AmTrust Financial bankruptcy a bad sign for regional banks

By Edward Harrison of Credit Writedowns

AmTrust Financial, a privately held regional bank holding company based in Cleveland, has just filed for bankruptcy. With well over $10 billion in assets, AmTrust Bank is fairly large. The circumstances surrounding its failure are unusual in that the Bank Holding Company (BHC) has filed for bankruptcy but the banking subsidiary is still operating. The picture this event reveals is one of continued distress in the banking industry, especially for regionals.

Bloomberg reports:

The 120-year-old bank, once known as Ohio Savings Bank, wasn’t included in the filing. The company listed $169.5 million in debt and more than $100 million in assets in a Chapter 11 petition filed yesterday in U.S. Bankruptcy Court in Cleveland.

“In the past two years, the debtors have diligently attempted to survive the downturn in the economy,” AmTrust Chief Executive Officer Peter Goldberg said in court papers. “Deterioration in mortgage quality and availability slowed the pace of transactions and devalued homes.”

The bankrupt units include AmTrust Real Estate Investment, AmTrust Insurance Agency and AmTrust Properties. The company, with bankrupt and non bankruptcy units, had assets and debt of more than $11 billion each and about 1,700 employees, it said.

Here’s what I believe happened.

Cleveland, like the larger Midwestern city of Detroit, was hit hard by the loss of manufacturing in the 1970s and 1980s. Unlike Pittsburgh, Detroit and Cleveland have never really recovered. This is reflected in the Case-Shiller Housing Index numbers. Cleveland has the lowest index numbers of the 20 cities covered outside of the apocalyptic Detroit and mega-bubble to bust city Las Vegas.

Like so many other Midwestern banks faced with poor lending environments in their home territory, AmTrust decided to jump on the Florida or Phoenix real estate bubble bandwagon.

Fifth Third in Cincinnati is another Ohio bank which comes to mind. I remember going to a wedding in Palm Beach last October at the height of the crisis. When I got off the plane to look for cash, I was met by a Fifth Third teller machine. Later I saw a bevy of Fifth Third branches in town. I wondered what a Cincinnati-based bank was doing at the West Palm Beach airport.

These bets went spectacularly pear-shaped in the housing bust, creating massive losses which were compounded by a deep, deep recession back in Ohio. No one escaped. Cleveland crosstown rival NCC was already flogged off last October to the stronger Pittsburgh-based PNC because it was going to fail.  They too had expanded into Florida. I saw numerous branches in Palm Beach for example.

I reckon AmTrust was shopped around by the FDIC and no bidders were forthcoming. On Monday, the Wall Street Journal had a good article on just this phenomenon. People United Financial was looking for acquisitions:

The financial crisis has given People’s United an appetite for dying banks that nevertheless might have some valuable pieces.

But of the 124 banks to fail so far this year, many of those put up for sale by regulators as part of the seizure process "are of very poor quality," said Norm Skalicky, chief executive of Stearns Financial Services Inc. "It’s not as if you can walk in and you are in business."

What does that tell you? I see it as a sign of many more busts to come. You might recall that I mentioned a growing dichotomy between the fortunes of big banks and small banks about two weeks ago. Too big to fail banks have been bailed out. Regional banks not so much. Therefore, regional banks have turned off the spigot and are holding on for dear life. This is what is behind the drop in lending.

As for AmTrust, about two years ago I met with a group of executives at AmTrust Bank at Cleveland Browns stadium for a one-day consulting engagement related to their HR strategy after changing their name from Ohio Savings Bank. While I enjoyed seeing the football stadium (and executive boxes) up close and meeting some nice people, I did not come away feeling like this was an organization in a particularly cheery mood despite the pep talk by CEO Peter Goldberg.

The Bloomberg story makes clear why:

The bank invested heavily in single- family home loans, land acquisition, development and construction loans, court papers show.

The bank has been controlled by the Goldberg family since the early 1960s and the family currently owns 77 percent of its commons stock, according to the court filing. The holding company was formed in 1977.

And remember, the Goldbergs own this bank. Its not like they are profiteering professional managers with no stake in the enterprise.  Clearly they did everything they could to avoid this outcome.  Moreover, the bankruptcy occurred yesterday, not on Friday in the typical FDIC bank seizure fashion.

Let’s watch what happens to the operating company. Right now, there is nothing on their website about the bankruptcy filing. The last press release is from October extolling how AmTrust Now Has Twenty-Five Branches in South Florida. What happens here could be a telltale sign of the near-term fortunes in regional banking.

See also AmTrust misses regulators’ financial demands from February and AmTrust Bank finances have gotten worse, records show from September in the Cleveland Plain Dealer. (Note: The September article puts assets at $13 billion while AmTrust’s Financial Statement from 30 Sep 2008 puts total assets at over $16 billion.)

Another good article on this is Regulators Fell One Bank, Spare a Rival from April in the Wall Street Journal. It points out that the demise of NCC and AmTrust would leave Cleveland starved for lending capacity. And given the lack of funding coming from the federal government, you should expect dire economic circumstances in Cleveland in electoral swing state Ohio to match the already dire circumstances in another swing state, Michigan.

Update: Credit Suisse is upgrading the regional financial sector (including Fifth Third, First Horizon, and SunTrust) because they believe non-performing loans and charge-offs will improve in 2010.  There are always two sides to every story.

Update II: The Cleveland Plain Dealer has a good article out suggesting the BHC bankruptcy filing is a tactic used to avoid the consequences that befell WaMu when it was seized last year. See the article AmTrust’s bankruptcy filing may be a lesson learned from WaMu.

Note: below this article are links to others on AmTrust Financial Services. But AmTrust Financial Services, Inc. is not affiliated with AmTrust Financial Corp.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. MyLessThanPrimeBeef

    It’s at times like this that I am grateful for my diversified portfolio of cowrie shells, tea bricks, bolts of silk and perhaps even sacks of Tibetan cordyceps.

    1. Vinny G.

      Land, my friend. Get land. And plenty of non-genetically modified corn and wheat seeds for next spring’s planting season… :)

      PS — and don’t forget the pitchforks…lol

  2. Dave

    With AmTrust now filing for bankruptcy, it looks like we will have more financial meltdowns. I still dont know why the stock market is going up!


  3. Waldo

    Speaking of banks.

    Talked to a Houstonian (Medical doctor) and it seems the Fed constructed a new branch of the Dallas Fed for the Houston area. Demolished the old Jefferson Davis hospital back in 2000 to make way for it. Very very large facility. Huge!!!

    Also heard where the Fed stores gold at the facility. Not interesting but what is is that Exxon houses a considerable amount of gold in the facility. Have been doing this (hedging) in a big way since about 2004.

    So they raise the price of oil (still doing it), monopoly stuff, this hammers the value of the dollar (counter intuitive I know; but that is what is happening, dollar does not drive the direction of the economy, it simply reveals it, high oil prices is working on its own, fuck the rest of the American economy (Iraq war mind-set).

    So the dollar takes a beating and Exxon gets out of dollar denominated assets and goes head-long into gold. Exxon says “Fuck the Dollar”. Wow!!

    Conspiritorial yes. But damn smart on Exxon’s part. Make’s Capone seams like a child with his bootlegging scheme. Wow!!

    This conspiracy stuff seems less and less ridiculous with each day that passes. Do not forget; oil was making strange moves up even before real estate started acting dysfunctional.

    A new path of thinking perhaps. But you know what Robert Frost saged about “The Road Not Taken”

    The Road Not Taken

    Two roads diverged in a yellow wood,
    And sorry I could not travel both
    And be one traveler, long I stood
    And looked down one as far as I could
    To where it bent in the undergrowth;

    Then took the other, as just as fair,
    And having perhaps the better claim,
    Because it was grassy and wanted wear;
    Though as for that the passing there
    Had worn them really about the same,

    And both that morning equally lay
    In leaves no step had trodden black.
    Oh, I kept the first for another day!
    Yet knowing how way leads on to way,
    I doubted if I should ever come back.

    I shall be telling this with a sigh
    Somewhere ages and ages hence:
    Two roads diverged in a wood, and I—
    I took the one less traveled by,
    And that has made all the difference.

  4. Namke von Federlein

    I find this interesting.

    Just a wild guess, but it would seem that they wanted the FDIC to close the bank but the FDIC refused (for lack of a buyer, lack of time and lack of FDIC capital). So, put the holding into bankruptcy until the FDIC finally gets around to closing the bank. Clever! I like it!

    Until now, the FDIC seems to be sticking with banks where loss is about 20-30% (very high by historical standards). So many banks to close, so little time (and money).

    The next step is some Vulture Capitalist to set up a Trust that sells DIP financing for other holding companies that would like to do the same thing until the FDIC can get around to closing their banks. A VC arm of Goldman Sachs, for instance. Or Maiden Lane IV?

    I think that we just saw the basis of the mechanism for how the banking sector is going to get consolidated next year. Very clever IMHO.

    Terrible for taxpayers, but clever nonetheless.

    Thanks for your wonderful blog!

    all the best

    Namke von Federlein

  5. Michael LittleBig

    AmTrust Bank was in trouble long before the financial meltdown. AmTrust Bank had established an unethcal behavior of not following the rules of safe and sound banking practices. For this bank to tell us that it was the economy would not be telling the whole story. The financial meltdown only magnified the aberrant mortgage lending activities and violations of federal rules,laws and regulations by the banks management. The other piece of this story is the failure of their federal regulator, The Office of Thrift Supervision to perform their legal responsibilities in administering,supervising,regulating and enforecement of violations as required under Title 12 (Banks and Banking).
    It would appear that the OTS has made malfeasance an art form.
    The management of this bank bought this on themselves and only has to look in a mirror to see who was responsible.

  6. run75441


    I am sure this would go to federal court; but what would happen if, Detroit told UBS and the other banks to go f*ck themselves and they would pay under the old arrangement? Eastern District Michigan Federal is more liberal than its western partner. Courts have been somewhat sympathetic to contract scams of such magnitude.

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