Reform Move is Strong

As the FDIC continues shuttering U.S. banks, ominous signals are coming from Central Banks around the world and from Moody’s Investor Services.  The timely release of this information seems to support the legislative reform proposed by Representative Barney Frank on Tuesday. 

On Monday, Moody’s released a report that loan charge-offs suffered by U.S. banks are greater than those endured during the early years of the Great Depression.  During 2009, uncollectable loans have topped $116 billion or 2.9% of all outstanding loans.  As unemployment numbers continue to mount, loans failures will continue to rise.  Today, the Labor Department announced that another 520,000 Americans filed for new unemployment benefits last week.

While third quarter earnings reported by big banks were surprisingly robust, the gains appear the result of cutbacks and trimming rather than increased growth.  “We believe earnings prospects for the fourth quarter of 2009 and for 2010 are bleak for many U.S. banks,” said Moody’s.

Meanwhile, European Central Bank Governor, Christian Noyer, warned that banks are continuing with their risky lending practices and are pointed to a certain complacency throughout global markets to reign in the culprits.  Noyer voiced his belief that financial gains were provided by public initiatives and that as some stability was restored to the marketplace, regulators have dropped the reform ball.

“There are signs that parts of the financial industry have resumed risk taking practices reminiscent of those which led to the crisis,” said Noyer.  “We do not know what kind of financial system will emerge from this crisis.  We need to think about this.”  The Governor pointed to the recent revelation that Goldman Sachs has recently set aside $16.8 billion in employee bonuses.

Noyer’s concerns were supported by the Bank of Canada whose Governor, Mark Carney, voiced strong support for controlling bonuses and the use of these proceeds to bolster cash reserves in order to spur lending.

“Current bumper profits can compensate employees, be returned to shareholders, or increase capital.  The clear priority of the pubic sector is the re-capitalization of the financial system to expand credit formation,” offered Carney.  Banks should once again become the “servants of the real economy rather than the apex of the economic activity.”

Obama, Geithner, Bernanke, Bair, Frank Push Reform

They may not agree on much and there appears to be a bit of a power struggle among the regulators but all agree reform is necessary.  It is unclear exactly how the main reform agencies will align but President Obama’s directive to Representative Frank makes it clear that, “No financial system can work effectively if financial institutions and investors operate with the belief that the government will act to protect them from the consequences of their failures.”

Obama and Frank have been structuring the reforms that will lead to the dismantling of “too big to fail” institutions.  “It is very important that we reach agreement on comprehensive reforms as soon as possible so that we can restore confidence among American taxpayers and the world. We cannot meet these tests with a set of small changes,” the President said.

Frank’s bill would allow the Federal Reserve to limit exposures, block acquisitions, restrict pay and bonuses and even empower the Fed to order bankruptcy at financial holding companies.  Additionally, the FDIC authority would allow Bair’s agency to extend Treasury Department credit to solvent banks and non-bank financial firms to prevent financial instability.

Losses by the FDIC would need to be repaid by “assessments on large financial companies” and not by taxpayers, who are unhappy about their exposure with poorly run, high-risk taking firms like AIG, Citigroup and Bank of America.  The reality is that taxpayers have kept these firms in business, as well as Goldman Sachs.  Yet, these companies continue to pay unwarranted bonuses while 10% of the American workforce is unemployed, losing their homes and defaulting on credit obligations.

Frank’s bill would place Treasury Secretary Timothy Geithner at the chair of the newly structured Financial Services Oversight Committee.  This committee is the culmination of months of positioning for a centralized regulatory agency.

The cycle is real, vicious and dangerous.  Reform legislation is squarely based on the actions that caused the recession and the need for taxpayer assistance.  At the core of this remedy is the belief that the taxpayer cannot tolerate any further burden for irresponsible lending practices and high-risk policies that generated huge bonuses but toppled the financial system.

When Congress and taxpayers are continually slapped in the face with AIG and Goldman bonuses as 106 banks have failed in 2009, a line has appeared in the sand.  What is clear is that the financials will not alter their modus operendae until legislative action is taken.

Bair – 106 Banks Down, 400 To Go!

Straight-talking, fast shooting and true to her word, FDIC gunslinger Sheila Bair pulled the trigger on seven more banks over the weekend.  The closings raised her agency’s annual total to 106 banks shuttered in 2009.  In August, the understaffed and under-funded FDIC identified 416 banks with total assets of $299.8 billion that were on the agency’s troubled bank list.  There is little doubt that bank closings will remain aggressive through 2011 and quite possibly well beyond.

The FDIC’s staff was trimmed from 21,000 employees to 6,000 during the Bush presidency.  Meanwhile, the agency’s capital funding is sorely depleted.  Bair is patiently waiting much needed new funding derived from pre-paid member dues and Obama Administration-approved staff increases.  The fund replenishment and increased examiner body count will enable even more aggressive shuttering of troubled lending institutions.

This weekend’s closings included: 

• Flagship National Bank ($175 million) – Bradenton, Florida – assets now managed by First Federal Bank of Florida

• Partners Bank ($64.9 million) – Naples, Florida – assets now managed by Stonegate Bank in Fort Lauderdale

• Hillcrest Bank Florida ($84 million) – assets managed by Stonegate Bank in Fort Lauderdale

• American United Bank ($101 million) – Lawrenceville, Georgia – assets now managed by American Bank of Moultrie, Georgia

• Riverview Community Bank – Otsgeo, Minnesota – assets now managed by Central Bank

• Bank of Elmwood – Racine, Wisconsin – assets now managed by Tri City National Bank of Oak Creek, Wisconsin

• First Dupage Bank – Westmont Illinois – assets now managed by First Midwest Bank of Ithasca, Illinois 

Typically, bank failures cost the FDIC between 25 and 30% of the bank’s total assets.  The weekend failures cost the FDIC approximately $357 million.  The agency projects that bank failures will cost the FDIC a stunning $100 billion from 2009 – 2013.

The FDIC has clearly pointed to commercial real estate investment failures as the dominant factor in the downfall of community banks.  Banks with less than $10 billion in totals assets tend to be heavily vested in commercial real estate ventures where the smaller banks were able to successfully compete with larger institutions for loans.  While bigger banks also have commercial loans, they tend to represent a smaller percentage of their overall portfolio.

The 106 closings this year mark the first time more than 100 banks have been closed in a single year since 1992.  In 1989, during the savings and loan debacle, a record 531 banks were closed.  The 2009 total would be immeasurably higher than the current tally if the FDIC had available funding and an adequate number of examiners to meet the crises.

While many investors and economists have concentrated on the residential housing woes of the recession, Chairman Bair is clearly more focused on commercial real estate (CRE).  “The most prominent area of risk for rising credit losses at FDIC insured institutions during the next several quarters is in CRE lending,” Bair told the Senate subcommittee on financial institutions.

As commercial loans approach renewal dates, hotels, malls and condominium financing remain in jeopardy.  Filled with unoccupied space and dwindling property values that are 35 – 40% less than originally appraised, many of these entities are underwater and non-performing.  Active commercial real estate loans now total more than $1 trillion or 14.2% of all loans and leases in the banking industry. 

Since 2007, U.S. lenders have endured about $1.1 trillion in credit losses and write-downs.  The process of closing these banks and clearing out the distressed assets is a painful but necessary step in the overall restoration of the American banking system.

Gerard Cassidy, an analyst with RBC Capital Markets of Portland, Maine, offered the following analysis; “We certainly know there are hundreds and hundreds of zombie banks out there.  The only alternative for them is to be seized and it’s only a matter of manpower and money before they get to it.  It’s very painful, it costs a lot of money, it ruins careers, but shutting down failed banks and writing off the bad loans is a necessary solution that has to be done to get the economy and the banking system back on its feet.”

A new initiative will encourage lending institutions to recognize potential losses in their commercial real estate portfolios while not renewing the losses awaiting loss recognition.  The guiding principle is to clear the decks of troubled assets as soon as possible.  Meanwhile, Chairman Bair’s steadfast apolitical approach to the banking crises is gaining momentum and restoring credibility to the very necessary cleansing process.     

FDIC Bank Closings 2009

Bank Name City State Closing Date First DuPage Bank Westmont IL October 23, 2009 Riverview Community Bank Otsego MN October 23, 2009 Bank of Elmwood Racine WI October 23, 2009 Flagship National Bank Bradenton FL October 23, 2009 Hillcrest Bank Florida Naples FL October 23, 2009 American United Bank Lawrenceville GA October 23, 2009 Partners Bank Naples FL October 23, 2009 San Joaquin Bank Bakersfield CA October 16, 2009 Southern Colorado National Bank Pueblo CO October 2, 2009 Jennings State Bank Spring Grove MN October 2, 2009 Warren Bank Warren MI October 2, 2009 Georgian Bank Atlanta GA September 25, 2009 Irwin Union Bank, F.S.B. Louisville KY September 18, 2009 Irwin Union Bank and Trust Company Columbus IN September 18, 2009 Venture Bank Lacey WA September 11, 2009 Brickwell Community Bank Woodbury MN September 11, 2009 Corus Bank, N.A. Chicago IL September 11, 2009 First State Bank Flagstaff AZ September 4, 2009 Platinum Community Bank Rolling Meadows IL September 4, 2009 Vantus Bank Sioux City IA September 4, 2009 InBank Oak Forest IL September 4, 2009 First Bank of Kansas City Kansas City MO September 4, 2009 Affinity Bank Ventura CA August 28, 2009 Mainstreet Bank Forest Lake MN August 28, 2009 Bradford Bank Baltimore MD August 28, 2009 Guaranty Bank Austin TX August 21, 2009 CapitalSouth Bank Birmingham AL August 21, 2009 First Coweta Bank Newnan GA August 21, 2009 ebank Atlanta GA August 21, 2009 Community Bank of Nevada Las Vegas NV August 14, 2009 Community Bank of Arizona Phoenix AZ August 14, 2009 Union Bank, National Association Gilbert AZ August 14, 2009 Colonial Bank Montgomery AL August 14, 2009 Dwelling House Savings and Loan Association Pittsburgh PA August 14, 2009 Community First Bank Prineville OR August 7, 2009 Community National Bank of Sarasota County Venice FL August 7, 2009 First State Bank Sarasota FL August 7, 2009 Mutual Bank Harvey IL July 31, 2009 First BankAmericano Elizabeth NJ July 31, 2009 Peoples Community Bank West Chester OH July 31, 2009 Integrity Bank Jupiter FL July 31, 2009 First State Bank of Altus Altus OK July 31, 2009 Security Bank of Jones County Gray GA July 24, 2009 Security Bank of Houston County Perry GA July 24, 2009 Security Bank of Bibb County Macon GA July 24, 2009 Security Bank of North Metro Woodstock GA July 24, 2009 Security Bank of North Fulton Alpharetta GA July 24, 2009 Security Bank of Gwinnett County Suwanee GA July 24, 2009 Waterford Village Bank Williamsville NY July 24, 2009 Temecula Valley Bank Temecula CA July 17, 2009 Vineyard Bank Rancho Cucamonga CA July 17, 2009 BankFirst Sioux Falls SD July 17, 2009 First Piedmont Bank Winder GA July 17, 2009 Bank of Wyoming Thermopolis WY July 10, 2009 Founders Bank Worth IL July 2, 2009 Millennium State Bank of Texas Dallas TX July 2, 2009 First National Bank of Danville Danville IL July 2, 2009 Elizabeth State Bank Elizabeth IL July 2, 2009 Rock River Bank Oregon IL July 2, 2009 First State Bank of Winchester Winchester IL July 2, 2009 John Warner Bank Clinton IL July 2, 2009 Mirae Bank Los Angeles CA June 26, 2009 MetroPacific Bank Irvine CA June 26, 2009 Horizon Bank Pine City MN June 26, 2009 Neighborhood Community Bank Newnan GA June 26, 2009 Community Bank of West Georgia Villa Rica GA June 26, 2009 First National Bank of Anthony Anthony KS June 19, 2009 Cooperative Bank Wilmington NC June 19, 2009 Southern Community Bank Fayetteville GA June 19, 2009 Bank of Lincolnwood Lincolnwood IL June 5, 2009 Citizens National Bank Macomb IL May 22, 2009 Strategic Capital Bank Champaign IL May 22, 2009 BankUnited, FSB Coral Gables FL May 21, 2009 Westsound Bank Bremerton WA May 8, 2009 America West Bank Layton UT May 1, 2009 Citizens Community Bank Ridgewood NJ May 1, 2009 Silverton Bank, NA Atlanta GA May 1, 2009 First Bank of Idaho Ketchum ID April 24, 2009 First Bank of Beverly Hills Calabasas CA April 24, 2009 Michigan Heritage Bank Farmington Hills MI April 24, 2009 American Southern Bank Kennesaw GA April 24, 2009 Great Basin Bank of Nevada Elko NV April 17, 2009 American Sterling Bank Sugar Creek MO April 17, 2009 New Frontier Bank Greeley CO April 10, 2009 Cape Fear Bank Wilmington NC April 10, 2009 Omni National Bank Atlanta GA March 27, 2009 TeamBank, NA Paola KS March 20, 2009 Colorado National Bank Colorado Springs CO March 20, 2009 FirstCity Bank Stockbridge GA March 20, 2009 Freedom Bank of Georgia Commerce GA March 6, 2009 Security Savings Bank Henderson NV February 27, 2009 Heritage Community Bank Glenwood IL February 27, 2009 Silver Falls Bank Silverton OR February 20, 2009 Pinnacle Bank of Oregon Beaverton OR February 13, 2009 Corn Belt Bank & Trust Co. Pittsfield IL February 13, 2009 Riverside Bank of the Gulf Coast Cape Coral FL February 13, 2009 Sherman County Bank Loup City NE February 13, 2009 County Bank Merced CA February 6, 2009 Alliance Bank Culver City CA February 6, 2009 FirstBank Financial Services McDonough GA February 6, 2009 Ocala National Bank Ocala FL January 30, 2009 Suburban FSB Crofton MD January 30, 2009 MagnetBank Salt Lake City UT January 30, 2009 1st Centennial Bank Redlands CA January 23, 2009 Bank of Clark County Vancouver WA January 16, 2009 National Bank of Commerce Berkeley IL January 16, 2009 Sanderson State Bank En Español Sanderson TX December 12, 2008 Haven Trust Bank Duluth GA December 12, 2008 First Georgia Community Bank Jackson GA December 5, 2008 PFF Bank & Trust Pomona CA November 21, 2008 Downey Savings & Loan Newport Beach CA November 21, 2008 Community Bank Loganville GA November 21, 2008 Security Pacific Bank Los Angeles CA November 7, 2008 Franklin Bank, SSB Houston TX November 7, 2008 Freedom Bank Bradenton FL October 31, 2008 Alpha Bank & Trust Alpharetta GA October 24, 2008 Meridian Bank Eldred IL October 10, 2008 Main Street Bank Northville MI October 10, 2008 Washington Mutual Bank Henderson NV September 25, 2008 Washington Mutual Bank FSB Park City UT September 25, 2008 Ameribank Northfork WV September 19, 2008 Silver State Bank En Español Henderson NV September 5, 2008 Integrity Bank Alpharetta GA August 29, 2008 Columbian Bank & Trust Topeka KS August 22, 2008 First Priority Bank Bradenton FL August 1, 2008 First Heritage Bank, NA Newport Beach CA July 25, 2008 First National Bank of Nevada Reno NV July 25, 2008 IndyMac Bank Pasadena CA July 11, 2008 First Integrity Bank, NA Staples MN May 30, 2008 ANB Financial, NA Bentonville AR May 9, 2008 Hume Bank Hume MO March 7, 2008 Douglass National Bank Kansas City MO January 25, 2008 Miami Valley Bank Lakeview OH October 4, 2007 NetBank Alpharetta GA September 28, 2007 Metropolitan Savings Bank Pittsburgh PA February 2, 2007 Bank of Ephraim Ephraim UT June 25, 2004 Reliance Bank White Plains NY March 19, 2004 Guaranty National Bank of Tallahassee Tallahassee FL March 12, 2004 Dollar Savings Bank Newark NJ February 14, 2004 Pulaski Savings Bank Philadelphia PA November 14, 2003 First National Bank of Blanchardville Blanchardville WI May 9, 2003 Southern Pacific Bank Torrance CA February 7, 2003 Farmers Bank of Cheneyville Cheneyville LA December 17, 2002 Bank of Alamo Alamo TN November 8, 2002 AmTrade International Bank En Español Atlanta GA September 30, 2002 Universal Federal Savings Bank Chicago IL June 27, 2002 Connecticut Bank of Commerce Stamford CT June 26, 2002 New Century Bank Shelby Township MI March 28, 2002 Net 1st National Bank Boca Raton FL March 1, 2002 NextBank, NA Phoenix AZ February 7, 2002 Oakwood Deposit Bank Co. Oakwood OH February 1, 2002 Bank of Sierra Blanca Sierra Blanca TX January 18, 2002 Hamilton Bank, NA En Español Miami FL January 11, 2002 Sinclair National Bank Gravette AR September 7, 2001 Superior Bank, FSB Hinsdale IL July 27, 2001 Malta National Bank Malta OH May 3, 2001 First Alliance Bank & Trust Co. Manchester NH February 2, 2001 National State Bank of Metropolis Metropolis IL December 14, 2000 Bank of Honolulu Honolulu HI October 13, 2000

Bernanke Re-Upped!

Two men firmly committed to increased transparency have decided to remain on the team that hopes to lead the U.S. Recovery and stave off the possibility of choking inflation.  President Barack Obama has crossed political parties once again and will reappoint former Princeton University economist Ben Bernanke to lead the Federal Reserve.  The move received global support and gives the U.S. government the perceived stability that improving markets are desperate to see.

Bernanke’s current appointment ends February 1^st 2010.  During his handling of the country’s largest recession, Bernanke has received both high praise and severe criticism.  Two of Bernanke’s most severe critics have been Democratic Senator Chris Dodd of Connecticut and Republican Richard Shelby of Alabama.  Dodd is Chairman of the Senate Banking Committee.  Both men will pose stern questioning at the upcoming confirmation hearings.

Obama’s support for Bernanke has never waned publicly.  However, there has been speculation that White House economic advisor and former Treasury Secretary Lawrence Summers was a strong candidate for the position.  The current trajectory of the recovery and the public’s support for Bernanke’s transparent handling of delicate matters definitely contributed to President Obama’s decision.

Around the world, Bernanke is held in high regard.  With the U.S. economy seemingly stabilizing, Bernanke’s extension should help to keep momentum moving in a positive direction.

The Challenges

Bernanke has drawn praise for his bold decisions and actions expanding the Federal Reserve’s role in dealing with the massive economic reversal.  At the same time, he is criticized for not seeing the recession’s handwriting on the wall and for the dramatic transformation of the Federal Reserve in the face of the crisis. 

Bernanke’s detailed familiarity of the Great Depression has served the country well in the current situation.  Bernanke stepped beyond the Fed’s veil to work closely with Treasury’s Timothy Geithner to deal with the AIG and Bear Stearns failures and the collapse of Lehman Brothers.  His aggressive actions were instrumental in stabilizing the country’s financial institutions.

Critics would say that he overstepped his bounds and that the Federal Reserve has far surpassed its defined role.  One of Bernanke’s challenges will be to return the Federal Reserve to that role as protector of the currency.

In the wake of a projected $9 trillion 10-year budget deficit, the Fed will be challenged to control inflation.  Controlling inflation will play a large part in Bernanke’s exit strategy.  In the upcoming hearings, Congress is sure to press Bernanke to define this strategy.

The Federal Reserve

At the time of Bernanke’s current appointment, the chairman inherited a position that was characterized by its strong independence and occasional disdain for market conditions.  Bernanke’s predecessor Alan Greenspan had chaired the Fed through the country’s greatest growth sprint. 

Many of Greenspan’s laissez-faire policies are deemed as causes of the recession.  AS the depth of the recession unfolded, Bernanke originally seemed overmatched.  In the Summer of 2007, the Chairman took the bull by the horns and began a series of bold moves to stabilize the financials, assist small business.  His transition from Greenspan’s hands-off mandate to his own transparent action is hailed as saving the country and the world from another devastating depression.

Bernanke was creative, decisive and unflinching as he unveiled new monetary policy procedures and aggressive lending policies.

As the Chairman struggled to keep AIG and Bear Stearns afloat, he could not justify a bailout of Lehman Brothers.  The company’s failure ignited harsh global reactions.

Along with changing the role of the Federal Reserve, Bernanke launched an unprecedented aggressive media campaign.  The Chairman’s consistent and calm demeanor in the face of crucial challenges played well with a public unused to such visible presentations of facts and figures.

Before Bernanke checks out on the recovery and reshapes the Fed once again, he will work closely with Treasury’s Geithner to mend the housing dilemma, improve unemployment and re-grip interest rates.  Along the way, there are sure to be a few surprises and the ever-present fear of another recession.  Bernanke has won another term but sleepless nights lie ahead.