I have generally not posted on Friday night bank seizures, unless there is a noteworthy element to them. The US has around 8000 banks, and with 70% of the deposits in the 19 banks that participated in the dubious stress tests, we can have a lot of little banks get merged into slightly less little banks without having much impact.
Bigger banks are another matter. First, dispatching of them in the normal “get someone to take this over” manner increases concentration at the top end, which is not a good development from a systemic risk standpoint. Second, a big bank going down suggests, contra the loud cheerleading of the Treasury and Fed, that something may indeed be rotten in bankland.
The bank that went under tonight was Colonial Bank, of Montgomery. Alabama, which we’ll turn to shortly. Consider this example of another less than sound bank in the same state. The stunning difference is that this one, Regions Bank, is considered well capitalized when it has just broadcast that it has a negative net worth. As Jonathan Weil of Bloomberg reports:
Check out the footnotes to Regions Financial Corp.’s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion.So, if it weren’t for the inflated loan values, Regions’ equity would be less than zero. Meanwhile, the government continues to classify Regions as “well capitalized.”
Now to tonight’s FDIC special, as reported by the Wall Street Journal. And notice that Regions, at roughly $140 billion in assets, is bigger than the bank being taken out tonight, a “mere” $25 billion institution:
Regulators seized Colonial Bank on Friday after reaching a deal to sell its branches, deposits and most of its assets to rival BB&T Corp. in the sixth-largest bank failure in U.S. history.The demise of Colonial, a regional bank based in Montgomery, Ala., with assets of $25 billion and 346 branches in five states, signals an ominous phase in the nation’s banking crisis. Even as some large institutions show signs of stabilizing, a slew of regional lenders remain on the ropes. And regulators appear to be giving up hope that some of them can be saved.
Colonial, a unit of Colonial BancGroup Inc., is the largest bank to fail since Washington Mutual Inc.’s banking operations collapsed last September and were sold to J.P. Morgan Chase & Co.
Colonial’s slide came largely as a result of aggressive real-estate lending in Florida and other frothy markets. The company had been teetering for months, but federal and state regulators gave it time to try to secure a financial lifeline from outside investors or another bank.
Yves here. And this bit is troubling:
Aside from BB&T, a regional bank in Winston-Salem, N.C., that has avoided the brunt of the financial crisis, bidders for Colonial were scarce, even though the Federal Deposit Insurance Corp. offered to shield buyers from some potential losses, according to a person involved in the talks. “No one wanted to touch this thing,” said Morgan Keegan & Co. analyst Bob Patten.
I’d bet on a Resolution Trust Corp v. 2.0 in our future.
VG Chicago 
Posts
Yves,
A Resolution Trust-2 might be a good way to extinguish all of the debt that cannot be serviced. Then again, just who will absorb the losses?
There is a lot of risk/venture money on the sidelines that would consider the impaired assets. The price the vulture investor will pay, however, is something on the order of 10 to 15 cents on the face dollar. This fact has been the big hairball preventing a rapid resolution of the credit crunch.
The current Fed/Treasury tactic of prolonging the resolution is intended to help the banks ear enough to write off their losses against current earnings. Given the steepness of the yield curve, a good many of them should be able to achieve solvency within two to three years.
On the other hand, the Fed/Treasury policies are creating a critical price distortion, interest rates are inordinately lower than they might otherwise be.
Many feel that the Resolution Trust was a good solution for the excesses in the commercial real estate market of the early
1980s. I has been my opinion that the Resolution would have been a more effective effort if the Resolution Trust had been created as Government Sponsored Enterprise that would have had a charter to be a for profit enterprise and sold to the private sector.
Resolution Trust operated as a liquidation enterprise and it took a very long time to go about its business. In particular, a local investor bot 13 odd office buildings for roughly 30 cents on the replacement cost dollar. Those building were sold in something like three year's time for 65 cents on the replacement dollar. That's an indication of the profit potential in a good many assets that the banks are carrying and why they are reluctant to take the write downs.
Now, do you believe that the Congress, the Fed and the Treasury can create an enterprise that will maximize the value of the distressed assets currently held by the banking system? Something close to the Swedish model might work. In the process of adapting such a model, however, there would be the removal of present management, the nationalization of the institution, and its rapid sale to private enterprise.
What say you?