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| Jonathan Weil: Banks have the world flying blind on depth of losses |
| Jonathan Weil / Oct 04, 2009, 00:24 IST |
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There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital. It failed last week.
Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 per cent of the bank’s assets. That percentage was almost double the average for this year’s 95 US bank failures, and it was the highest among the 10 largest ones.
How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
The cost of Georgian’s failure confirms that the bank’s asset values were too optimistic. It also helps explain why the FDIC, led by Chairman Sheila Bair, is resorting to extraordinary measures to replenish its battered insurance fund.
Georgian was chartered in 2001. By 2003, it had raised $50 million from an investor group led by a long-time local banker, Gordon Teel, who remained chief executive officer until last July. It grew at a breathtaking pace, fuelled by the real-estate bubble.
TRIPLE PLAY
From 2004 to 2007, total assets almost tripled to $2 billion from $737 million. Annual net income rose seven-fold to $18.3 million. The bank touted its philanthropy, including a $1-million pledge to a local children’s hospital, and boasted of a growing art collection showcasing Georgia painters.
As recently as its March 31 report to regulators, Georgian said it met the FDIC’s requirements to be deemed “well capitalised”. By June 30, that had dropped to “adequately capitalised,” after a $45-million second-quarter net loss.
Georgian also reported a 12-fold jump in non-performing loans to $306.4 million from $24.7 million three months earlier, mostly construction loans. Georgian’s numbers made it seem as if the surge arose from nowhere. On its March 31 report, the bank said just $79.1 million of its loans were 30 days or more past due.
SURVIVAL MODE
Georgian’s new CEO, John Poelker, downplayed any concerns. “Whether there is enough capital for the bank to be a survivor isn’t an issue,” he told Bloomberg News for an August 5 article.
What wasn’t made public until September 25, the day it closed, was that Georgian Bank had agreed to a cease-and-desist order with the FDIC on August 31 after flunking an agency examination. The 19-page order described various “unsafe or unsound banking practices and violations of law and/or regulations”, including failing to record loan losses in a timely manner. Georgian neither admitted nor denied the allegations.
The FDIC updates the public about the number of banks on its problem list once a quarter. An FDIC spokesman, David Barr, said Georgian was added to the FDIC’s internal list in July. As for the 416 banks on the list as of June 30, up from 305 a quarter earlier, the FDIC said their combined assets were $299.8 billion (The FDIC didn’t name the banks, as per its usual practice). If Georgian’s experience is any guide, the real-world value of those assets probably is much less.
RISING LOSSES
That might help explain why the FDIC keeps increasing its estimates for the losses it’s anticipating from future bank failures. In May, the agency said it was expecting $70 billion of losses through 2013. This week, it bumped that to $100 billion. The agency also said its insurance fund would finish the third quarter with a deficit, meaning liabilities would exceed assets.
The FDIC, backed by the full faith and credit of the US government, will get whatever money it needs to protect depositors. For now, it plans to raise $45 billion by collecting advance payments from the banking industry. Those payments will cover the next three years of premiums that the banks owe.
The big question is what the FDIC will do next time, should its loss estimates keep rising--and there’s no reason to believe they won’t. By statute, the insurance fund is supposed to be funded solely by the banking industry. The FDIC could keep borrowing from the banks, directly or through more advances.
The agency could tap its $500 billion credit line with the US Treasury. It still would have to pay back the money with fees from the industry, assuming the banks can’t persuade their minions in Congress to change the law. As it stands, the only way to boost the fund’s capital immediately is by charging the banks a lot more money for their insurance premiums. Given the odds that other surprises like Georgian Bank are lurking, the FDIC will have to bite this bullet eventually.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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