Is the White House pushing bank failures onto the next administration's plate?

Posted Aug 13th 2008 2:46PM by Peter Cohan
Filed under: Bad News, Industry, Scandals, Economic Data, Politics, Housing, Recession

The Washington Post reports that the number of bank failures has been surprisingly low. But the crunch count is likely to grow as the problem bank list triples from 90 to 300 over the next three years. Meanwhile, the Federal Deposit Insurance Corporation (FDIC) could run out of money to pay off depositors of future failed banks unless it raises its deposit insurance rates from their current 5.4 cents per $100 deposits.

But the most interesting question is whether the White House is propping up banks that should fail so that it can push the biggest part of the cleanup into the lap of the next President. It is certainly bringing out all the biggest economic guns to delay the inevitable reckoning from the $8 trillion credit collapse. It spent $29 billion bailing out Bear Stearns, sent $160 billion worth of checks to taxpayers, cut interest rates from 5.25% to 2%, and seems belatedly to be enforcing regulations against manipulation of oil trading.

The Post quotes industry experts who think that the FDIC is propping up many banks. For instance, Bert Ely of Ely & Co., a bank consulting firm in Alexandria, VA, told the Post, "They are dragging their feet in forcing these banks to reserve realistically. Some of these banks could have been closed two or three quarters earlier." And Ken Thomas, a lecturer in finance at the Wharton School at the University of Pennsylvania, told the Post that the FDIC's foot dragging would only cost taxpayers more in the long run. Thomas said, "In some of these cases, I believe regulators should act sooner than later to prevent future losses to the fund."

Recent Bank Failures

Even the banks are facing hard times these days, and some have to close up shop entirely. Click forward to see the most recently failed high-profile banks as reported by the FDIC.

First Heritage Bank
On July 25 2008, First Heritage Bank N.A., Newport Beach, CA was closed by the Office of the Comptroller of the Currency (OCC). Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed. Click here for more information on First Heritage Bank

First National Bank of Nevada
On July 25, 2008, First National Bank of Nevada, Reno, NV, was closed by the Office of the Comptroller of the Currency (OCC). Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. As of June 30, 2008, the former First National Bank of Arizona, Scottsdale, AZ, merged with First National Bank of Nevada and is included in this action. Click here for more information on First National Bank of Nevada

Getty Images

IndyMac Bank
On July 11, 2008, IndyMac Bank, F.S.B., Pasadena, CA was closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) was named Conservator. All non-brokered insured deposit accounts and substantially all of the assets of IndyMac Bank, F.S.B. have been transferred to IndyMac Federal Bank, F.S.B. (IndyMac Federal Bank), Pasadena, CA "assuming institution") a newly chartered full-service FDIC-insured institution. Click here for more information on IndyMac Bank

Gabriel Bouys, AFP / Getty Images

First Integrity Bank
On May 30, 2008, First Integrity Bank NA, Staples, MN was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Click here for more information on First Integrity Bank

ANB National Bank
On May 9, 2008, ANB Financial, NA, Bentonville, AR was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Click here for more information on ANB National Bank

Hume Bank
On March 7, 2008, Hume Bank, Hume, MO was closed by the Missouri Division of Finance and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Click here for more information on Hume Bank

Douglass National Bank
On January 25, 2008, Douglass National Bank, Kansas City, MO was closed by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Click here for more information on Douglass National Bank

Miami Valley Bank
On October 4, 2007, Miami Valley Bank, Lakeview, Ohio was closed by the Ohio Department of Commerce, Division of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Click here for more information on Miami Valley Bank

NetBank
On September 28, 2007, NetBank, Alpharetta, Georgia was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All insured depositors are now customers of ING Bank, fsb (ING DIRECT), member FDIC. Click here for more information on NetBank

With record bank losses possible this year, the FDIC's fund could drain to a dangerously low level. The Post reports that "The failures so far this year will drain the FDIC's insurance fund by an estimated $9.2 billion." And this year's losses could hit the inflation-adjusted record of "$12.8 billion set in 1988."

The drain on the FDIC's fund could happen fast. Losses so far this year will cut 17% from its record high balance of $52.8 billion at the end of the first quarter. That could drop the fund below its minimum requirement of 1.15% of all U.S. insured deposits. The reason? The number of problem banks is likely to rise from 90 to 300 in the next three years according to Gerard Cassidy, an analyst with RBC Capital Markets. The Post reports that historically, regulators end up closing "about 13 percent of the institutions" on the problem bank list.

I spent the summer of 1982 working with the FDIC's liquidation division which was in charge of selling off the assets from failed banks. And it looks like that division will be very busy in the next few years. It would not surprise me if that spurt in activity begins after the November elections.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Tags: bank failures, BankFailures, FDIC, featured, George Bush, GeorgeBush

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Reader Comments (Page 6 of 6)

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8-15-2008 @ 11:51AM

winslow said...

Mike said...
These are not bad times......

Mike, I'm from another country.You are very wrong. The main problem is that Americans THINK they can do no wrong and everything will always work out for them because, afterall, they are patriotic, hard-working Americans. On a relative basis and from an inflationary basis, the average American is making less now than 20 yrs ago. The power is being controlled by a small group, much as it had been in Europe. Thirty years ago we were awed and inspired by Americans. This is no longer true.