Monday, December 28, 2009

FDIC Draws Brisk Bidding on Loans by Failed Banks

DECEMBER 23, 2009

By LINGLING WEI, Wall Street Journal

Investors are jostling for the chance to buy a $1.1 billion package of commercial real-estate loans extended by failed banks, as these once-toxic assets attract growing interest.

More than a dozen investors, including Texas banker Andrew Beal, have submitted bids to the Federal Deposit Insurance Corp. for the portfolio of loans held by Franklin Bank, IndyMac Bank and other failed lenders, according to people familiar with the matter.

But the portfolio represents only a fraction of the real-estate loans held by the FDIC and the volume is mounting as more banks fail.

The FDIC, which declined to comment on pending transactions, is expected to announce the winning bidder within weeks in what will be its second-largest bulk sale of commercial-property assets since the downturn. The largest deal involved the sale in October of about $5 billion in condominium loans and other property made by now-defunct Corus Bank.

Demand for these assets, at a discounted price, has grown intense. Investors have amassed billions of dollars to buy distressed loans and property much as investors like Sam Zell did in the early 1990s.

"A lot of investors are anxious to invest cash they have raised," said David Tobin, a principal with Mission Capital Advisors, a loan-sale adviser.

But many banks won't sell. Some, especially community and regional banks, haven't marked down the value of their existing loan portfolios to current market rates—something that could jeopardize the survival of weaker lenders. Many hope the low cost of funds offered by historically low interest rates will let them earn their way out of trouble.

"They don't want to be blowing the entire mess out at the low point of the cycle," says John Howley, an executive director and specialist in loan sales at Cushman & Wakefield, a real-estate firm.

That makes the FDIC practically the only game in town.

The agency has to sell off a growing pipeline of real-estate assets acquired from banks that collapsed after lending too aggressively to owners of offices, shopping malls, apartments and other commercial property.

Consolation Prize

Demand for its current package of loans is a consolation of sorts for the FDIC, which is trying to limit taxpayer losses and shore up its deposit-insurance fund. An avalanche of bank failures wiped out the fund in the third quarter of this year, putting it at negative $8.2 billion at the end of September.

While the loans are expected to be sold for a steep discount, experts say, the competition should drive the price higher. Also, the FDIC is structuring the deal so taxpayers will share in the upside if the market improves.

Despite the strong interest from investors, the FDIC faces growing challenges to unload the assets. A total of 140 banks have gone belly up so far this year. Currently, the FDIC has about $30 billion in real-estate debt held by failed banks that is available for sale for the next 12 months, according to the agency. That figure is double the level a year ago.

In most FDIC deals involving failed banks during the current downturn, the agency has lined up buyers to take over loans, deposits, branches and most other assets when the banks have failed. But for some failed banks like Corus, Franklin and IndyMac, the FDIC has decided to sell some hard-to-value assets separately.

These bulk sales use a public-private partnership structure pioneered by the Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess in the early 1990s.

The set-up enticed private investors to buy distressed real-estate assets while giving the government the opportunity to make money on behalf of taxpayers should the assets rise in value.

Since last year, the FDIC has sold residential and commercial loans through eight such partnerships, with the agency's equity interest ranging from 50% to 80%. Those partnerships bought loans at discounts ranging from pennies on the dollar to more than 50 cents on the dollar of face value.

These structured deals, however, carry additional risk for the FDIC and, by extension, taxpayers. Because the agency takes a big chunk of the equity and provides financing, it stands to lose more if the markets continue to decline.

Under the options being considered for the $1.1 billion package, the FDIC would likely hold a 60% stake and provide financing. Deutsche Bank AG is advising the FDIC on the auction.

The portfolio consists of mostly nonperforming commercial property loans. Both Franklin, led by mortgage-bond pioneer Lewis Ranieri, and IndyMac were best known as home-mortgage lenders. But they also lent heavily to home builders and other property developers during the boom times, in states from California to Texas.

According to Foresight Analytics, Franklin had a total of $1.6 billion in commercial real-estate loans as of the third quarter of 2008, before its closure last November, and IndyMac had about $2.8 billion in such loans before its failure in July 2008.

Among the bidders for the portfolio is Mr. Beal, whose Beal Bank laid low during the boom years and avoided much of the real-estate bust. It has since gone on an opportunistic buying and lending binge, increasing its assets to more than $9 billion from $2.9 billion in 2007.

'Good Opportunities'

"We're in the business of buying loans," said Mr. Beal, a math whiz who likes to drive racecars in his spare time. "There are good opportunities, but investors have to be careful of what they buy and what they pay for."

He said the bank's goal is to buy performing loans at discounts. If the borrower defaults, the bank may modify the terms to bring it back to current. The bank would make money as long as the borrower stays current on modified terms.

—A.D. Pruitt
contributed to this article.
Write to Lingling Wei at lingling.wei@dowjones.com

Wednesday, December 23, 2009

Seven U.S. Banks Are Seized, Raising Year’s Failure Toll to 140

Dec. 19 (Bloomberg) -- Seven U.S. banks were seized by regulators, bringing this year’s total of failed lenders to 140 as financial companies are tested by the recession and the Federal Deposit Insurance Corp. anticipates more shutdowns.

Banks with $14.4 billion in total assets were closed yesterday in six U.S. states, the FDIC said in statements on its Web site. The agency is overseeing the dissolution of banks at the fastest pace in 17 years.

Two of the closures were in California. The assets and deposits of Federal Bank of California in Santa Monica were bought by closely held OneWest Bank, which acquired IndyMac Federal Bank this year. Imperial Capital Bank was bought by City National Corp., the Beverly Hills-based parent of City National Bank, which expanded in Southern California with the purchase.

“Imperial Capital Bank is a very good fit for City National, given that eight of its nine locations are in communities we serve,” City National Chief Executive Officer Russell Goldsmith said in a statement. “We’re pleased to contribute to the increased stability of the banking system.”

Federal Bank was the biggest lender seized yesterday, with $6.1 billion of assets and $4.5 billion in deposits, according to the FDIC. Based in La Jolla, Imperial Capital had assets of $4 billion and $2.8 billion in deposits.

Earlier this week, the FDIC boosted its 2010 budget by 56 percent to $4 billion to manage further shutdowns. The total budget will increase from $2.6 billion and the set-aside for bank failures doubles to $2.5 billion over this year, according to a proposal approved by the FDIC board. The agency staff will increase to 8,653 next year from 7,010 this year.

‘Larger Number’ of Failures

The budget “will ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary,” FDIC Chairman Sheila Bair said in a statement. Yesterday’s bank closings will cost the agency about $1.8 billion, according to the FDIC statements.

U.S. lenders are buckling under the weight of loans tied to commercial real estate, which is plummeting in value. Prices have dropped 43 percent from their peak in October 2007, Moody’s Investors Service said last month.


To contact the reporter on this story: Dan Reichl in San Francisco at dreichl@bloomberg.net

Thursday, December 17, 2009

Regulators Resist Volcker Wandering Warning of Too-Big-to-Fail

Bloomberg News

Dec. 15 (Bloomberg) -- Paul A. Volcker visited nine cities in five countries in the past eight weeks to warn that bankers and regulators “have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years.

“There is a lot of evidence that financial weaknesses brought us to the brink of a great depression,” Volcker, 82, said Dec. 8. at a conference in West Sussex, England. He told executives there that the changes they’ve proposed are “like a dimple.”

Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net.

There’s little evidence that policy makers are heeding Volcker, the former chairman of the U.S. Federal Reserve. More than 50 regulatory overhaul proposals have been submitted in the U.S. and Europe, the data compiled by Bloomberg show. Lawmakers and regulators have debated new rules for capitalization and leverage, central clearing for derivatives trading, oversight of hedge funds and ways to monitor systemic risk.

While the U.S. House of Representatives has approved a financial regulation bill, authorities in the U.S. and Europe have sidelined measures that would automatically force changes in the structure of financial companies that Bank of England Governor Mervyn King called “too important to fail.” Volcker is leading a chorus arguing for restricting the size or primary functions of financial institutions.

Volcker’s Travels

“He is spot on,” Joseph Stiglitz, a Columbia University professor who won the Nobel Prize in economics in 2001, said in an e-mail.

Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, told Kentucky’s Georgetown College students “we need to produce more, finance less,” according to the school’s Web site, and said in Bonn that some banks have “pervasive conflicts of interest.” In Berlin, he told Bloomberg television that “this isn’t any time to go back to business as usual.”

After Volcker became chairman of the Federal Reserve in 1979, he restricted the money supply, forcing interest rates to 20 percent to break an inflationary surge. Following the recession that ensued, President Ronald Reagan nominated Alan Greenspan in 1987 to replace Volcker, who had succeeded in driving the inflation rate to 1.1 percent by the end of 1986.

Dubai, China

A new debt crisis may threaten the economy before regulatory changes are enacted, according to Simon Johnson, an entrepreneurship professor at Massachusetts Institute of Technology in Cambridge and a former International Monetary Fund chief economist. Most of the world’s large international banks continued to expand as stock markets plunged and credit froze last year, data compiled by Bloomberg show.

After Dubai, the second-biggest sheikhdom in the United Arab Emirates, said Nov. 25 that it might delay debt payments by a development unit, analysts questioned whether the European Union would back Greece’s debt, roiling Greek stocks and bonds. Abu Dhabi promised yesterday to help the Dubai unit avoid defaulting. In China, a 4 trillion yuan ($585 billion) stimulus package, five interest rate cuts since September 2008 and $1.35 trillion in lending this year may lead to an asset bubble, according to Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas SA.

“Making meaningful regulatory changes is urgent now because this is the window of opportunity,” MIT’s Johnson said in an interview. “If that window closes, we’re asking for trouble.”

Resolve Fades

U.S. and European governments’ $15 trillion of guarantees, cash injections and other financial industry support, based on Bank of England data, may have been too successful. After Obama and other leaders opened 2009 promising sweeping financial overhaul, credit thawed, markets rebounded and resolve for “fundamental reform” faded, according to Susan Hoffman, a professor of political science at Western Michigan University in Kalamazoo and author of the book “Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions.”

Bloomberg News interviewed lawmakers, investors, economists, analysts and academics from 11 countries and reviewed draft laws and rules in the U.S. and Europe, the epicenters of the crisis of 2007-2008. The measures included those by members of executive or legislative branches in the U.S. and EU and by the Basel Committee on Banking Supervision, which recommends standards for financial institutions for 27 countries including the U.S., Russia, Japan and Brazil.

State of Play

The survey found that most of the more than 50 proposals are still being debated. Among at least 14 adopted are limits on banker pay in France, the U.K, and the Netherlands; more stringent testing of banks’ ability to withstand losses in Germany; and tougher capital rules in Switzerland.

In the U.S., Congress isn’t likely to pass final legislation until next year, as Obama and the Democratic leadership have made health-care overhaul the top priority and lawmakers face resistance from Wall Street banks, hedge funds and the U.S. Chamber of Commerce. Financial companies historically are the largest donors to congressional election campaigns, according to the Center for Responsive Politics in Washington.

House Bill

The House voted 223-202 Dec. 11 to approve a package assembled by the Financial Services Committee. The bill would heighten consumer protections, expand oversight of hedge funds and derivatives and set up a mechanism to allow -- without requiring -- regulators to dismantle large firms whose failure could threaten the economy. The Senate is writing its own law.

“The House of Representatives has acted to leave the age of dishonesty, recklessness and irresponsibility behind,” said Speaker Nancy Pelosi, a California Democrat, after the vote.

The European Commission, the EU’s executive arm, has proposed a European Systemic Risk Board similar to authorities being considered in the U.S., with the power to warn national regulators of risks. EU bodies are also developing rules on derivatives, hedge funds and bank capital.

Asia accounted for 2.5 percent of the $1.71 trillion in losses and writedowns by banks and insurers during 2007-2008, data compiled by Bloomberg show. Regulatory overhaul steps by Japan include expanding financial inspections of insurance and securities companies. China asked its biggest banks to increase capital ratios to at least 11 percent from 10 percent. The minimum set by the Basel committee is 8 percent.

Great Depression

Governments worldwide need to work together to implement roughly the same solutions at about the same time, or financial companies may move their operations to the countries with the least stringent rules, regulators said in interviews.

To be sure, restructuring in the U.S. during the Great Depression came together years after the 1929 stock market crash. Congress took until 1933 to create the Federal Deposit Insurance Corp. and 1934 to establish the Securities and Exchange Commission. Now lawmakers are attempting to reverse three decades of deregulation.

“This is one time when you hope they move slowly,” said Bert Ely, the head of Ely & Co., a bank consulting firm in Alexandria, Virginia, in an interview.

Protecting the economy from another catastrophe is important enough for lawmakers to take their time, said Ely, an adjunct scholar at the Cato Institute, a Washington research group, who has testified before Congress.

“You’ve got to get it right the first time,” he said.

HSBC’s Green

New regulations might slow economic expansion, according to Stephen Green, chairman of London-based HSBC Holdings Plc.

“If all of the measures currently under discussion with regard to strengthening the financial system came in their most extreme form and all too quickly, there is no question in my mind that this would damage the recovery,” Green said in a Nov. 17 speech in London.

The countries belonging to the Basel committee will probably agree next year on tougher capital, liquidity and leverage requirements for banks, members said. Implementation will take longer and depend on economic recovery, they said.

The measures would substantially increase amounts that banks have to set aside against emergencies, potentially reducing their lending ability, according to Josef Ackermann, chief executive of Frankfurt-based Deutsche Bank AG.

Antitrust regulators forced asset sales at bailed-out companies, such as the U.K.’s Lloyds Banking Group Plc and Germany’s Commerzbank AG. Still, European banks are emerging from the credit crisis bigger than before, according to data compiled by Bloomberg. The data show European bank assets grew 25 percent since January 2007, compared with a 20 percent rise at U.S. lenders.

‘It’s Insanity’

Four U.S. institutions -- Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup -- held 35 percent of the country’s deposits on June 30, compared with 28 percent by the four biggest two years before, according to the FDIC and the Fed. The world’s 10 largest banks at the end of 2008 had 26 percent of the assets of the top 1,500 banks, up from 18 percent in 1999, Bloomberg data show.

“It’s insanity that the too-big-to-fail institutions are even bigger today than they were,” said U.S. Senator Bernie Sanders, a Vermont independent, in an interview. “God forbid we have another financial crisis.”

Governments should separate deposit-taking banks from those that use their own money to trade and issue securities, said Irving Kahn, 103, who has worked on Wall Street since 1928.

Reed’s Apology

“I wouldn’t lend you a dime if I knew you loved to gamble at a casino,” said Kahn, the chairman of investment advisers Kahn Brothers Group Inc., in an interview.

John S. Reed, the former co-chief executive officer of Citigroup Inc., regrets helping to engineer the merger that created the bank, he said. Citigroup, which took $45 billion in U.S. aid under the Troubled Asset Relief Program, said yesterday that it will repay $20 billion.

“I’m sorry,” Reed, 70, said in an interview. U.S. lawmakers were wrong in 1999 to repeal the Depression-era Glass- Steagall Act, he said. The act required the separation of institutions involved in capital markets from those engaged primarily in traditional customer services, such as taking deposits and making loans.

Resurrecting Glass-Steagall would reduce the need for the taxpayer bailouts that added between 9 percent and 49 percent to the profits of the 18 biggest U.S. banks in 2009, according to Dean Baker, co-director of the Center for Economic & Policy Research in Washington.

Europe’s Universal Banks

Another school of thought is that outlawing institutions of a certain size or laying down universal caps on securities trading by retail banks would be impractical, ineffectual and a potential drag on growth, politicians and regulators in charge of rule-writing in the U.S. and the EU said in interviews.

“Plenty of firms got into trouble making regular commercial loans, and plenty of firms got into trouble in market-making activities,” Fed Chairman Ben S. Bernanke, 56, told the Economic Club of New York on Nov. 16. “The separation of those two things per se would not necessarily lead to stability.”

In continental Europe, most regulators say they see little reason to break up so-called universal banks -- such as Deutsche Bank, HSBC and BNP Paribas -- largely because they have withstood turmoil. HSBC didn’t take the U.K. government’s offer for aid, and Deutsche Bank never tapped Germany’s bank-rescue fund. BNP took 5.1 billion euros as part of a program to provide funds to banks in exchange for an increase in lending. The bank raised 4.3 billion euros in a rights issue in October 2009 to reimburse the government.

Fisherman’s Patience

“The crisis didn’t come from here,” said Daniele Nouy, secretary general of the Commission Bancaire, France’s bank regulator. “We think our model, with universal banks and a single, strong regulator, works well.”

The nascent economic recovery represents a serious threat to the overhaul of financial regulation, according to Representative Brad Miller, a North Carolina Democrat on the House Financial Services Committee.

“My greatest fear for the last year has been an economic collapse as bad as the Great Depression,” Miller said in an interview. “My second greatest fear was that the economy would stabilize and begin to recover and the financial industry would have the clout to defeat the fundamental reforms that our nation desperately needs. My greatest fear seems less likely, lately, but my second greatest fear seems more likely every day.”

With a fisherman’s patience, Volcker said he may eventually get his way on financial regulation. He took a break from his efforts in July, fly-fishing in New Brunswick’s Restigouche River. He landed a 28-pound Atlantic salmon, according to his staff.

“I’m not alone in this,” Volcker said at the Dec. 8 conference. “I think I’m probably going to win in the end.”

To contact the reporters on this story: Gadi Dechter in Washington at gdechter@bloomberg.netAlan Katz in Paris at akatz5@bloomberg.net .

Tuesday, December 1, 2009

Buyers Take a Pass on Some Failed Banks

NOVEMBER 30, 2009, 4:04 P.M. ET

By MATTHIAS RIEKER, Wall Street Journal

People's United Financial Inc. wanted to buy failed banks on the cheap. Instead, it struck a deal to buy a healthy equipment-leasing company.

Last Monday's change of plans by the Bridgeport, Conn., bank-holding company underscores a problem with the growing pile of terminally ill U.S. banks being wrestled with by the Federal Deposit Insurance Corp.

Some are in such bad shape that potential buyers won't touch them at any price, even if the government agrees to eat losses on the failed bank's bad loans. In addition to their depleted capital, many seized banks operate in areas with sluggish growth prospects, are puny and are loaded with expensive deposits gathered through brokers that are likely to leave when the acquiring bank reins in interest rates, some bankers complain.

Philip Sherringham, chief executive of People's United, said it is getting harder to find the dream deal that bank officials hoped to hatch from a wrecked bank. The supply of ideal targets—sensible deposit-gatherers that fatally "overextended" their loan portfolio—is slim and the competition fierce, he said.

The company's roots go back to 1842. Its biggest deal was the 2008 purchase of Chittenden Corp., including six banks owned by the Burlington, Vt., company. 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."

The St. Cloud, Minn., bank has bought five failed banks since the financial crisis erupted, including two in Florida and one in Atlanta, where soured real-estate loans are piling up and deposits are expensive.

Fifth Third Bancorp CEO Kevin Kabat complained at an investor conference recently that the "relative quality…of available FDIC transactions have really not been very attractive from our perspective."

The Cincinnati bank bought failed Freedom Bank of Brandenton, Fla., in October 2008 and is looking mostly for FDIC-arranged deals in geographic areas where Fifth Third already has branches.

Sluggish interest in doomed banks could push the FDIC's losses higher at a time when the agency's fund to shield depositors is in negative territory for just the second time in its history.

Kevin L. Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP, said FDIC officials might be forced to bundle some small banks together in order to lure potential buyers.

An FDIC spokesman said the agency isn't having trouble lining up buyers. About 95% of banks seized by regulators have been sold. While some attract few bids, the FDIC has "had tremendous success in finding buyers," the spokesman said. Two of the nine banks that failed this month were sold without loss-sharing agreements.

People's United, the largest bank based in New England, has been hunting all over the U.S. for attractive acquisition targets. The bank has relatively few problems compared to the overall banking industry and $2.6 billion in capital to spend.

Last month, regulators notified People's United that its bid for FBOP Corp., the battered Illinois owner of nine banks, wasn't chosen by the government, according to people familiar with the matter.

U.S. Bancorp bought the banks and reopened the branches as part of the Minneapolis-based regional bank.

Financial Federal Corp., the leasing company that People's United agreed to buy in a stock-and-cash deal valued at $738 million, is a move to expand some loan businesses rather than gain more overall heft.

Still, People's United hasn't entirely soured on the bad banks being shopped around by the FDIC. "In difficult times, bad banks will fail and good banks will fail," Mr. Sherringham said in an interview.

In many cases, though, "there are fewer bidders" and "the folks that are bidding realize that," lowering their offers, said Mr. Petrasic, the banking lawyer.

As a result, said Kip A. Weissman, a partner at Luse Gorman Pomerenk & Schick PC, there are "probably going to be more liquidations and high-loss deals."

Write to Matthias Rieker at matthias.rieker@dowjones.com

Saturday, November 21, 2009

Pace of job losses slows in many states

Michigan’s jobless rate drops to 15.1 percent, still highest in the nation

The Associated Press

updated 11:52 a.m. PT, Fri., Nov . 20, 2009

WASHINGTON - In a sharp improvement, more than half of U.S. states added jobs in October, though economists said many of the gains likely occurred in temporary employment.

That's customarily a positive a sign. Employers usually hire temporary workers before they add full-time jobs. But in this case, the temporary hiring may be inflated by the auto sector, which has boosted production to replace depleted inventories. As a result, the increase might not be sustainable.

Some of last month's job gains also were in sectors such as education, health care and government, which have fared relatively well during the recession. By contrast, there's little evidence that companies in hard-hit industries are hiring permanent staff.

Overall, 28 states added jobs in October. That's up from only seven in September and eight in August. It's also the largest number to record increases since 33 states did so in February 2008, according to the Economic Policy Institute, a think tank.

"It's a positive signal ... that states are mixed rather than uniformly bad," said Jim Diffley, a regional economist at IHS Global Insight. Previous reports have all been "doom and gloom," he said.

Many states that added jobs still saw an increase in their unemployment rates. The figures for jobs and unemployment come from separate reports. The unemployment rate is calculated from a survey of households, while the jobs count comes from a survey of businesses. The two don't always match up.

The unemployment rates rose in 29 states in October from the previous month, the Labor Department said Friday. Thirteen states saw their jobless rates drop.

Michigan still had the nation's highest unemployment rate in October: 15.1 percent. It was followed by Nevada at 13 percent, Rhode Island at 12.9 percent, California at 12.5 percent and South Carolina's 12.1 percent.

California, Florida, Delaware and Washington, D.C., posted their highest unemployment rates on records dating to 1976.

Still, Michigan's jobless rate fell from 15.3 in September, as the state gained 38,600 jobs, mostly in professional and business services sector. That category includes temporary workers.

Other states with heavy auto manufacturing activity also saw jumps in the professional and business category. They included Ohio, Kentucky and Tennessee.

Sophia Koropeckyj, managing director at Moody's Economy.com, said the gains could reflect greater use of temp workers by auto makers. The government's Cash for Clunkers auto rebate program led to big sales gains in August, forcing auto makers to increase production to replace inventories.

But sales dropped after the clunkers program ended. And demand for new cars is likely to remain weak, Koropeckyj said.

"We won't necessarily see a sustained increase" in auto employment, she added.

Koropeckyj said her firm hopes to see higher manufacturing and construction employment. That would reflect increasing business investment, a key ingredient for a healthy recovery. But it wasn't apparent in Friday's report, she said.

Still, there were other positive signs. Texas added 41,700 jobs, increasing its total payrolls for only the second time in the past year. Its unemployment rate edged up to 8.3 percent from 8.2 percent.

Most of Texas' gains were in education, health care and government. California, which added over 25,000 jobs, saw a similar mix.

Oklahoma added 8,800 jobs, the fourth-highest in the country, mostly in professional and business services, education and health care.

Nevada, meanwhile, saw its unemployment rate drop to 13 percent, from 13.3 percent. That's the first decline in its rate since November 2005. Much of the gain, however, was a result of a drop in Nevada's labor force, as about 14,200 people gave up looking for work. People who stop looking for jobs are no longer counted as unemployed.

The national unemployment rate jumped to 10.2 percent in October, the highest in 26 years, from 9.8 percent in September.

Thursday, November 12, 2009

FDIC: Big banks still aren't lending enough

Large banks aren't ‘stepping up to the plate providing credit,’ Bair says

The Associated Press

updated 4:09 p.m. PT, Tues., Nov . 10, 2009

NEW YORK - The head of the Federal Deposit Insurance Corp. said Tuesday she's "very worried" that the nation's biggest banks aren't lending enough and warned the economy could take another turn for the worse without increased access to credit.

FDIC Chairman Sheila Bair said the FDIC's upcoming quarterly report would show that "not many large institutions are doing a very good job of lending." Instead, she said, some are taking advantage of near-zero interest rates by borrowing dollars cheaply to buy higher-yielding assets like stocks or commodities — a move known as the "carry trade."

"I don't see much money going out (from banks). I see a lot of carry trade," Bair told a banking conference in New York. "It used to be you take deposits and you lend out money. We'd like to see more of that."

Many banks have tightened lending standards following a wave of residential and commercial property defaults. Others say they want to lend but see little demand as consumers and businesses seek to pay off debt, not take on more.

The lack of lending by large banks is dangerous at a time when many small and midsize banks are teetering on the brink amid the economic downturn, Bair said.

"I'm very worried (that) the larger institutions don't seem like they're stepping up to the plate providing credit," Bair said. "Because if they don't do that, we're all in the soup."

Addressing the rash of bank failures, Bair said the FDIC had enough funds to shut down troubled banks and would tap its line of credit with the Treasury only as a last resort. There have been 120 bank failures this year, and Bair predicted "many more" ahead.

On the regulatory front, Bair reiterated her agency's bid to require banks to hold more capital as a buffer against rough times, even if it eventually reduces the amount of funds available to lend. She said the requirement would not only protect banks but could also help prevent asset bubbles by reducing excess credit in the financial system.

"I think we have the authority and hopefully the will to do that," she said.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Wednesday, November 11, 2009

Banks Hasten to Adopt New Loan Rules

NOVEMBER 12, 2009

By LINGLING WEI and PETER GRANT, Wall Street Journal

Banks are moving quickly to restructure commercial mortgages under new U.S. guidelines that are more forgiving of battered property values and can help banks avoid bigger losses.

Citigroup Inc., regional bank Whitney Holding Corp. and other lenders around the country are planning to review loans now considered nonperforming to determine if they can be reclassified under the guidelines announced Oct. 30 by bank, thrift and credit-union regulators, according to bank executives and people familiar with the matter. The moves could help the banks absorb fewer losses on troubled real-estate loans and preserve capital.

"It's a positive all the way around," said James Smith, chief credit officer for National Bank of South Carolina, a unit of Synovus Financial Corp.

Matthew Anderson, partner at research firm Foresight Analytics, estimates that about two-thirds of the $800 billion in commercial real-estate loans held by banks that will mature between now and 2014 are underwater, meaning the loan amount exceeds the value of the property. The flexibility extended by regulators will apply to $110 billion to $130 billion of these loans, he said.

The guidelines are controversial, with critics accusing the U.S. government of prolonging the financial crisis by not forcing borrowers and lenders to confront inevitable problems.

Regulators respond that they are being prudent, adding that a crackdown will occur at any banks misinterpreting last month's announcement as an opportunity for leniency.

"We will push banks to be realistic [about losses] and will drag them out of denial if that's what we need to do," Tim Long, senior deputy comptroller at the Office of the Comptroller of the Currency, said in an interview Tuesday.

Regional and small banks are the most likely financial institutions to benefit from the guidelines because of their exposure to commercial real estate. More than 2,600 banks and thrifts have commercial real-estate-loan portfolios that exceed 300% of total risk-based capital, according to an analysis of regulatory filings by The Wall Street Journal. Nearly all of those institutions have less than $5 billion in assets.

Regulators consider the 300% threshold a red flag, though it doesn't necessarily mean the banks are in danger of failing. Risk-based capital is a cushion that banks use to cover losses. Commercial real-estate woes contributed to 100 of the 120 bank failures this year, according to Foresight Analytics.

Supporters of the guidelines note that commercial properties still can generate enough cash to pay debt service on mortgages even if they are underwater. In such cases, banks shouldn't be required to classify the loan as delinquent and reserve capital against it.

"If you're going to take a hit, make sure you're taking a hit for a legitimate reason, not because an examiner is making an immediate judgment on the loan," said Tom Flexner, Citigroup's global head of real estate.

Regulators also suggested ways for banks and borrowers to restructure loans and avoid foreclosure even if the properties can't pay debt service. Banks can carve troubled loans into one performing part and one nonperforming part. That would allow the bank to incur losses on only the nonperforming part, not the entire loan.

In an interview, Joe Exnicios, chief risk officer of Whitney's Whitney National Bank unit, of New Orleans, cited a hypothetical example in which a developer borrows money to develop a small retail center and gets a drugstore chain to sign a lease for one store. If the developer can't sell the other sites, he would be unable to repay the loan. Under the new guidelines, the bank could create a healthy, performing loan supported by the drugstore lease and a nonperforming loan from the rest of the loan. "It may make a difference on whether you need to have additional capital and take additional reserves," he said.

Critics agree that regulatory flexibility might help some banks avoid failure. But the troubled loans remaining on their books will discourage them from lending, reminiscent of Japan's "lost decade" in the 1990s.

A better solution, critics said, would be similar to the approach regulators took during the commercial real-estate crash of the early 1990s.

"Back then, regulators moved aggressively to force banks to take write-offs and sell off their troubled loans, and the market recovered faster," said Mark Edelstein, head of the real-estate group at law firm Morrison & Foerster LLP.

Some observers also worry that the guidance could lead to fewer real-estate transactions.

"The question becomes: Are you going to invest in new properties knowing that there is this overhang [of troubled loans] that could hit you?" said Michael Straneva, global head of Ernst & Young's transaction real-estate practice.

Bankers respond that some critics would prefer that regulators pressure banks to sell assets so they can scoop them up at steep discounts.

"The people who are complaining the loudest are the people who want to buy the real estate," said Pat Goldstein, head of real estate for Emigrant Savings Bank in New York City.

—Maurice Tamman contributed to this article.

Write to Lingling Wei at lingling.wei@dowjones.com and Peter Grant at peter.grant@wsj.com

Tuesday, November 10, 2009

Construction nears standstill

Commercial sector enters ‘drought’ with demand staying low

By Brian Wargo (contact) Las Vegas Sun

Saturday, Nov. 7, 2009 | 2 a.m.

The state bird of Nevada, the construction crane, is on the endangered species list.

The good news, at least, is that it still has a few places to roost — maybe an amazing achievement in itself, given the economic climate.

Las Vegas research firm Applied Analysis reports there are nine commercial projects of consequence under construction off from the Strip in Southern Nevada. Once most of those projects wind down early next year, there’s not much in the pipeline and development will essentially cease, said Jake Joyce, an analyst with Applied Analysis.

“With limited projects remaining under construction, the build-it-and-they-will-come mentality has gone the way of pillbox hats, Benny Goodman and your grandmother’s dance card,” Joyce said. “Essentially, commercial is following the same path as tourism. It is about supply and demand.”

After the completion of CityCenter, the most prominent project under construction will be Tivoli Village at Queensridge, which recently resumed work on its mixed-use development after virtually halting it a year ago. Also, Marnell Properties on Monday will break ground on a 200,928-square-foot airfreight logistics center on McCarran International Airport’s new Terminal 3.

With the completion of most of CityCenter in December, the long-range outlook, analysts say, is that there won’t be another major casino project built on the Strip for another decade.

With commercial vacancy rates at record levels, weak demand because of the economy and job market, and with credit hard to obtain, the chance for new projects is low. Las Vegas now has the same amount of space occupied as it did in 2006, and there’s been millions of square feet added since then.

“It will be pretty bad,” said John Restrepo, principal of Restrepo Consulting. “We are going to have a drought of commercial construction for a number of years until we burn through this inventory.”

Commercial has nearly caught up with the home construction industry, in which builders are taking only about 400 permits a month because of weak demand given the foreclosure inventory. Fewer than 5,000 homes will be built in 2009, compared with more than 35,000 a year during the boom.

The office market has 11.2 million square feet of empty space with a vacancy rate of nearly 23 percent. That equates to about five years of inventory, Joyce said.

With the unemployment rate in Las Vegas at 13.9 percent and rising, there won’t be job creation to spur demand for office and industrial space, Joyce said.

The industrial real estate market is hurting too, with 13 million square feet of vacant industrial space, which is about two years of inventory.

The retail sector has 5.1 million square feet of vacant space, a supply of about two years, Joyce said.

With foreclosures expected to increase in 2010, the value of vacant commercial space will slide and make it more difficult for developers to build anything that can be competitive, analysts said.

Besides Tivoli Village, another project kicking off is a $29 million freight and mail sorting operation for FedEx, UPS and airlines scheduled to be completed in about a year.

Analysts said projects such as the Marnell Air Cargo Center will proceed because they’re built specifically for companies rather than speculative development. The project is nearly fully pre-leased.

Other projects Applied Analysis reports are under construction off the Strip are:

• A 412,000-square-foot warehouse facility at the southwest corner of Sunset Road and Torrey Pines Drive.

• A 50,000-square-foot distribution center on Trade Drive in North Las Vegas.

• The 48,047-square-foot Tuscano Medical Park Building C on Jeffreys Street.

• The 130,000-square-foot Corporate Center at the Curve on West Teco Avenue.

• The Campos Office Building — 84,184 square feet of government office on Bonanza Road.

• Caroline’s Court — 258,210 square feet of retail at U.S. 95 and Durango Drive.

• Phase 2 of retail development totaling 101,550 square feet at Horizon Ridge and Green Valley parkways.

The list is telling because in early 2007 — when commercial construction was booming — there were 75 to 100 projects under construction, Joyce said.

At least three dozen office projects that Applied Analysis had previously listed as planned are on hold because they are no longer being marketed, Joyce said. That doesn’t include other projects under construction that have stalled because construction loans expired and banks won’t extend them.

“The banks are trying to shore up their balances and it doesn’t make sense to loan more money on a project that is going to sit vacant and they are eventually going to take back,” Joyce said.

Added Restrepo: “We won’t see much if any new spec commercial development until we see vacancies below 10 percent for an extended period of time.”

That’s quite a comedown for a region that had twice the construction employment as the national average. No one ever expected a slowdown of this magnitude, Restrepo said.

“Southern Nevada went through a long stretch having a disproportionate share of its job base in construction, at least by national standards. Many in the community started to believe that this reflected a normal and sustainable job base. The recession has dramatically shown how transitory construction employment really is,” Restrepo said.

In its latest quarterly report, the Associated General Contractors of Las Vegas said 19 commercial building permits were issued in September with a value of $10 million. Between September 2007 and September 2008 the value of commercial permits averaged $130 million per month.

Steve Holloway, the industry group’s executive director, said it may be another two to five years before commercial construction picks up in the private sector and that hope for the near term is expanded government spending.

The slowdown in construction has also prompted an exodus of construction workers because about 15,000 of the 50,000 union-hall workers are considered “travelers,” in that they relocate to markets temporarily for work and return home when work is no longer available, Holloway said.

“Once CityCenter is done, that is going to be it for a while,” Holloway said. “It is going to be ugly. There is so much supply that it will remain idle for a while. Unless some huge project magically takes off, I think Southern Nevada is going to remain in this recession two to five more years.”

Holloway said tourism won’t be enough to push Las Vegas out of its recession because construction is the second-largest industry in an economy predicated on growth. That industry pays more than 30 percent of sales and use taxes, he said.

“Unless construction recovers both nationally and locally, we are not coming out of this recession no matter what gaming does,” Holloway said.

Friday, November 6, 2009

Gloomy times for commercial real estate

Carolyn Said, Chronicle Staff Writer

Friday, November 6, 2009

Shopping centers, office buildings, industrial spaces, hotels and apartments can expect a period of "enveloping gloom" from the recession and credit crunch, according to a report released on Thursday.

Values will plunge, vacancies will rise and rents will decrease across all types of commercial property before the market hits bottom in 2010, according to the "Emerging Trends in Real Estate" forecast from the Urban Land Institute and PricewaterhouseCoopers LLP.

Based on interviews with 900 industry leaders, including investors, developers and financiers, the report was released at an Urban Land Institute conference for developers, planners and other real estate professionals taking place this week at San Francisco's Moscone Center.

No quick recovery is in store, the report said. "2010 looks like an unavoidable bloodbath for a multitude of 'zombie' borrowers, investors and lenders," it said. "The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed."

One flicker of good news was that investors with cash to burn should find some exceptional bargains amid the carnage. Properties may lose 40 to 50 percent of the values they enjoyed at their peak in mid-2007, the report said.

Apartments are likely to be the first sector to recover in sync with the economy, as young people who were forced to move back in with their parents seek their own places as soon as they find jobs, the report said.

Retail is likely to undergo the most wrenching problems. While top-tier malls and infill shopping centers with grocery stores will still attract customers, many struggling malls in secondary markets "will be worthless soon," one person interviewed for the report said.

"It's triage time with retail," said Jonathan Miller, the report's author. "A lot of people will give up on the weaker malls."

Ground-up building is likely to enter suspended animation for the next few years. "Why build anything if you can buy existing real estate so cheaply?" said Stephen Blank, senior resident fellow for real estate finance at the Urban Land Institute.

The report also assessed the relative strength of core urban markets. Washington, D.C. - recession-proof because the federal government eschews layoffs - ranked No. 1 for expected resilience.

San Francisco came in second because of its "multifaceted economy, proximity to high-tech Silicon Valley, and history of bouncing back from corrections," as well as its links to other global capitals and its "brainpower jobs."

Although San Francisco has taken some hard hits in the past year, experts interviewed for the report "feel it will bounce back before other markets," Miller said.

E-mail Carolyn Said at csaid@sfchronicle.com.

Thursday, November 5, 2009

Commercial property market to hit bottom in 2010, report says

Owners of properties such as office buildings, warehouses and malls will suffer a surge of painful defaults, write-downs as the market finally faces up to the reality of its diminished conditions.

By Roger Vincent, Los Angeles Times

November 5, 2009

After spending more than a year in suspended animation, the commercial real estate industry is expected to hit bottom in 2010 with a wrenching thud.

Owners of business properties such as office buildings, warehouses and malls will suffer a surge of painful defaults, write-downs and workouts with their lenders as the market finally faces up to the reality of its diminished conditions, according to a report set for release today.

The long-awaited blood bath, however, will benefit investors who are able to swoop in to take advantage of record bargains.

Unlike the formerly overheated housing market, which is in the process of being purged through foreclosures and sellers' growing willingness to lower their asking prices, the business of buying and selling commercial real estate has been stuck in neutral since the recession kicked in.

So far, potential sellers have been loath to lower their prices, and banks have been unwilling or unable to lend money for purchases. Even financially strapped owners who are unable to keep up their mortgage payments haven't had to let go because their lenders don't want to take back distressed properties in a down economy.

Banks instead have often been willing to renegotiate loan terms, a practice drolly referred to as "extend and pretend," as both lenders and debtors hoped the market would turn around.

The era of wishful thinking is about to end, according to industry professionals who participated in a study by consulting firm PriceWaterhouseCoopers and the Urban Land Institute, a real estate industry trade group and think tank.

"The recession," said Richard Kalvoda, a partner at PriceWaterhouseCoopers, "is now impacting the fundamentals of real estate."

A key fundamental, for example, is office leasing. As white-collar companies lay off employees or go out of business in the tough economy, they no longer need as much office space. Landlords, in turn, lose rental income and find it harder to make mortgage payments.

With vacancy growing -- about 51 million square feet of space is empty in Southern California -- and rents falling, commercial property values are in the midst of the biggest drop since the Great Depression. Industry experts predict properties will have lost 40% to 50% of their value from the peak of mid-2007 by the time the market presumably reboots next year.

Retail and office properties will take the biggest hits, the report said, as nervous consumers curb spending and companies delay rehiring. Many landlords who are barely hanging on now will lose their grip in 2010 -- and some investors can hardly wait.

"Our report participants find that a sense of nervous euphoria is growing among liquid investors who can make all-cash purchases," said Stephen Blank, a senior resident fellow at the Urban Land Institute. "Those that are patient, daring and selective could score generational bargains on premium properties from both distressed sellers and banks that are clearing out unwanted bad loan and real estate-owned portfolios."

Among those poised to leap is real estate fund manager Xavier Gutierrez of Phoenix Realty Group. The New York-based firm is sitting on $450 million it has ready to buy real estate, including $170 million earmarked for the Los Angeles area. The money will be invested on behalf of pension funds and insurance companies, he said.

The current real estate scene is "definitely grim," he said, but the outlook for three years from now and beyond is much better.

Southern California has a young population that is still growing from new births and immigration. Apartments may be the first commercial real estate category to recover as a large cohort of people in their 20s leave home or stop doubling up with roommates when their economic status improves, Gutierrez said.

The region also is well-positioned for recovery in international trade through the ports of Los Angeles and Long Beach and local airports, he said.

Hotels, which have been particularly hard hit by the recession, can also bounce back quickly when the economy improves, said Kalvoda of PriceWaterhouseCoopers. Office buildings, which are dependent on hiring, and malls, which are dependent on consumer confidence, probably will take longer to recover.

Real estate industry leaders who are meeting at the Urban Land Institute's annual gathering in San Francisco are more optimistic than they were at this time last year because they can see the reckoning finally on the horizon, said Richard Green, director of the USC Lusk Center for Real Estate.

"The mood is considerably lighter," he said.

Green is concerned, though, about whether bankers will do what he thinks they should.

"One thing that is worrisome is that banks are still delusional," he said, extending weak loans while hoping for a turnaround that will preserve older, higher property values.

"There are people out there who need to realize that we need to take the hurt and move on," Green said. "People who have moved on see an opportunity."

roger.vincent@latimes.com

Copyright © 2009, The Los Angeles Times

Wednesday, November 4, 2009

CMBS Savior? Developers Diversified Deal Is Nearer

Fed Worry Is Easing, Clearing Path for Test of TALF; 'We Need a Transaction Approved to Reconnect the Market'

By LINGLING WEI, Wall Street Journal

A closely watched deal that may help uncork the commercial-property debt market is picking up steam after being threatened by some queasiness by the Federal Reserve, according to people familiar with the matter.

The Fed is sending signals that its concerns over the deal are easing, paving the way for the first sale of commercial-mortgage-backed securities, or CMBS, through a major rescue program called the Term Asset-Backed Securities Loan Facility, or TALF. The credit-starved real-estate industry has been hoping that the debt sale by shopping-center giant Developers Diversified Realty Corp. would lead to other CMBS sales.

Developers Diversified announced in early October that it had obtained from Goldman Sachs Group Inc. a $400 million loan, which Developers Diversified and Goldman intended to be converted into a CMBS offering through the TALF program. But the Fed, mindful of protecting taxpayers' interest, had shown reservations about financing the deal because it involves just one borrower, according to the people with knowledge of the issue.

Single-borrower CMBS offerings are considered riskier than multiple-borrower deals, with the risks spread over many different borrowers as well as different kinds of commercial buildings and geographic locations.

"The Fed is being very conservative, very diligent in reviewing collateral and very risk-averse," said Frank Innaurato, managing director at Realpoint LLC, a credit-ratings firm.

The Fed is still reviewing the deal and may still decide it is too risky. But in recent days, the Fed has indicated progress with reviewing the 28 shopping centers owned by Developers Diversified and underlying the $400 million loan, and the deal likely will be closed in the coming weeks, the people said.

If the Fed opted against the deal, Goldman likely would try to sell the $400 million loan outside of the TALF program. Representatives at the Fed, Developers Diversified and Goldman declined to comment.

Mounting Worry

Regulators are getting increasingly worried about the commercial real-estate market as rents and occupancies fall and defaults mount. The growing pressure bad loans are putting on the nation's financial institutions are jeopardizing the economy's recovery.

Part of the problem has been the evaporation of the CMBS market, which had been one of the top sources of real-estate finance. TALF is designed to revive the CMBS market as well as markets for other securitized debt by offering low-cost financing from the Fed for investors buying these securities. Investors can borrow as much as 95% of the bonds' value by pledging the securities as collateral. That means that if there is a default, taxpayers take most of the risk.

CMBS offerings are considered one of the key tests for the TALF program, introduced by the Fed in March. Since then, TALF has been viewed as a moderate success, helping borrowers from auto companies and credit-card issuers raise capital. The Fed has so far made about $40 billion in TALF loans to investors buying these securities, which has sparked a market rally and reduced the cost of borrowing.

The Fed extended TALF to include newly issued CMBS in June. But there have been no deals so far, even though a dozen or so new CMBS deals are hoping to take advantage of the program.

Like the Developers Diversified deal, these potential deals also are collateralized by multiple properties owned by one owner. While the Fed has indicated concerns over such deals, banks remain reluctant to take on "warehouse" risks associated with having to pool together loans from many borrowers. Other CMBS deals in the pipeline include those by Inland Western Retail Real Estate Trust Inc. and Vornado Realty Trust. J.P. Morgan Chase & Co. is working on both deals.

"We need a transaction approved to reconnect the market," said Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying body for property owners and investors.

High TALF Bars

The deal Developers Diversified has in the works reflects the high bars the Fed sets for the type of loan it will accept as eligible for TALF financing. The $400 million loan it got from Goldman is secured by shopping centers with stable cash flow because they are occupied by discount retailers that tend to attract business even in a recession. The $400 million loan represents about half of the value of the underlying properties. By comparison, during the years before the recession, banks were willing to lend as much as 70% of a property's value because the debt could be easily sold as CMBS.

But not everyone is going to benefit from the TALF program. Tight restrictions will bar thousands of small developers and commercial-property owners with heavy debt loads from participating. Among loans that won't qualify: floating-rate mortgages, construction loans or loans secured by properties that are being "repositioned" and don't have a stabilized cash flow.

Write to Lingling Wei at lingling.wei@dowjones.com

Monday, October 26, 2009

Capmark, a Big Commercial Lender, Files for Bankruptcy

October 26, 2009

By MICHAEL J. de la MERCED, New York Times

The Capmark Financial Group, the big commercial real estate finance company cobbled together from pieces of GMAC, filed for bankruptcy on Sunday after struggling with a heavy burden of failing loans and debt stemming from its leveraged buyout three years ago.

Capmark is only the latest to fall victim to continued trouble in the commercial real estate market, which many analysts have said will continue to deteriorate. Many small banks have collapsed this year under the weight of commercial loans.

The company had warned last month that it might seek Chapter 11 protection after reporting a $1.62 billion quarterly loss.

Last month, the company agreed to sell its mortgage loan and servicing business to Berkshire Hathaway and Leucadia National for as much as $490 million. That agreement carried a 60-day expiration date, or around Nov. 2 — unless Capmark filed for bankruptcy, which would give it 60 more days to complete the sale.

Kohlberg Kravis Roberts, Goldman Sachs Capital Partners, Five Mile Capital and Dune Capital bought GMAC’s commercial real estate businesses in 2006 for about $1.5 billion in cash, with GMAC retaining a 21 percent stake in the operation. K.K.R. has already written down the value of its Capmark investment to zero.

In a court filing on Sunday, Capmark said that it had about $20.1 billion in assets and $21 billion in liabilities as of June 30. About $10 billion of Capmark’s assets reside in a Utah bank the company owns, which will not be subject to a bankruptcy filing.

In a Chapter 11 proceeding, the Berkshire-Leucadia sale would be structured as a 363 sale, named after a section of the federal bankruptcy code. A Berkshire-Leucadia venture would be deemed the stalking horse bidder, which allows other companies to potentially top that offer.

Friday, October 9, 2009

Starwood Sees Payoff in Patience

OCTOBER 7, 2009

Corus's Condo Assets Look Primed to Rebound Someday; FDIC Approves Sale

By NICK TIMIRAOS, Wall Street Journal

Barry Sternlicht's Starwood Capital Group has a relatively straightforward game plan for the distressed condo assets of Corus Bank that he is set to buy in a closely watched federal auction: wait until the market recovers.

The deal, announced Tuesday evening by the Federal Deposit Insurance Corp., hands Starwood and its investor partners the Corus portfolio of 112 construction loans, more than two-thirds of which are in default or are in foreclosure. Starwood will have to decide how to deal with the troubled projects and their developers as well as those headed for default.

Mr. Sternlicht is under no pressure to move quickly. The FDIC structured the deal to discourage the winning bidder from "flipping" individual commercial real-estate loans and assets to vulture investors or individual borrowers. Instead, the deal gives added incentives for the winning bidder to manage assets and reduce debt.

The FDIC's offer of zero-percent financing means that "you can afford to hold these properties and sell them at the right pace in difficult markets," Mr. Sternlicht said in an interview.

Starwood and private-equity firm TPG made the winning bid of about $2.77 billion for the Corus assets, which was about 20% higher than competing offers, according to people familiar with the matter. Those assets have a face value of $5 billion, but many of the condo projects funded by Corus face varying degrees of distress.

The FDIC is providing financing and taking a 60% equity stake in the Starwood partnership. As a result, Starwood's upfront equity stake comes to $554 million. The FDIC is also offering up to $1 billion over the next five years for any unfunded commitments, construction overruns, and carrying costs for bank-owned inventory. The investors would have to pay off any of that debt, plus $1.38 billion in debt issued by the FDIC, before they can begin collecting on their investment.

The Starwood-led consortium includes private-equity firms W.L. Ross & Co. and Perry Capital LLC and beat out seven other bids, including those from investors Colony Capital LLC and New York developer Related Cos. Barclays Capital advised the FDIC on the auction.

"This is not about making a quick sale or a quick flip. This is about serving as an appropriate steward for the capital of the FDIC," said Harrison LeFrak, a principal of the LeFrak Organization, a developer with a small stake in the investor group.

Corus assets include luxury-condo projects in the hardest-hit housing markets in California, South Florida and Las Vegas. Some of those areas are seen as strong growth markets over the long term, and many will have little new construction coming online over the next few years.

"In years three, four and five, there won't be any more new condos being built in these markets and you'll be one of the few guys with new inventory," Mr. Sternlicht said.

In South Florida, where Corus had some 16 condo loans at the end of June, the Starwood-led consortium could leapfrog other developers that have been sidelined during the credit crunch. "There's a symbolic changing of the guards in terms of who is the most powerful entity in Miami's condo market," says Peter Zalewski of Condo Vultures LLC.

Starwood, founded by Mr. Sternlicht in 1991, is positioning itself to emerge as a major force in the world of distressed real estate. It has closed a $2 billion private-equity fund to buy distressed hotel assets and recently took a real-estate investment trust public, raising an additional $950 million that will be investing in distressed commercial real-estate loans and securities.

Chicago-based Corus was seized by federal regulators last month and another Chicago bank, MB Financial Inc., agreed to assume $6.6 billion in deposits from the bank. The FDIC has estimated that the Corus failure will cost its insurance fund about $1.7 billion.

The fate of Corus's borrowers remains to be determined in the coming months, as Starwood decides which loans it may extend, and where it will pursue foreclosure. Empty or unfinished developments, for example, might be converted to rental buildings until the market recovers.

Write to Nick Timiraos at nick.timiraos@wsj.com

Thursday, October 8, 2009

Retail Vacancies Hit Multiyear Highs

By KRIS HUDSON, Wall Street Journal

When consumers start their holiday shopping in earnest next month, they will find fewer stores competing for their business as vacancy rates at malls and shopping centers have risen to multiyear highs.

According to Reis Inc., a New York real-estate research firm, 10.3% of the retail space at U.S. shopping centers -- open-air centers typically anchored by a grocery store or big-box retailer -- was vacant in the third quarter. That was up from 8.4% in the same period a year earlier and was the highest vacancy rate since 1992. At enclosed malls, the vacancy rate rose two percentage points to 8.6%, the highest rate since Reis began tracking mall data in 2000.

The hardest-hit retail properties were those completed this year. Of those, 30% opened half-empty or worse, according to Reis data, which cover the 77 largest U.S. markets.

Mall and shopping-center owners are reeling from two years of flat to declining retail sales and waves of store closures. Many are still trying to find tenants to fill hundreds of vacancies created by the closures last year and early this year of chains including Linens 'n Things Inc., Circuit City Stores Inc. and Gottschalks Inc. Meanwhile, the closures continue to mount, with chains such as Blockbuster Inc., Hollywood Entertainment Corp.'s Game Crazy, Zale Corp. and AnnTaylor Stores Corp. cumulatively closing more than 1,000 stores.

The Federal Reserve has tallied nearly 8,300 store closings announced by retailers so far this year, including more than 1,500 large anchor stores. Last year, the International Council of Shopping Centers, an industry trade association, counted 6,900 such announced closures. The next-highest annual total recorded by the trade association was 7,000 in 2001.

As demand for retail space plummeted, average retail lease rates continued to decline in the third quarter, down 3.7% to $16.89 per square foot for shopping centers and off 3.5% to $39.18 for malls. And the outlook for a recovery in the near future appears bleak. "We don't see rent levels in retail returning to 2008 levels until 2016," said Victor Calanog, Reis director of research.

Glenn Rufrano, chief executive of Centro Properties Group, which owns 610 U.S. shopping centers, said Centro has managed to find new tenants to occupy stores vacated by bankrupt retailers, but only after making concessions.

Relief won't come soon. Market-research company Retail Metrics Inc. predicts that the 31 retailers it tracks will report Thursday an average decline of 0.8% in September sales at stores open at least a year. That would mark the 13th consecutive month of same-store sales declines. In addition, the National Retail Federation trade group disclosed its prediction Tuesday that this year's holiday-season sales will amount to a 1% decline from last year's total. That is on top of a 3.4% decline last year from 2007 levels.

"If sales are flat, plus or minus, that won't be so bad, especially since our tenants are carrying lower inventories," Centro's Mr. Rufrano said. "What we're hoping against are big negative sales over Christmas."

Some retailers are holding off on expansion plans until they can see how many closures occur after the holiday season and how willing landlords might be to cut deals to fill that space. Shopping centers tend to suffer more vacancies than malls because they house more local tenants. "The better malls are still strong," said Larry Meyer, executive vice president at affordable-fashion retailer Forever 21 Inc., which has opened dozens of stores this year.

Write to Kris Hudson at kris.hudson@wsj.com

Office Rents Dive as Vacancies Rise

By CHRISTINA S.N. LEWIS, Wall Street Journal

Rent for office space is falling at the fastest pace in more than a decade as vacancies create a glut and landlords slash prices to attract tenants.

Nationwide, effective office rents fell 8.5% in the third quarter compared with the same period a year ago, the steepest year-over-year decline since 1995, according to Reis Inc., a New York real-estate research firm.

The decline came as companies returned a net 19.6 million square feet of space to landlords in the third quarter, slightly more than in the second quarter. For the first three quarters of this year, the net decline in occupied space totaled a record 64.2 million square feet, the highest so-called negative absorption recorded since Reis began tracking the data in 1980. (That doesn't count space that left the market as a result of the 2001 terrorist attacks.)

The vacancy rate, meanwhile, hit 16.5%, a five-year high, according to Reis.

Declining rents and rising vacancies in the office sector signal more woes for the commercial-real-estate market, which already faces a lack of credit and plummeting property values. With landlords more likely to default, financial institutions, which hold trillions of dollars in commercial-real-estate debt also face more pain. "It means more losses for the banks, because they will have to write off more bad debt," said Victor Calanog, director of research for Reis.

For tenants, however, falling rents represent opportunities to save. Landlords are offering concessions, in the form of free rent and build-out costs. "There's a recognition [from some companies] that this is probably a bottom, let me lock in long term," said Mary Ann Tighe, a New York-based leasing broker with CB Richard Ellis, who has negotiated corporate relocations for tenants including advertising firm Ogilvy & Mather and retailer Limited Brands.

As bad as the current environment is for landlords, analysts say it will worsen as unemployment continues to rise. "Even though the technical recession may be over, the labor market typically takes anywhere from 18 to 24 months to bounce back in a consistent way," said Mr. Calanog, who predicts vacancy will rise through 2010 and may not peak until 2011. "If employers are still shedding jobs, they are also going to shed space."

Vacancies are highest in areas with poor housing markets and industrial cities. They are approaching historic highs in Southern California; Las Vegas; Phoenix; southwest Florida; Detroit; Dayton, Ohio; and Hartford, Conn. Other cities, including Dallas and other parts of Texas, and Atlanta, are seeing high vacancy rates largely as a result of overbuilding.

Rent declines were steepest in big cities with large financial sectors, which saw the greatest run-up in rents in 2006 and 2007. They include Seattle, which has been slammed by the failure of Washington Mutual Inc., New York and San Francisco. But the office market deteriorated broadly across virtually all regions: Of the 79 metro areas that Reis tracks, office vacancies rose in 72 of them and effective rents declined in 68 of them.

In Boston, intellectual-property law firm Fish & Richardson PC recently signed a lease for 124,000 square feet of space in a new development under construction on the South Boston waterfront, paying about $48 a foot with about $85 a foot in tenant improvements from the landlord, according to a person familiar with the deal -- compared with the roughly $55 a foot the firm is paying now to landlord Equity Office.

In its attempt to persuade the tenant to stay, Equity Office, which is owned by private-equity firm The Blackstone Group, initially offered the firm $84.50 a foot in December 2007, but dropped the price over time to stay competitive and sent wine and champagne gift baskets to all of the firm's 45 principals, according to Tim French, Fish & Richardson's Boston managing principal.

"We were like the belle of the ball," said Mr. French.

Write to Christina S.N. Lewis at christina.lewis@wsj.com

Wednesday, October 7, 2009

Debt-Market Paralysis Deepens Credit Drought

October 7, 2009

By JENNY ANDERSON, New York Times

A year after Washington rescued the big names of American finance, it’s still hard to get a loan. But the problem isn’t just tight-fisted banks.

The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up.

But now the Federal Reserve has put these markets on notice that it plans to withdraw its support for them. Policy makers hope private investors will return to the markets, which imploded during the financial crisis.

The exit will require a delicate balancing act, government officials said.

“You do it incrementally, where and when you think you can, and not sooner,” said Lee Sachs, a counselor to the Treasury secretary, Timothy F. Geithner.

The debt-securitization markets finance corporate loans, home mortgages, student loans and more. In good times, they enabled banks to package their loans into securities and resell them to investors. That process, known as securitization, freed banks to lend even more money.

Many investors have lost trust in securitization after losing huge sums on packages of subprime mortgages that had high default rates. The government has since spent more than $1 trillion trying to restore the markets, with mixed success.

Until more of the securitization market revives, or some new form of financing takes its place, a wide range of loans needed to secure a lasting economic recovery will remain elusive, experts said.

“Given the imperative for securitization markets to fuel bank lending, we won’t have meaningful economic growth until securitization markets are re-established,” said Joseph R. Mason, a professor of banking at Louisiana State University. Mr. Sachs agrees: “It’s very important these markets come back to get credit to businesses and families who need it, and also as a sign of confidence.”

Enormous swaths of this so-called shadow banking system remain paralyzed. Depending on the type of loan, certain securitization markets have fallen 40 to 100 percent.

A once-thriving private market in securities backed by home mortgages has collapsed, from $744 billion in 2005, at the peak of the housing boom, to $8 billion during the first half of this year.

The market for securities backed by commercial real estate loans is in worse shape. No new securities of this type have been issued in two years.

“The securitization markets are dead,” said Robert J. Shiller, the Yale University economist and housing expert who predicted the subprime collapse. The government is supporting them, he said, but it’s unclear what will happen when it extricates itself. “We’re stuck,” he said.

Despite the running problems, federal officials hope to start weaning the securitization markets off government support next spring. The Federal Reserve has spent about $905 billion buying government-guaranteed mortgages in an effort to keep mortgage rates low. It will continue buying until it reaches its target of $1.25 trillion.

Complicating the Fed’s plan, banks — the other source of credit next to the securitization markets — continue to rein in lending, according to data from the Federal Reserve. And next year, banks face accounting rule changes and capital requirements that could further restrict their ability to make loans.

To be sure, certain corners of the securitization market are percolating again, thanks to the government’s Term Asset-Backed Securities Loan Facility, or TALF, which provides attractive financing for investors who buy the securities.

Bonds backed by consumer debt — credit card debt, auto loans and some student loans — are being issued at costs close to those before the financial crisis, an indication that the market is functioning again.

But the program applies only to borrowers with stellar credit. It does not cover credit card debt or auto loans for people with blemished credit histories.

“The market is coming back, but a lot of it is because of TALF,” said Hyun Song Shin, a Princeton economist who studies securitization. “The big question is, Will the private issuance market stand on its own two feet without TALF, or has there been a fundamental change in the market that it is somehow hobbled permanently?”

That question is hard to answer as long as the government is dominating certain securitization markets. So far, the Fed has been most aggressive in supporting the market for mortgage-backed securities, which plays a crucial role in housing finance. The Fed is virtually the only buyer for these instruments, purchasing about $905 billion worth of government-guaranteed mortgage-backed securities through mid-September. Industry analysts estimate that is about 80 to 85 percent of the market.

“This is public support,” said George Miller, executive director for the American Securitization Forum, which represents the industry. “At the end of the day, the mortgage risk is held by the taxpayer.”

Investors are particularly concerned about the commercial real estate market. A big worry is that $50 billion of securitized commercial property loans are due to be refinanced in the next year. If that can’t be done, a toxic mix of declining property prices and maturing loans could lead to fresh losses at many banks.

“If there’s no mechanism, those properties will default,” said Arnold Phillips, who oversees mortgages and structured securities for the $50 billion in fixed-income investments managed by the California Public Employees’ Retirement System.

As long as the market remains closed, banks will be reluctant to make loans for commercial real estate, since they would have to hold on to them, rather than package them into securities.

Meanwhile, the programs the government has started have not changed securitization practices that many investors say were a cause of the financial crisis. Lawmakers remain concerned that when securitization comes back, it does so in a way that doesn’t put the financial system at risk.

“Our challenge is to have a robust securitization process that adds value to the economy and doesn’t undermine it,” said Senator Jack Reed, Democrat of Rhode Island and chairman of the Banking Subcommittee on Securities, Insurance and Investment. He plans to hold a hearing on securitization next month to find out why consumers and businesses are still having so much trouble getting loans.

Monday, October 5, 2009

Starwood, TPG Said to Win Auction for Corus Assets

By Jason Kelly and Jonathan Keehner, Bloomberg

Oct. 5 (Bloomberg) -- A group led by Starwood Capital Group LLC won the bidding for the assets of Corus Bankshares Inc., the Chicago lender seized by regulators after its portfolio of construction loans soured, according to people familiar with the decision.

Private-equity firm TPG was also part of the winning group in an auction run by the Federal Deposit Insurance Corp., said the people, who declined to be identified because the process is private. Corus, which was seized on Sept. 11, had a $5.4 billion commercial real estate loan portfolio as of March 31, including $997 million to condominiums in Miami and southeast Florida, according to company filings.

“For experienced funds with the expertise to manage these assets, it’s a great opportunity,” said Dennis Yeskey, a managing director at AlixPartners LLP who focuses on real estate. “If you needed a loan, for years it was always ‘Corus for condos.’”

FDIC spokesman Andrew Gray declined to comment. Starwood spokesman Tom Johnson and TPG spokesman Owen Blicksilver declined to comment.

The auction attracted bids from developers and private equity firms. At least two-thirds, or $410 billion, of commercial mortgages bundled and sold as bonds coming due between 2009 and 2018 will have difficulty refinancing, according to Deutsche Bank AG data.

WL Ross, Perry

“Commercial real estate exposure is the largest segment of most banks’ balance sheets, and is viewed as uniquely toxic given current market conditions,” said Steven Goldstein, a managing director at Alvarez & Marsal who advises private-equity firms. “These assets are most attractive to groups that focus on real estate, who believe they have the expertise to make lemonade out of lemons.”

The Starwood and TPG group also includes WL Ross & Co. and Perry Capital LLC, the people familiar with the group said.

Colony Capital LLC and The Related Cos, were among groups that submitted bids for the assets, the people said.

MB Financial Bank, which has more than 80 branches in the Chicago area, agreed last month to acquire $7 billion of Corus deposits.

To contact the reporters on this story: Jason Kelly in New York atjkelly14@bloomberg.net; Jonathan Keehner in New York atjkeehner@bloomberg.net.

Last Updated: October 5, 2009 14:40 EDT

FDIC's Bair drills down on how to end 'too big to fail'

October 4, 2009 | 3:34 pm

Federal Deposit Insurance Corp. Chairwoman Sheila Bair gave a long speech to an international meeting of bankers in Istanbul, Turkey, today, focusing on how to end the "too big to fail" doctrine.

"In a properly functioning market economy there will be winners and losers. When firms are no longer viable, they ought to fail," Bair said. "Actions that prevent firms from failing ultimately distort market mechanisms."

Nothing new there. But Bair then got into more detail about how she would level the playing field so that even the biggest financial institutions could be "wound down" if they failed, instead of being supported by the government.

For starters, she wants to make sure that any bank-holding company would pay the ultimate price if one of its banking units collapses, even if the company operates other businesses that are still viable:

"The basic rule should be that when an insured bank fails and a receiver is appointed, the holding company of that bank and its non-bank affiliates should also be subject to resolution.

"U.S. law already allows the FDIC to use the equity of other commonly owned banks if necessary to offset the losses to the insurance fund from a failure of a related bank. This so-called cross guarantee rule should be extended to apply to the holding company and affiliated firms."

Bair also got more specific about an idea she raised last summer, regarding forcing even the secured creditors of a bank to take haircuts in the event the bank fails:

"A more far reaching proposal to consider is limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm.

"This could involve limiting their claims to no more than, say, 80% of their secured credits. This would ensure that market participants always have ‘skin in the game.’ "

But turning secured creditors into partially unsecured creditors, Bair acknowledged, "could have a major impact on the cost of funding for companies subject to the resolution mechanism."

In other words, it could raise the potential for another credit crisis if banks suddenly became unwilling to lend to peers because of the increased risk of loss.

Finally, Bair suggested serious consideration of a British idea for bank "living wills" -- plans, drawn up in advance, that would describe how an institution would be wound down if it failed:

"To make them more effective, perhaps the approved orderly wind down plans should be uploaded on the companies' websites for the information of stakeholders.

"Secured and unsecured creditors, counterparties, and shareholders will then have full information on the effect of a wind down on their positions.

"These public plans would also serve as a constant reminder to boards of directors and managements of the consequences of their risk taking, structural complexity, and operational fragility."

But would any of this really assure that Bank of America Corp. or JPMorgan Chase & Co. would be allowed to fail?

The best defense against "too big to fail" still might be former U.S. Secretary of State George Shultz’s idea: "If they are too big to fail, make them smaller."

-- Tom Petruno, Los Angeles Times

Saturday, October 3, 2009

Starwood Said to Be Near Deal to Buy Assets of Corus

October 3, 2009

By ZACHERY KOUWE, New York Times

The Starwood Capital Group, the real estate investment firm run by Barry Sternlicht, is close to a deal with the Federal Deposit Insurance Corporation to purchase the assets of Corus Bank, which failed under a mound of soured condominium and commercial mortgage loans, people briefed on the matter said Friday.

In addition to contributing capital for the purchase, Starwood plans to manage several foreclosed or soon-to-be-owned residential and office buildings seized by Corus after their borrowers defaulted. The deal could be announced as soon as Monday, these people said.

A private equity firm, W. L. Ross & Company, and at least two others are also contributing cash to the deal, these people added.

It is unclear how much the group is paying for the assets, which are said to have a face value of about $5 billion.

A Starwood spokesman declined to comment. As part of the deal, the F.D.I.C. plans to take an equity stake in the venture and provide financing.

Corus was seized by the F.D.I.C. last month and its $6.6 billion in deposits were assumed by MB Financial.

If the deal with Starwood goes through, the company will have beaten some major real estate investors like Thomas J. Barrack of Colony Capital; Jay Sugarman of iStar Financial; the New York developer Stephen M. Ross; and Lubert-Adler, a big property investor in Philadelphia.

In the run-up to the financial crisis, Corus barreled into hot markets like California, Florida and Nevada and kept lending as those markets boiled over.

Rather than diversify, it concentrated its lending bets by financing only a handful of big, risky projects. And it poured its idle cash into a small group of other banks and financial companies that were upended when the crisis struck.

Friday, October 2, 2009

Banks With 20% Unpaid Loans at 18-Year High Amid Recovery Doubt

By James Sterngold, Linda Shen and Dakin Campbell, Bloomberg

Oct. 2 (Bloomberg) -- The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, signaling that more bank failures and losses could slow an economic recovery.

Units of Frontier Financial Corp.,Towne Bancorp Inc. and Steel Partners Holdings LPare among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average -- according to Federal Deposit Insurance Corp. data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.

While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.

“There are some zombie banks out there,” said Bert Ely, chief executive officer at Ely & Co., a bank consulting firm in Alexandria, Virginia. “Neither the banking industry nor the economy benefits from keeping weak banks in business.”

Ninety-five banks have failed this year at the fastest pace in almost two decades, depleting the FDIC’s insurance fund. The agency proposed on Sept. 29 that financial firms prepay three years of premiums, which would add $45 billion of reserves. The fund sank to $10.4 billion as of June 30, the lowest since 1993. It will run at a deficit starting this quarter, the agency said.

Non-Current Loans

The cost of this year’s failures to the FDIC equals 25 percent of the banks’ assets, according to agency data. Applying the same ratio to the $14.1 billion of assets held by the 26 lenders on SNL’s list means the FDIC could face additional losses of $3.5 billion.

Non-current loans averaged 4.35 percent of the total at U.S. banks as of June 30, the most in 26 years of FDIC data. Regulators typically take notice at 5 percent, according to Walter Mix, a former commissioner of the California Department of Financial Institutions. Corus Bankshares Inc.’s bank unit in Chicago was shut Sept. 11 after 71 percent of its loans soured.

The last time so many banks had 20 percent of their loans more than 90 days overdue was in 1991, near the end of the savings-and-loan crisis, when there were 60, according to an SNL analysis of FDIC data. That year the number of bank failures was less than half those at the peak of the crisis in 1988; this year closings are almost four times what they were in 2008.

For banks with 20 percent of loans overdue, “either they’ve got a massive amount of capital, or the FDIC just hasn’t gotten around to them,” said Jeff Davis, an analyst withFTN Equity Capital Markets in Nashville. Lack of staff and money are slowing shutdowns, he said.

Enforcement Orders

At least 17 of the 26 banks have been hit with civil penalties or enforcement orders that demand improved management and more capital, according to data compiled by Bloomberg. Failure to comply can lead to seizure.

The number of distressed banks is larger, with the FDIC counting 416 companies on its confidential list of “problem” lenders at mid-year.

The data were compiled by Charlottesville, Virginia-based SNL from FDIC records. Institutions that had loans less than 50 percent of assets were excluded, as were those closed since the end of June. The calculation didn’t include restructured loans modified after borrowers couldn’t keep up with the original terms, which have default rates of 40 percent to 60 percent within two months, according to SNL senior analystSebastian Hindman. Had such loans been included, the list would have swelled to 49 lenders holding $48.4 billion in assets.

Local Impact

Firms range in size from Frontier Bank in Everett, Washington, with $3.98 billion in assets, to Gordon Bank in Gordon, Georgia, with $35 million in assets. Six of the banks are in Florida and five in Illinois.

“While these aren’t your giant banks, they are the guys your local strip mall and commercial real estate investors get their funds from,” said Joseph Mason, a Louisiana State University banking professor and visiting scholar at the FDIC.

The bank with the highest level of non-current loans, 49 percent, is Community Bank of Lemont in Lemont, Illinois, a town of about 13,000 people 30 miles southwest of Chicago. Bad loans at the bank, about a third of them in construction and development, increased fivefold from a year earlier, according to FDIC data.

In February, the FDIC ordered Lemont, a unit of Oak Park, Illinois-based FBOP Corp., tostop “operating with management whose policies and practices are detrimental to the bank and jeopardize the safety of its deposits.” Calls to the bank seeking comment weren’t returned.

’A Surprise’

Another Illinois lender, Benchmark Bank, also had an increase in non-current loans, to 25 percent as of June 30 from about 1 percent a year earlier.

“Everything was so positive for so long in this area, it came as a surprise when it stopped,” said John Medernach, Benchmark’s CEO, who added that a building boom and bust in his region may have wrecked more than just his balance sheet.

“I stop and think of all the rich farmland that has been developed into subdivisions during the boom years,” Medernach said. “It makes you wonder what we’ve been doing.”

Frontier Bank, owned by Frontier Financial, reported a sixfold rise in overdue loans to $764.6 million in the quarter ended June 30 from a year earlier, or 22 percent, according to FDIC data. More than 43 percent of the bank’s delinquent loans were in construction and development, FDIC data show. The bank has 51 branches in northwestern Oregon and western Washington.

Steel Partners

In July, Frontier Financial agreed to be acquired by SP Acquisition Holdings Inc.,controlled by CEO Warren Lichtenstein, who heads the New York-based investment firm Steel Partners LLC, according to a presentation on the bank’s Web site. The deal would give Frontier access to about $456 million and create ’’an over-capitalized bank’’ that may consider acquisitions, the presentation said. The stock-swap transaction is scheduled to be completed in the fourth quarter.

Frontier “was a well-run organization for the majority of its history,” said Jeffrey Rulis, a banking analyst at D.A. Davidson & Co. in Lake Oswego, Oregon. The offer by SP Acquisition is “probably not what current shareholders envisioned a couple of years ago.” The company’s stock has dropped 92 percent in the last 12 months, and the bank posted an $84 million loss in the first half.

Patrick Fahey, Frontier’s CEO, said the transaction will resolve the bank’s credit issues. He declined to elaborate while a shareholder vote is pending.

Regulatory Art

Lichtenstein’s Steel Partners Holdings LP controls WebBank, a Salt Lake City lender with $35.5 million in assets and 31 percent of its loans overdue, according to SNL. More than 90 percent of construction and development loans weren’t current as of June 30, according to the FDIC. John McNamara, WebBank’s chairman and a managing director at Steel, declined to comment.

Determining which banks to close is “more of an art than a science,” said William Ruberry, spokesman at the Office of Thrift Supervision, which regulates four of the 26 lenders. “Examiners and the supervisory people have a lot of information that’s not public, and they know the circumstances of an institution and everything that goes into it.”

FDIC spokesman Greg Hernandez said in an e-mail that the agency doesn’t comment on individual institutions. Capital levels, profitability and financial strength of the owners are considered in addition to soured loans when deciding a bank’s fate, Hernandez said.

Sources of Capital

“There may be personal guarantees, there may be other collateral that will more than make up for the impairment on the 20 percent,” said Tom Giallanza, assistant superintendent for the State of Arizona Department of Financial Institutions, in a Sept. 15 interview. One bank on the list, Mesa, Arizona-based Towne Bank of Arizona, is in Giallanza’s state, with 28 percent of its loans non-current. Towne Bancorp CEO Patrick Patrick declined to comment.

H&R Block Bank, with 29 percent of its loans overdue, is dwarfed by the Kansas City, Missouri-based tax preparer that owns it. The bank’s deposits totaled $720.1 million as of June 30; assets at the parent company, H&R Block Inc., included more than $1 billion in cash and cash equivalents on July 31. The lender’s balance sheet is strong enough to be considered “well- capitalized” by regulators, according to FDIC reports.

The bank is a legacy of H&R Block’s subprime home lending that ended with more than $1 billion of losses for the parent company. The unit was kept open because it’s an inexpensive way to fund the company’s financial products, President Russell Smythsaid a year ago. Spokeswoman Elizabeth McKinley didn’t respond to requests for comment.

Pace of Closures

Regulators may be pacing themselves on closings because the FDIC fund “is only so big,” there isn’t enough staff to close all the struggling banks at once and customers aren’t staging mass withdrawals that would force action, said Kevin Fitzsimmons, a managing director at Sandler O’Neill & Partners LP, a New York brokerage firm specializing in banks.

While a high level of non-performing assets doesn’t mean a bank can’t survive, “in some cases it creates a hole that’s too deep to climb out of,” Fitzsimmons said.

To contact the reporters on this story: James Sterngold in New York atjsterngold2@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net;Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

Last Updated: October 2, 2009 00:01 EDT