FDIC unable to find an acquirer for failed bank

The Wall Street Journal reports that the FDIC will pay Utah bank's depositors after it was unable to find an acquirer for the financial institution.

(emphasis mine)

JANUARY 31, 2009
FDIC to Pay Utah Bank's Depositors
By DAMIAN PALETTA

WASHINGTON -- Three banks failed Friday as the credit crisis continues to punish the financial-services industry, with federal banking regulators bracing for dozens of more lenders to collapse in the coming months.

In the case of one failure, that of Utah's MagnetBank,
the Federal Deposit Insurance Corp. agreed to write checks to the bank's depositors after it wasn't able to find a buyer for the bank's deposits or assets, a rare event and an ominous sign for regulators.

The other banks that failed were Ocala National Bank in Florida and Suburban Federal Savings Bank in Maryland. The FDIC was able to sell those banks' deposits to other lenders. Combined,
the failures are expected to cost the FDIC's deposit insurance fund close to $350 million.

Typically,
the FDIC can find other banks to buy the deposits and some of the assets of banks that fail. The regulator tried to market the assets of Salt Lake City-based MagnetBank but couldn't. That forced the regulator to send out checks that will likely cover the entire $282.8 million the lender had in deposits. The agency expects the failure will cost it $119.4 million, further depleting the government's deposit insurance fund.

All the deposits at failed Ocala National Bank, which had four branches and $223.6 million in assets, were acquired by CenterState Bank of Florida in Winter Haven.

The FDIC was able to sell all of the deposits of seven-branch Suburban Federal Savings Bank to Bank of Essex in Tappahannock, Va. It marked the first bank failure in Maryland since 1992. Bank of Essex agreed to buy $348 million of Suburban Federal's $360 million of assets.

The same story from MarketWatch, which reports that regulators close three more banks as failure list grows.

Utah's MagnetBank closed without an acquirer
FDIC shuts down three banks in one day amid ongoing credit crisis
By John Letzing, MarketWatch
Jan. 30, 2009

SAN FRANCISCO (MarketWatch) -- Federal regulators closed three banks in a single day Friday, as the ongoing credit crisis showed no signs of abating.

Utah's MagnetBank became the fourth bank failure of the year, and the
Federal Deposit Insurance Corp. was forced to directly refund depositors after being unable to find another institution willing to take over its operations.

That marked the first time the FDIC has been unable to find an acquirer for a failed bank in nearly five years, according to FDIC spokesman David Barr. "This bank did not have an attractive franchise value, and not many retail deposits or core deposits," Barr said. The FDIC had conducted an extensive marketing process for the bank's assets, he said.

Salt Lake City-based MagnetBank had total assets of $292.9 million as of Dec. 2, and $282.8 million in total deposits.
"It is estimated that the bank did not have any uninsured funds," the FDIC said in a statement.

The FDIC later said it has also closed Maryland-based Suburban Federal Savings Bank, and Florida's Ocala National Bank.

Suburban Federal had total assets of roughly $360 million as of Sep. 30, and total deposits of $302 million, the FDIC said in a statement. Tappahannock, Va.-based Bank of Essex agreed to assume all of the failed bank's deposits, the FDIC said.

Ocala National had $223.5 million in total assets as of Dec. 31, and $205.2 million in total deposits, the FDIC said. Winter Haven, Fla.-based CenterState Bank has agreed to assume all of the failed bank's deposits.

The closures mark the fourth, fifth and sixth bank failures of 2009,
bringing the total to 31 since the start of the credit crisis.

My reaction: Once the FDIC runs out of funds, it will have to borrow from the fed (fed prints money and FDIC borrows it). That means the checks being send out by the FDIC will soon be funded by printed cash. The important points to note from these two articles are:

1) Three banks failed Friday.

2) The failures are expected to cost the FDIC's deposit insurance fund close to $350 million.

3) For the first time in nearly five years, the FDIC was unable to find an acquirer for a failed bank, which is an ominous sign for regulators

4) 6 banks have failed in 2009, and 31 have failed since the start of the credit crisis.

Conclusion: The FDIC was a bad idea:

1) FDIC insurance has created a false sense of security. Right now, millions of Americans believe their checking and saving accounts are safe. They don' t realize that if there are widespread bank failures, even if they get their dollars back, those dollars won' t be worth much anymore because of all the money the government will have to print.

2) FDIC insurance encourages risk taking by banks. Today, bankers aren' t concerned about the moral consequences of their actions in the way they would be without the FDIC. Even if a banker drives his bank into the ground, he doesn' t need to worry about the deposit of his friends and family, because they are guaranteed. In other words, the FDIC has freed bankers from the worry of losing their depositor' s life savings, allowing them to freely concentrate on profit motives (ie: creating wonderful inventions like subprime CDOs squared)

4) FDIC insurance distorts interest rates by allowing failing institutions to survive to long. For example, banks that get into serious trouble can raise interest rates on their CD deposits, instead of failing like they normally should. The investors flock to these high yielding CD knowing that they are fully insured by the FDIC, and this allows insolvent banks to stay afloat. Meanwhile, healthy banks have to pay higher interests rates on their deposits,

While it is true that FDIC insurance provides stability and peace of mind during the good times, it also creates systematic risks which are a root cause of today' s once in a generation financial collapse.


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0 Responses to FDIC unable to find an acquirer for failed bank

  1. Anonymous says:

    FDIC insurance doesn't matter much in the good times. It matters crises (like now). I know there have been bank runs, but it would be much much worse without the FDIC.

    The problem isn't the FDIC, it's the inherently unstable nature of fractional reserve lending. It depends on confidence, not on solvency.

  2. Anonymous says:

    Thanks for sharing your economic knowledge with those of us who have very little knowledge, yet just enough to know these are scary times.
    Is it too late to buy gold, are prices too high, dollar too low to make a difference?

    How do I know what gold to buy?

    Where do I find a reputable dealer?

    Should I put all of our cash savings in to gold?

    Sorry for all the questions, but I have no idea the best way to prepare.

  3. Anonymous said...
    The problem isn't the FDIC, it's the inherently unstable nature of fractional reserve lending. It depends on confidence, not on solvency.

    I disagree. The FDIC, in its present form, is a hugely destabilizing factor. Consider that many brokerage firms were offering their richest clients last year to spread their millions of dollars out among hundreds of the country's riskiest (highest yielding CD) small banks around the country (so everything was under 100,000 insured limit). This flow of cash into America's sickest institutions was/is terrible for the economy. Bad banks should fail, not suck up all the deposits from healthy banks.

    Two changes need to be made to FDIC for it to be viable:

    1) Make it the insured limit higher and per taxpayer (ie: taxpayer gets his first
    2) Make interest bearing accounts insured minus 1 years interest. (ie: 97% of a saving account yielding 3% would be insured)

    These two changes would change the behavior of America's richest: healthy banks will get deposits and bad banks will fail.

    ------------

    Anonymous said...
    Thanks for sharing your economic knowledge with those of us who have very little knowledge, yet just enough to know these are scary times.
    Is it too late to buy gold, are prices too high, dollar too low to make a difference?

    Gold is still around 900. It is not too late to buy gold.

    How do I know what gold to buy?
    Where do I find a reputable dealer?

    Try Tulving.com (there is a 20 oz minimum, but ships right away)
    or ebay (more expensive, but you can use credit card and it ships right away. make sure you buy from someone with a lot of feedback)

    Should I put all of our cash savings in to gold?

    That is the easiest way to go. The important point is to have all your cash in hard assets (gold, silver, real estate, etc) or commodity stocks (gold miners, oil producers, etc).

    Sorry for all the questions, but I have no idea the best way to prepare.

    No problem. I should/will make an entry answering these questions.

  4. whoguess says:

    I should admire that USA hasn't printed dollars yet, there's no inflation in US:
    http://www.shadowstats.com/imgs/sgs-cpi.gif
    Today we see dollar revaluation to all currencies. While DJIA, S&P;, Nasdaq are falling, dollar grows because of vacuum cleaner based on US Treasury:
    http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
    US has demand in dollars. The more demand - higher the price of dollars. If you look 2008 historical data for treasuries:
    http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical.shtml
    you'll see that people from all the world are willing to buy treasuries because of the strong dollar - nobody knows alternatives, as everywhere situation is worse than in US. When US treasuries interest rate rises, it means hyperinflation has begun. Before anybody runs out of treasuries, inflation will eat all their revenues and savings. Don't burry your savings in treasuries.

  5. whoguess says:

    I should notice that today it's too late to buy gold. Here's the image with the price according inflation of dollar:
    http://en.wikipedia.org/wiki/File:Gold_price.png
    When will people who bought gold in 1979-1980 return their money? Better buy petroleum.

  6. Numonic says:

    Too late to buy gold? Hell NO. although i do recomend getting silver over gold but there is absolutely no way that it is too late to buy gold.

    Hyperinflation began when this credit contraction began.

    The final stage of hyperinflation is Treasuries, Fed Notes and finally Precious Metals.

    This credit contraction is making it more costly to borrow money which makes it harder to maintain a business which is the reason companies are going out of business and unemployment is rising. The only way to combat this is to raise enough money to compensate the rising costs of borrowing and have people pay that price. With so many companies still in business, competition is preventing companies from raising prices too much which is leading those companies to go out of business anyway. But the more companies that go out of business, the less competition there is out there for companies to raise prices against. It's going to come to a point where we will see only a small amoung of companies left out there and those companies will have high prices and these companies will get the business they need because of the need of the people even with the high price. This is the point people will see their mistake in running to Fed Notes and those remaining in paper will run to Physical Precious Metals. So Gold still has a ways to go up.

    Treasuries would crash before this happens as soon as people realise there's the same upside in holding Fed Notes and more downside in holding Treasuries.

    So it will go from Treasuries, to Fed Notes to Precious Metals.

    Right now the Treasuries have begun to pop.

    Companies are going out of business fast which are giving the surviving businesses room to raise prices. This is what will confuse alot of people. Demand will be down but prices will rise. Why? Because the demand that people are expecting already happened and the effect is having a lag. The demand is in the form of debt/$1 quadrillion in derivative debt in the market which is vacume sucking all the dollars out of the economy and making it harder(more costly) for companies to pull that money out. The only way that company can pull that money out is with more strength(money) behind him helping him pull that money out. The only way that company can get that extra strength(money) is by raising it's prices and also having people pay those prices. That means there has to be less competition before we start seeing these rising prices but the competition is getting thin as companies are going out of business by the masses. It's going to come down to only a few companies left and their prices will be sky high and they will remain in business because they will be selling neccessities and everyone's dollars will be going to them as they will be the few companies out there selling goods.

    This is how rising unemployment will lead to rising prices. It's the debt deleveraging, the rising cost of borrowing that will be passed on to consumers in order for the companies to stay in business.

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