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.
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.