The New York Times reports that the Federal Deposit Insurance Corporation (FDIC) is hiring back experienced people as the number of failed banks rises. Its report gives a good idea of what the FDIC does to rescue a failed bank. In a nutshell, when a bank fails the FDIC tries to find a stronger partner who can take over the foundering operations. Starting on Friday evening, the FDIC does triage so that it knows which assets and deposits the partner will get and which will go on the FDIC's books.
Here are six key steps:
- Find a merger partner. For example, the Times reports that on Friday May 9, the FDIC seized Arkansas National Bank (ANB) -- a $2.1 billion construction lender -- and arranged for it to be acquired by Pulaski Bank and Trust Company. As it usually does, the FDIC planned to use the weekend to minimize the disruption to depositors of ANB.
- Enter town quietly. FDIC personnel try not to alert the locals to their presence. The Times reports that they "used personal credit cards, rather than cards provided by the FDIC, to avoid detection." And they were told to give a false reason for their presence in town. The Times quotes Gary Holloway, a hired back retiree, who said: "If anybody asked why they were in town, they were told to say that they were with the Toy Shop on business."
- Decide which deposits and loans will go to the partner. Holloway and a team of five from the FDIC worked over the weekend to decide which deposits and loans would go to Pulaski. The Times quotes Holloway as saying, "Between Friday night and Sunday morning, we separated the bad loans that would ultimately be sold off from the assets and deposits that would go to Pulaski Bank and Trust Company."
- Select the bad loans that will go on the FDIC's books. The better loans go to the partner bank and the worst ones go the FDIC. In this case, the FDIC decided that a golf resort that was 90% complete was worth salvaging because its housing units could be sold once complete -- and it went to Pulaski. By contrast, a construction project which still needed $8 million to complete went to the FDIC.
- Help depositors. Although the Times does not discuss this, a big part of what the FDIC does is to help depositors of the former bank who generally line up at bank offices Monday morning to make sure their money is safe. In this case, the former ANB offices probably reopened on Monday as offices of Pulaski. And the FDIC probably had employees stationed there to answer depositor questions.
- Sell off the bad loans. The FDIC takes possession of the worst loans and tries to sell them. The Times reports that the FDIC posted on its Web site "$145 million in nonperforming loans of various types [which] are listed for sale from ANB, along with a few properties from Arkansas to Utah." But the FDIC employs people who are responsible for selling these loans so it can replenish its funds.
Back in 1982 I helped to develop the system that the FDIC uses to manage the bad loans it takes on its books. The Times reports that its assets under liquidation nearly quintupled from $2.2 billion in 1982 to more than $11 billion in 1987. The key principle is that the people in charge of liquidating those loans need to balance the urge to get the loans into private hands as quickly as possible against the desire to get the highest possible price.
No doubt, the FDIC's system has improved in the last 26 years -- and the Internet helps to broaden the market for those loans.
The FDIC is likely to use it much more over the next several years.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
Reader Comments (Page 1 of 1)
8-16-2008 @ 1:59PM
william lindblad said...
J.P. Morgan -1909. The guru on how to fix bank failure.