Two Surprisingly Costly Bank Failures in Two Weeks

Reader Steve A has been on the Friday night FDIC bank euthanasia watch, and in the last two weeks, he has discerned a disturbing trend. If this pattern persists, it seems a sign that things in bank-land may be much worse than is widely acknowledged.

From last week’s post, “This Week’s Bank Failure Surprisingly Costly,” on the demise of the faith-based Integrity Bank of Alpharetta:

$250 to $300 million of losses for a mere $1.1 billion in assets bank? As reader Steve A noted:

Today’s failure of the amusingly named Integrity Bank of Alpharetta, GA, confirms two very ugly trends: once again, FDIC was only able to pass cash and cash-equivalents to the assuming bank, and the FDIC’s loss estimate is extremely high ($250M – $350M on $1.1B of assets). I don’t have hard numbers handy but I seem to recall that receivership losses in the range of 25% – 35% were unusual in the commercial bank failures of the late 80’s. I could be wrong, but the numbers this year are extremely high. FDIC’s expected losses certainly make me wonder what on earth the bank examiners were doing for the last year besides critiquing the bank’s coffee and color scheme.

Now to this week’s FDIC prepack, Silver State Bank of Henderson, Nevada:

As of June 30, 2008, Silver State Bank had total assets of $2.0 billion and total deposits of $1.7 billion. Nevada State Bank agreed to purchase the insured deposits for a premium of 1.3 percent….

Silver State Bank also had approximately $700 million in brokered deposits that are not part of today’s transaction. The FDIC will pay the brokers directly for the amount of their insured funds….

In addition to assuming the failed bank’s insured deposits, Nevada State Bank will purchase a small amount of assets comprised of cash and securities. The FDIC will retain the remaining assets for later disposition.

The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund is between $450 and $550 million.

The losses are stunning. and proportionately almost identical to the levels last week. a range of 22.5% to 27.5%. One wonders why the same loss estimate ranges are being applied to banks in two different states. Regardless, the estimates raise questions as to how these banks could have gotten in such bad shape without anyone taking notice.

And Steve A called our attention to another worrisome aspect (boldface ours):

FDIC …has again retained all assets except cash and “certain securities” (i.e. govies). There appears to be no market for performing bank loans..

Update 11:50 PM: This tidbit from the Wall Street Journal:
Until recently, the son of Republican nominee Sen. John McCain sat on Silver State’s board and was a member of its three-person audit committee, which was responsible for overseeing the company’s financial condition.

Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing “personal reasons.” He is Sen. McCain’s adopted son from his first marriage.

Print Friendly, PDF & Email


  1. James B

    This further supports the idea that the FDIC, due to understaffing, politically motivated foot-dragging, lack of sufficient funds, or whatever else, is waiting too long to close failed banks. I wonder how many banks there are right now that, if closed tomorrow, would yield a similar level of losses (quite a few, I’m guessing).

  2. Anonymous

    great quote “FDIC’s expected losses certainly make me wonder what on earth the bank examiners were doing for the last year besides critiquing the bank’s coffee and color scheme.”

    well fdic executives were busy promoting the industry, telling bankers how to make small dollar consumer loans or perform loss mitigation on defaulted mortgages, or most importantly ignoring a small minority of internal analysts/economists that started warning them about the coming crisis as early as 2003. not only did they ignore them, but these executuves went out of their way to silence those voices by not letting them publish or through reassignments.

    disgustingly, all of these executives are still in place under bailout bair and some have even received “war time” promotions in the last year or performance bonuses. if bailout bair had any sense she would clean house beacuse of their malfeasance.

    these failures will require a material loss review; the fdic’s inspector general office needs to investigate the dereliction of duties by these fdic executives.

  3. dh

    10 year treasury still sucking wind @ 3.63%

    Not sure what this means>> Currencies are in the "throes of de-leveraging with a rumored massive margin call in the Tokyo market that drove large unwind of yen carry," according to BMO's Andy Bush

    The collapse of sterling has been particularly dramatic. Worth $2.10 less than a year ago, today it is worth less than $1.80.

    Friday’s jobless figures make it harder than ever to believe that the US has engineered a “soft landing”. This means we are looking at a “worst-case scenario” – a truly global slowdown.

    This will increase risk aversion. Any given bet looks less likely to make money, so investors will rush to remove those bets.

    In the jargon, this is often called “deleveraging”: paying off debts. Because many hedge funds had been using a “carry trade” strategy – borrowing in currencies such as the yen or dollar, with their low interest rates, and putting money where rates were higher – cutting back on risk will involve money flowing back into the dollar.

    Moreover, the flow of funds in recent years has been overwhelmingly out of the US. According to Emerging Portfolio Fund Research of Boston, $391bn flowed into non-US equity funds from 2003 to 2007 compared with only $7.3bn into US funds.

    Starting with such a heavy bet on the world outside the US, the logical response to the latest news is to sell the non-US investments and repatriate into the US – either in equities that produce a lot of cash, such as consumer staples, or more likely into Treasury bonds.

    Pimco's Bill Gross just stated that the US treasury needs to act quickly to support the markets or there will be a ‘tsunami' of deleveraging in all financial markets as funds are now finally starting to bail out, realizing that there is likely no recovery of the US economy. They had held out hope since 07 for that recovery, but that is now clearly not in the cards. So they are bailing out. Deleveraging is USD and carry trade currency bullish.

    >> This is great, earnings yields are going down — which devalues or dilutes value — yet all the hot money will be buying these overvalued securities with devalued currency which is running away from compounded losses. This is looking like a liquidity trap that will catch more and more cash that runs to safety!

  4. foesskewered

    agree in part with what you said but what are the realistic alternatives, waiting out the crisis seems not to be an alternative for either fund managers or investors.


    how much of a domino effect do you see in the bank failures?

  5. etc

    yves: “And Steve A called our attention to another worrisome aspect (boldface ours):

    FDIC …has again retained all assets except cash and “certain securities” (i.e. govies). There appears to be no market for performing bank loans..”

    This is not true; there is a market for bank loans. There continue to be purchases of bank loans by a lot of players (private equity folks, hedge fund folks, even mutual funds).

  6. Yves Smith


    I may have left a dramatic comment standing without further observation, but the general point is the FDIC typically unloads a fair bit of the loan book as well as deposits when it announces a bank closure. These aren’t terribly large banks. Query the FDIC is stuck holding the bag. Perhaps it only rings up other banks for a bid, but one imagines they’d have an idea of who the other suspects are.

    At a minimum, this suggests banks aren’t buying performing bank loans. That alone is troubling,

  7. Richard Kline

    So dh, agreed but with an addendum: deleveraging is _initially_ $ and carry trade bullish—until that unwind is largely in place. Then, those overpumped refugee asset classes themselves crash. We have already seen the summer stock version of this with the commodities hump-and-crump. Now, the 10-year $ is getting gangbanged. In neither case does the ‘action’ reflect fundamental issues in the asset class; it’s all hot money, stoopid money, and dim bulb speculation. If the herd gets in, smart money generally has already gotten out, if they can.

  8. etc

    yves smith: “Query the FDIC is stuck holding the bag. Perhaps it only rings up other banks for a bid, but one imagines they’d have an idea of who the other suspects are. At a minimum, this suggests banks aren’t buying performing bank loans. That alone is troubling.”

    If the FDIC can’t sell its bank loans, its asking too high a price. There are bids at below par; if the FDIC chooses to refuse them, it isn’t “stuck” holding loans; it is choosing to hold them rather than accept market bids.

    Also, obviously, just because a loan is performing doesn’t mean it is worth par. Maybe the borrower’s financial strength has been be declining; maybe this weakness hasn’t shown up in a default because the loan doesn’t amortize principal, the loan allows the borrower to defer interest-payments, the loan allows the borrower to pay interest in additional notes or stock, etc, etc.

  9. Clyde

    Well, if the bank has finally been shuttered, its loans are suspect anyway, and since the FDIC is taking its sweet time, loan quality is deteriorating by the minute. There is no price premium at which these loans can be sold, much like the toxic waste in the SIVs or the investment bank balance sheets.

  10. msgtb

    OMG! I saw a post on one of the message boards which said, Jim Cramer was recommending that the FDIC take all the bad parts of the closing bank (debt), and leave only the good (credit) assets for the receiving bank. Could it be that the FDIC gets guidance from Jim Cramer? How can we confirm this?

    We are lost for sure.

  11. Anonymous

    I’m in CRE in LA, and banks are sending me more and more C+D or land loans they want off their books. The reason that no market exists for these loans is that, even under the most optimistic scenario in which I could foreclose on these loans quickly and cheaply and then lease up res/retail or “blow out sale” some condos, the loans pencil out to being worth less than 50 cents on the dollar. Of course, the banks can’t sell at this price, as the FDIC would quickly take them over. I have seen over seventy term sheets come across my desk in the last two weeks. These are the best loans out there. I asked the banks what they are holding back with C+D loans, and they said nothing. Think about it. What a phenomenal mis-allocation of resources. Not only was all the equity wiped out on these deals, but the debt part is worth less than 50% of the principal. In a hard asset like real estate! I have generally eschewed development deals, but even I was a small player in two local condo deals that started in 2005 and were basically given back to the bank. The reason these bank losses are so large is that the banks don’t write them down until it becomes clear that the condos won’t sell or the res/retail can’t be leased up. This is all coming to a head right now as the developers are finally giving up their “call options” (they know they’ve been dramatically under water for a year) and just handing the keys back to the bank en masse. If my experience is at all representative (and it appears from these two bank failures that it might be), this is just the beginning. We are talking about huge losses on C+D loans, all coordinated to hit the banks in the next 9 to 12 months.

  12. Cash Mundy

    Anonymous in CRE in LA,

    Thanks for the hard front-line news.

    It appears that between the FDIC and FNR/FRE, the US Government is going to be the owner of a great deal of US property. Am I cynical in assuming this means the property will be deeply discounted to upper-level Bushites and the taxpayer will get a bath and a haircut?

  13. Anonymous


    Mr.Mortgage there, pretty much predicts the future which is not hard to do in his line of business.

    What is more interesting is that anything mortgage backed was leveraged maybe 30 to 1 via some investment vehicle….these banking and investment failures are going to on for years.

  14. doc holiday

    Mr. Kline, and others

    If hot money does pour into 10 yr Treasury and pushes the bubble there with yields dropping to match Fed Fund Rate, then what? What happens when we see a mass exodus out of Treasuries at some point, like we are seeing with oil, with wheat, gold? Are we witnessing the morphing of hot money into light speed money that zips from asset to asset in realtime, as in the speed of attention deficit disorder? We may be watching our lotto mentality morph into a new age where risk management and a lack of planning, lack of education and behavioral addictions connect chaos to supercomputing.

    It’s really a disaster movie in the works, starring Shelley Winters and Ernest Borgnine, with musical score based on The Beatles “Number Nine”:

    Re: Bottle of claret for you
    if I’d realised
    I’d forgotten all about it George, I’m sorry,
    Will you forgive me?
    Mmm yes
    Number nine, number nine, number nine, number nine
    Number nine, number nine, number nine, number nine
    Number nine, number nine, number nine, number nine
    Number nine, number nine, number…
    …Then there’s this Welsh Rarebit wearing some brown underpants
    …About the shortage of grain in Hertfordshire
    Everyone of them knew that as time went by they’d
    Get a little bit older and a little bit slower but…
    It’s all the same thing, in this case manufactured by
    Someone who’s always umpteen (…)
    Your father’s giving it diddly-i-dee district was leaving…
    Intended to die (…) Ottoman…..

Comments are closed.