3, 5:53 pm, PP Y <papaya2...@gmail.com> wrote:

> Why is FDIC not being held accountable for its failure in supervision
> but praised for its efficiency in shutting down banks? Why is FDIC
> practically using our tax money to share losses and wiping out
> shareholders because it failed its job to supervise properly?

> "Regulators shut down the John Warner Bank of Clinton, Ill.; the First
> State Bank of Winchester in Winchester, Ill.; the Rock River Bank of
> Oregon, Ill.; the Elizabeth State Bank of Elizabeth, Ill.; the First
> National Bank of Danville in Danville, Ill.; the Founders Bank of
> Worth, Ill.; and Millennium State Bank of Texas, based in Dallas."http://www.nytimes.com/2009/07/03/business/03banks.html?ref=business

> "The FDIC and The First National Bank of Beardstown entered into a
> loss-share transaction on approximately $20 million of The First State
> Bank of Winchester's assets."http://www.istockanalyst.com/article/viewiStockNews/articleid/3330752

> All these banks except for First National Bank fell under FDIC
> supervision (Class NM)
> *NM = commercial bank, state charter and Fed nonmember, supervised by
> the FDIC*http://www2.fdic.gov/idasp/main.asp

The FDIC is only the *backup* regulator for state-chartered Federal
Reserve Nonmember (NM) banks. It generally cannot take direct action
against a state-chartered institution except in the most egregious of
circumstances, or in the case of direct violation of one of the FDIC-
enforced consumer protection laws (i.e., the FTC Act).

> This is the first page of the latest failed bank list on the FDIC
> website; 11 out of 20 were under its supervision.http://www.fdic.gov/bank/individual/failed/banklist.html

> Mirae Bank (NM) June 26, 2009
> MetroPacific Bank (NM)
> Horizon Bank (NM)
> Neighborhood Community Bank
> Community Bank of West Georgia
> First National Bank of Anthony
> Cooperative Bank (NM)
> Southern Community Bank (NM)
> Bank of Lincolnwood (NM)
> Citizens National Bank
> Strategic Capital Bank (NM)
> BankUnited, FSB
> Westsound Bank (NM)
> America West Bank (NM)
> Citizens Community Bank (NM)
> Silverton Bank, NA
> First Bank of Idaho
> First Bank of Beverly Hills (NM)
> Michigan Heritage Bank
> American Southern Bank (NM) April 24, 2009

The overwhelming majority of our nation's banks are state-chartered
Fed nonmember banks. Even if 70% of failures fell under the NM
classification, that would be relatively low given the overall
prevalence of the NM charter class in the market. By far the largest
failure and assistance liabilities for the FDIC (the five Citigroup-
linked banks/thrifts, Bank of America, IndyMac, BankUnited, ...) were
all either national banks regulated by OCC, or thrifts regulated by
OTS. The state regulators have actually done a far better job than
OTS, OCC, etc., at enforcing the capital rules.

> Why would anyone want to buy any bank? As long as our regulators don't
> follow rules nobody would want to deal with the government. Sheila
> Bair now says these private investors must maintain a tier I capital
> ratio of at least 15% but back when Wamu had a tier I capital ratio of
> 8.4% (yes not as high as 15% but a pretty good number at that time)
> she still seized it.

The FDIC does not seize banks, nor decide which ones are open and
which ones are closed. The FDIC can only accept or decline
appointment as receiver for banks that have already been closed by
their primary regulator. The agency that closed WaMu was the Office
of Thrift Supervision, not the FDIC.

Furthermore, the chief objective of the banking regulators is *NOT* to
minimize the number of failures, but rather to minimize the total cost
to the DIF (and therefore the risk to the credit of the United
States). WaMu was closed not because its capital was insufficient,
but because it was losing deposits at such a rate that its capital
would have *become* insufficient in a matter of days. With WaMu
losing $10 billion a month in deposit base and the run accelerating as
the damage was tallied, OTS recognized that the bank had lost
depositor confidence and would run out of capital, causing a huge loss
to the Deposit Insurance Fund. WaMu, rather than being simply
undercapitalized, was operating in an "unsound condition", hence its
closure.

> "The FDIC today released a memorandum designed to provide guidlines to
> private equity firms looking to own banks. A summary is (emphasis
> mine):

> Pursuant to the proposed policy statement, the Investors’ holding
> company will be expected to provide for the capital support of the
> acquired or de novo depository institution through a strong initial
> capital contribution – maintaining a minimum 15 percent Tier 1
> leverage ratio for a period of at least 3 years. Staff believes that
> up-front capital protection for the depository institution would
> provide an effective cushion that could have a lasting impact...

> Now, some might recall that banks were judged on their Tier 1 ratio
> once upon a time. Regulators then swung to tangible common equity and
> settled into tangible capital. But now that the danger has passed and
> all is better (right?), the FDIC swings back to tier 1 and well
> capitalized (recall that WaMu and WB were "well capitalized when they
> were defacto siezed)."http://seekingalpha.com/instablog/153397-boneyard/11078-fdic-shepardi...

WB was never actually seized; OCC didn't close the bank, nor did it
place it in conservatorship. The FDIC had a plan for an Open Bank
Assistance & Acquisition (A/A) transaction with Citigroup, but it
deliberately allowed Wachovia to remain open. Wachovia ended up being
bought in an unassisted sale by Wells Fargo and Co., hence no federal
intervention.

As noted above, WaMu was closed because of a crippling ($300 million
per day) deposit run, not a capital problem.

> FDIC now has the power to borrow up to $500 billion, and is that not
> tax money?

The FDIC borrowing authority is only $100 billion, not $500 billion.
Chris Dodd proposed the $500 billion number when the health of
Citigroup, Bank of America, et al. was in question, but it didn't end
up going that high in the final legislation.

Treasury borrowing is in fact borrowing tax dollars. However, the
FDIC must not only pay back the principal of what it borrows, but also
the interest (i.e., the borrowing cost). The taxpayer doesn't
actually lose anything by way of the FDIC's borrowing, which is what
happened when the FDIC borrowed money for the RTC's wind down in 1991.

> Bair's original proposal was to collect only $27 billion
> from special assessment fees this year so how long do you think it
> will take FDIC to pay back whatever it borrows? Its DIF ratio
> continues to plummet; as of last quarter, it was at 0.27%. That means
> for every $100 you deposit you can really only get $0.27 back.

I don't think you understand how insurance systems work. The idea is
that you take money from all the banks, and insure them all against
failure. You can't collect a dollar for every dollar of deposits, or
you'd have no deposits. So, what you do is, you collect the statutory
1.5% of those deposits and then you basically pray that the banks that
fail at any one time hold less than 1.5% of deposits. Typically, it's
actually a sane bet, as large banks are unlikely to be allowed to fail
and even small banks don't routinely fail.

Even in a good environment, when the DIF is at its statutory maximum
and the banks pay nothing for deposit insurance, only $1.50 per $100
of deposits is backed by actual cash in the insurance fund.

> Wait, did I forget to mention FDIC is also backing over $300 billion
> of bank bonds for Goldman Sachs etc?

TLGP backing is virtually risk free for the FDIC; the odds that a
large bank like Goldman Sachs would:

A) fail; and
B) not be rescued by the Federal Reserve's printing press

are essentially zero, as most of the big banks have been explicitly
labeled too big to fail.

Also, the FDIC is paid a fee for its guarantee, just as it is for
deposit insurance.

> Its great GS is paying back TARP
> but why should it give out record bonus this year when the US
> government is still backing its bonds?

TLGP backing of banks' debt is due to end in a few months. One of the
conditions for exiting TARP (and therefore paying unregulated bonuses)
was that the bank issue unbacked debt without an FDIC guarantee. Once
the FDIC guarantees on existing debt expire at maturity, the bank will
have been completely re-privatized.

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