Sunday, May 30, 2010

L.A. Project Gets Caught in Limbo

MAY 21, 2010

By JOHN R. EMSHWILLER, Wall Street Journal

LOS ANGELES—Unlike many real-estate deals across the U.S., developer Sonny Astani's downtown condominium-construction project here wasn't killed by the property market's collapse. The death of the project's lender, however, has left a big mess.

Last September's failure of Corus Bank, a Chicago-based unit of Corus Bankshares Inc., put the $163 million construction loan used to finance Mr. Astani's project in the hands of the Federal Deposit Insurance Corp. The loan now is controlled by a partnership of the FDIC and an investor group led by Starwood Capital Group, part of an unusual public-private push to increase returns on loans and real estate inherited by the FDIC.

The 56-year-old Mr. Astani says his efforts to finish the project, called Concerto, have been impeded by the FDIC and Starwood, which eventually could result in them seizing the property Concerto could be "a treasure chest for these guys," he says, contending the project, which includes a 30-story condo tower, retail space and a one-acre park, is worth more than the amount of the construction loan.

Corus Construction said Thursday that a tentative agreement has been reached with Mr. Astani that would allow the project to continue and the real-estate developer to retain ownership. Mr. Astani says negotiations have begun and are making progress but that no agreement has been reached.

Clashes between real-estate developers and lenders are common, especially during tough times. But the dispute over Concerto is an example of the litigation and other snarls facing the FDIC as it tries to work through tens of billions of dollars in loans, foreclosed real estate and other assets from failed financial institutions.

Some subcontractors have griped that Corus Construction Venture LLC, the entity formed to manage Corus's loans, has hindered their efforts to get paid. City officials say the delay has cost Los Angeles construction jobs at a time when the struggling local economy needs them.

A spokesman for Corus Construction says the Concerto loan is in default, which Mr. Astani disputes. In court filings, Corus Construction contends that the project is worth less than the amount Mr. Astani owes, accusing him of trying to "play fast and loose" with the loan terms by selling part of the project to raise cash. Corus Construction denies blocking money to subcontractors and has begun paying some of their claims.

More than 230 banks and savings institutions have failed since the start of 2008. Acquirers of seized banks usually take most of their assets, except when the loan portfolio is horribly battered. Of the $7 billion in assets that Corus had when it was taken over by the Office of the Comptroller of the Currency, the FDIC got about $4 billion.

Hoping to avoid selling loans at fire-sale prices, the FDIC in 2008 launched a plan to bring in private investors. Such investors put in some of their own money, oversee asset dispositions and share proceeds with the FDIC.

The idea is to "capture the expertise and efficiency of the private sector, as well as improvements in market conditions," says James Wigand, an FDIC deputy director. So far, the agency has entered into 13 joint ventures involving more than $15 billion in assets. FDIC officials plan additional partnerships with investment firms.

Corus is the biggest public-private loan-workout alliance yet. Mr. Astani's loan was part of a package of assets with a face value of $4.45 billion. The Starwood-led investor group owns 40% of the venture, while the FDIC owns 60%.

Mr. Astani says he has pumped $55 million of his own money into Concerto. In 2007, he got a $190 million loan from Corus to finance construction of the 30-story tower and a seven-story loft building.

By early 2009, though, Corus's financial condition was deteriorating, and the bank faced mounting pressure from regulators. Mr. Astani says he encountered resistance in winning approval to keep the project moving. Last August, he sold the 77 loft units in a one-day auction that raised nearly $29 million. But because of the lousy real-estate market, the sales prices fell far short of the minimum specified in his 2007 loan agreement.

Completion of the loft sales required approval by Corus. But the bank was seized before Mr. Astani got the clearance he needed. Six days after the bank's failure, Mr. Astani put the Concerto project into bankruptcy proceedings in Los Angeles, hoping a judge would sign off on the loft sales and let him use some of the cash to finish the tower.

In an interview, Mr. Astani says he believed the FDIC "would be very happy" with his plan.

The FDIC objected to the move, accusing the developer in an October court filing of trying to "play fast and loose" with the collateral for the loan. The FDIC added that Mr. Astani's financial projections ignored the "grave market and economic conditions" in the downtown Los Angeles real-estate market.

In October, Mr. Astani won permission from a U.S. Bankruptcy Court judge to complete the loft sales and use some of the proceeds to finish the condo tower. To protect the loan, though, the judge ordered the Concerto project to pay $1 million a month to Corus Construction, which also would have to sign off on further spending.

Since then, the FDIC-Starwood partnership has dragged its feet on approving a budget and construction payments, Mr. Astani says. The Corus Construction spokesman says that Mr. Astani provided insufficient information needed for the budget and has "routinely submitted incomplete or improper loan-draw requests."

The FDIC-Starwood venture is offering unpaid subcontractors 95 cents on the dollar for their claims. The offer is an "end run" to undermine support for Mr. Astani among the creditors' committee in the bankruptcy case, contends Ronald Hudson, who claims his wall-installation company is owed $1.6 million for work on Concerto. He says he hasn't been offered a payment.

The Corus Construction spokesman says the offer "simply acknowledges" that subcontractors "deserve to be paid" and isn't aimed at influencing the bankruptcy proceeding. "Several" have accepted the offer, the spokesman adds.

Write to John R. Emshwiller at john.emshwiller@wsj.com

Saturday, May 29, 2010

New Home Sales Set to Plunge in Former Bubble Markets

Bloomberg News

May 28 (Bloomberg) -- New home sales in Phoenix and Las Vegas, two U.S. markets hardest hit by foreclosures, are set to plunge as a federal tax credit for homebuying expires, according to data from real estate researcher Metrostudy.

A sample of subdivisions in both cities showed sales contracts for new homes “pulled back sharply in May and contract cancellations spiked,” Houston-based Metrostudy said in an e-mail. Would-be buyers canceled about 40 percent of new home contracts in San Diego in May, up from 10 percent in April, the company said. Data on new signings in that city weren’t immediately available.

Sales indicators fell after April 30, the last day for homebuyers to sign contracts in time for a federal tax credit of as much as $8,000 for first-time purchases and $6,500 for certain “move-up” buyers. The deadline may have hurried customers to snap up properties when they otherwise would have waited, said Brad Hunter, chief economist based in Palm Beach Gardens, Florida, for Metrostudy.

CBH Homes, a Meridian, Idaho-based builder whose average house price is about $145,000, countered the post-tax credit slump with a one-month “Tax Credit After Party.” It’s offering as much as $8,000 in savings for signing a contract in May.

“Think you missed out on the tax credit? THINK AGAIN,” the company says on its website.

“Buyers have a certain mindset,” Holly Haener, director of sales and marketing for CBH, said in a telephone interview. “They want to see that savings.”

Phoenix Falls

In Phoenix, contracts in the subdivisions surveyed by Metrostudy fell almost 49 percent for the week ended May 24 from the same period a year earlier, Hunter said. More than 8 percent of Phoenix households received a notice of default, auction or foreclosure in 2009, ranking the city the eighth worst in the country, according to Irvine, California-based research company RealtyTrac Inc.

Signed contracts in Metrostudy’s Las Vegas subdivisions dropped 12 percent for the week ended May 24 from a year earlier. They climbed 220 percent in the last week of April, an indication of buyer interest in capturing the tax credit before it ended, Metrostudy said.

Las Vegas had the highest rate of foreclosure filings in the U.S. last year, with 12 percent of households receiving a notice, according to RealtyTrac.

U.S. Property Sales

The tax credit helped push U.S. new home sales up 15 percent in April to the highest annual pace since May 2008, the Commerce Department said May 26.

“We had this large spike before the tax credit expiration and now we see the downside of that,” Hunter said in an interview. “Based on this research, it seems that a post-credit pullback is under way.”

Larry Seay, chief financial officer of Meritage Homes Corp. of Scottsdale, Arizona, said demand has dropped across the company’s markets, which include Phoenix, Denver, Houston, Las Vegas, and Orlando, Florida.

“The tax credit during the first four months of the year did positively impact sales,” Seay said. “We’re seeing a bit of a fall since then.”

Meritage is prepared to weather any temporary decline because it is selling a greater proportion of lower-cost properties.

Companies should avoid price cuts or incentives that drive down already slim margins, said Jason Forrest, president of Fort Worth, Texas-based Shore Forrest Sales Strategies, a consultant for builders.

“The solution is to create a strategy and a sales message,” Forrest said.

To contact the reporter on this story: Prashant Gopal in New York at Pgopal2@bloomberg.net

Friday, May 28, 2010

FASB Plan Is ‘Destructive Idea,” Ex-FDIC Chief Says


Bloomberg

May 28, 2010, 4:17 PM EDT
By Dakin Campbell and Michael J. Moore,  Bloomberg
May 28 (Bloomberg) -- A U.S. accounting board’s proposal that would require banks to report the fair value of loans on their books will lead to reduced lending, a former chairman of the Federal Deposit Insurance Corp. said.
“This is a terribly destructive idea to even propose,” William Isaac said in a telephone interview today. Just by making the proposal, the Financial Accounting Standards Board will lead banks to quit making loans without an easily discernable market value, and keep the ones they do make to shorter maturities, Isaac said.
Banks would have to report the fair value and amortized cost of loans and some other financial instruments on their balance sheets under the new rules released by FASB for comment on May 26. Changes in fair value would in most cases be recognized in other comprehensive income, the panel said. That could cause swings of billions of dollars in the book values of some of the nation’s biggest lenders.
Among U.S. banks, Regions Financial Corp. and KeyCorp may face the biggest initial impact from the proposal as they have the largest percentage gap between the carrying value and fair value of their loans of lenders analyzed by Jason Goldberg at Barclays Capital and David George at Robert W. Baird & Co., they said yesterday in notes to clients. FASB, which sets U.S. accounting standards, estimated that the new rules would take effect in 2013.
‘Worldwide Condemnation’
The proposal comes “in the face of worldwide condemnation,” Isaac said. It conflicts with the recommendations of the Group of 20 nations, the Basel Committee on Banking Supervision and the International Accounting Standards Board, according to the American Bankers Association, which also opposes the plan.
David Larsen, who serves on FASB’s Valuation Resource Group, said the volatility created by markets and fair value “is there whether or not it is measured.”
“It comes down to the question, is greater transparency of help to users of financial statements?” said Larsen, a managing director at New York-based Duff & Phelps Corp.
Mark-to-market accounting destroyed $500 billion of bank capital as traders marked down all assets during the crisis by a total of 27 percent, and many of those values have now returned to near par, Isaac said. “Now FASB is going to spread this disease throughout the system,” he said.
Checks and Balances
Loans should be evaluated using the current system of checks and balances including bank management, independent accounting firms, and outside bank examiners, Isaac said.
“This is a dramatic departure from past practices, and we caution it has the ability to create increased volatility in earnings and equity,” Goldberg wrote in his note. “One of our hopes coming out of the past couple of years was to reduce the pro-cyclicality of bank earnings. These proposals appear to take a step in the opposite direction.”
Regions carried loans at a mark 15 percent higher than fair value at the end of the first quarter, while KeyCorp’s were 12 percent higher, the two analysts wrote in their notes, citing company filings.
“We are currently reviewing the exposure draft, however in general we believe this is an ill-conceived concept,” Regions spokesman Tim Deighton said in an e-mailed statement. “Accounting is based on the core principles of relevancy and reliability, so the highly subjective and inconsistent nature of fair value makes it ill-suited to such an important application.”
Shrinking the Gap
Deighton said Regions’ gap had shrunk from 25 percent a year earlier. “We would expect that the level of discount would continue to improve in line with economic conditions prior to any proposed rule coming into effect,” he said in the statement. KeyCorp spokesman Bill Murschel said it was “somewhat premature” to comment on FASB’s proposal.
The median gap among the 26 large U.S. banks covered in Goldberg’s note was carrying value exceeding fair value by 1 percent. Some banks may have bigger gaps because of differences in how they determine fair value, Goldberg said.
The rule changes could have dramatic effects on banks’ balance sheets. The difference between carrying value and fair value at Birmingham, Alabama-based Regions and Milwaukee-based Marshall & Ilsley Corp. is bigger than those banks’ tangible common equity, Goldberg wrote. Tangible common equity is book value minus intangible assets such as goodwill.
Regulatory Requirement
Whether the new rules would force banks to raise capital would depend on regulators, who will be able to determine how the changes are treated in regulatory capital requirements, Larsen said.
FDIC Chairman Sheila Bair, speaking at a conference in September 2009, said she didn’t agree with the content of FASB’s proposal.
“When a bank is holding a deposit, a loan or a similar banking asset for the long term, it shouldn’t have to mark them to market values that may vary widely over time,” Bair said. “Extending mark-to-market accounting to all banking assets takes a good approach for market-based assets, like securities, but extends this to areas where it doesn’t accurately reflect the business of banking.”
Bank of America Corp., based in Charlotte, North Carolina, and San Francisco-based Wells Fargo & Co. had the largest absolute differences between carrying value and fair value, according to Goldberg and George.
Bank of America
Bank of America’s carrying value for some loans on March 31 was $908 billion, or $23.9 billion more than the fair value, the company said in a regulatory filing. The fair value of Wells Fargo’s net loans was about $21 billion less than the amount at which the bank reported them in the first quarter, according to a filing.
Non-public companies with less than $1 billion in consolidated assets would be allowed a four-year deferral past the effective date to make the changes, said FASB, which is based in Norwalk, Connecticut. Some financial instruments, including pension obligations and leases, would be exempt from the changes.
The new rules would be “an incremental negative if implemented,” George said. “While anything is possible, we do not expect this proposal will end up going through.”
--Editors: Steve Dickson, William Ahearn
To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net.
To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net.

Who is Sara Glakas? It Is Early but She is 2 for 10 on 10 Banks She Thinks Could Fail In 2010



By Sara Glakas Friday, May 14, 2010

Bank failures were all the rage in 2009, with the Federal Deposit Insurance Corporation (FDIC) seizing 140 financial institutions that year. But make no mistake…bank failures are still happening at an alarming rate. The FDIC has already shut down 68 banks, putting us on pace for over 200 failures this year.

Even though the U.S. government has decided there will be no more bank failures as large as Lehman Brothers, the smaller local and regional banks are being allowed to slip under the surface without much of a ripple in the headlines.

The list of troubled banks maintained by the FDIC still has over 700 names on it (though the list is confidential). The FDIC has more banks on its trouble list than it has manpower to deal with, slowing down the whole process of closing failing institutions. And because the process is slower and the banks are smaller, the public has been lulled into a state of complacency, with many believing that there's nothing to worry about.

Those people are wrong.

To get you up to speed on the situation, we've put together a list of what we believe may be the next institutions to be seized by the FDIC.

There are plenty of ways to measure a bank's strength. But when it comes down to it, banks that have too little equity compared to their assets are exactly like the homeowner who has too little equity compared to the price of his home. Remember that a bank's assets are the loans it makes to customers. If too many loans go bad for too long, eventually the equity cushion disappears and the bank finds itself underwater.

To find the most vulnerable banks, we looked for firms with high financial leverage. In particular, we screened for firms with a total assets/shareholder equity ratio of over 30. The average leverage ratio for all FDIC-insured institutions was 9.1 as of the end of 2009. When Lehman failed in 2007, it had a leverage ratio of 30.7.

If you're a depositor, you may want to stop reading this report and hightail it to the teller's window to withdraw your deposits from these walking dead. For planning purposes, note that the FDIC generally shuts down banks after the close of business on Friday in what has become known in the industry as "Bank Failure Friday."

If you insist on remaining a loyal customer of one of these banks, double-check and triple-check that your accounts have less than the $250,000 FDIC-insured limit.






1. Crescent Bank & Trust
As of the end of 2009, Crescent had leverage ratio of 1,365. You are not reading that wrong. The Georgia bank had $993,855,000 of assets teetering on top of $728,000 in shareholder equity.

Recently, Crescent stock traded up to $1.95 from $0.82 in a single day on a message board rumor that its liquidation value was north of $20 per share. With a book value of less than $0.15 per share today, it's unlikely that rumor is true.

2. Midwest Bank (note to readers: the FDIC placed Midwest in receivership after close of business on Friday, May 14th)
With a leverage ratio north of 60, Midwest Bank has already been identified as one of the next banks in line for "Bank Failure Friday." The FDIC has said that it will accept bids from investors who are interested in acquiring Midwest, but it's unlikely that anyone will step forward. After all, an acquirer can get FDIC guarantees on 80% of Midwest's assets if it waits for the failing bank to go into receivership.

3. Integra Bank
Integra had a rough first quarter in 2010, reporting some truly abysmal results:
- 13.3% of its loans are non-performing
- net loss to common shareholders of $54 million
- return on common equity of -1,418.4%

Integra runs about 69 banking centers in Indiana, Kentucky, Illinois and Ohio and it's been busy raising money by selling some of the branches that it acquired during the good times. But shareholder equity continues to erode, falling from $102 million at the end of December 2009 to $52.6 million at the end of March 2010. Its leverage ratio currently stands at 55.4.

4. Bank of Florida (FDIC placed in receivership on Friday, May 28th)
Earlier this year, the FDIC put each of the three subsidiaries that comprise the Bank of Florida on notice and told them to be adequately capitalized by April 17th. Zero of three met the deadline. In fact, each bank's capital ratio got worse. Now they are not only short on capital, they are "critically short" on capital.
5. Sonoma Valley Bank
The FDIC is pressuring Sonoma Valley to find investors, and quick. With capital ratios well below the FDIC's all-important "adequately capitalized threshold," Sonoma Valley needs to find someone to inject additional capital if it has any chance of getting back into compliance.

Earlier this year, federal regulators forced the bank to restate third-quarter 2009 results after regulators noted that the bank was not setting aside enough reserves for anticipated troubled loans. After marking up their third-quarter loan-loss provision to about $24.5 million from just $2.6 million, Sonoma Valley revised its originally reported $495,000 loss to a $19 million loss.

6. Bank of the Cascades
Oregon-based Bank of the Cascades is currently working to improve its capital levels after receiving an FDIC notice that the bank is considered to be undercapitalized. As of the end of 2009, it had $2.2 billion in assets and $45 million in equity, giving it a leverage ratio of 48.7.

Recently, Cascades reached a tentative agreement with investors to inject $65 million, but the investment is contingent on Cascades finding an additional $85 million from other sources.

7. Sterling Financial
Sterling is in negotiations with private equity firm Thomas H. Lee Partners regarding a $170 million investment in the bank. The capital injection is contingent on the Spokane-based bank raising an additional $555 million in preferred and common stock from other investors. All this dilution has pushed Sterling's price per share to around $0.85.

As of the end of 2009, Sterling's leverage ratio was hovering around 32.8. It posted a Q1 2010 net loss of almost $79 million when it was forced to set aside $85 million for potentially bad loans. Unless the stars align and the financing plan comes together as proposed, Sterling will likely end up in receivership.

8. Capitol Bancorp
Capitol has implemented "capital preservation and balance sheet deleveraging strategies" to help it repair its balance sheet. This means that the bank has been frantically selling subsidiary banks and branches to raise money. It's also attempting a debt for equity swap, which would also help bring down its lofty leverage ratio of 43.2.

Capitol is "undercapitalized" according to 1 of the 3 capitalization ratios the FDIC uses to assess bank strength. Unfortunately for Capitol, it continues to lose money as fast as it can replace it with asset sales. In Q1 2010, Capitol reported a net loss of almost $50 million.

9. Independent Bank Corp
Upon reporting first quarter earnings, CEO Michael Magee said, "Our results for the first quarter of 2010 continue to reflect the difficult market conditions we face in Michigan."

Independent reported a net loss of almost $15 million for Q1 2010, which was better than the almost $20 million loss for the quarter ending December 31, 2009. Independent Bank was a recipient of TARP funds in 2008, but failed to pay the dividend on the government-owned preferred shares due on November 2009. Now, with a leverage ratio of almost 30, Independent is trying to convince investors to exchange preferred shares for common shares.

10. TIB Financial
TIB Financial, with branches throughout south Florida and the Florida Keys, currently has a leverage ratio of 30.4. It's been meeting with private equity firm, Patriot Financial Partners, in what may be its last chance to raise capital.

On April 27th, TIB issued a press release saying that as of March 31, 2010 it remained adequately capitalized for regulatory purposes. Technically, it's true. For example, TIB's total capital to risk-weighted assets ratio is 8.1%, and the FDIC's standard for "adequate capitalization" is 8%. For a bank to be considered "well-capitalized" the FDIC wants it to have a risk-weighted asset ratio of 10%.

Rare Event on a Long Weekends: Regulators shut down 3 affiliated banks in Florida; 76 US bank failures this year




Regulators Shut 3 Florida Banks

The Associated Press

WASHINGTON

Regulators have shut down three affiliated banks in Florida, bringing the number of U.S. bank failures this year to 76.

The Federal Deposit Insurance Corp. on Friday took over the banks, all owned by holding company Bank of Florida Corp. They are: Bank of Florida-Southeast, based in Fort Lauderdale, with $595.3 million in assets; Bank of Florida-Southwest, based in Naples, with $640.9 million in assets; and Bank of Florida-Tampa Bay, based in Tampa, with $245.2 million in assets.
EverBank, based in Jacksonville, Fla., agreed to assume the assets and deposits of the failed banks. 

Thursday, May 27, 2010

Bank of Florida Corp. in Naples facing new federal action


By LAURA LAYDEN  naplesnews.com

Originally published 06:59 p.m., May 26, 2010 

Updated 07:02 p.m., May 26, 2010

Naples-based Bank of Florida Corp. faces new enforcement actions from its regulators.

The Federal Deposit Insurance Corp., or FDIC, has entered into consent orders with each of the holding company’s three banks, according to a filing with the U.S. Securities and Exchange Commission. In those orders, the company does not deny or admit any wrongdoing.

The orders require the boards of directors to get more involved in their banks by holding meetings at least once a month and more closely monitoring activities.

The banks have been directed to retain experienced, qualified management, who can comply with the consent orders, and operate the banks “safely and soundly.”

Within 30 days, the banks must submit plans to the FDIC on how they will achieve and maintain an adequate level of capital. They will have the same amount of time to review the adequacy of their allowances for loan losses.

Within 45 days, the banks will have to implement plans to reduce assets classified as “substandard or doubtful.”

The orders also require the banks to reduce concentrations of credit that represent large portions of its working capital.

The banks have 60 days to develop profit plans and comprehensive budgets, and to adopt a liquidity, contingent funding and liability management plan.

While the orders are in effect, the banks can’t declare or pay any bonuses or dividends, or make any principal or interest payments on subordinated debt, without FDIC approval.

The banks also can’t accept, renew or roll over any brokered deposits.

In its filing with the SEC, the company also noted that is has received a warning letter from Nasdaq that its stock may be delisted. Shareholder equity on March 31 was less than $1 million, falling below the equity required for listing. The company has 45 days to submit a plan to regain compliance. The ability to comply is “likely exclusively dependent upon the success of the company’s current $72 million common stock offering,” the SEC filing says.

In March, regulators ordered Bank of Florida Corp. to boost its capital, giving it 30 days to strengthen its finances. Its three subsidiaries are still short on capital.

Bank of Florida-Southwest, with branches in Lee and Collier counties, is in the worst shape.
“The Southwest bank is critically undercapitalized,” said Michael McMullan, CEO of Bank of Florida Corp., in a recent interview with the Daily News. “It’s very much a reflection of the economic times and the dramatic decline in real estate values.”

The Bank of Florida - Southeast and Bank of Florida - Tampa Bay subsidiaries are also struggling with troubled loans in a bad economy.

In 2009, the holding company reported losses of $147.6 million, or $11.54 per diluted share. That compares to a loss of $13.2 million, or $1.03 a share, in 2008.

The company recently adjusted its financial results for the first quarter of this year to show bigger losses. The loss was increased to $48.2 million, or $3.76 per diluted share. Originally the loss was estimated at $33.1 million, or $2.66 per diluted share.

If the company fails to meet the latest regulatory demands, the FDIC will likely take further action, which could include closure and appointing a receiver to take over the banks.

Bank of Florida Corp. was organized in 1998. It has grown to include 13 financial centers, more than 250 employees and more than $1.5 billion in assets.

Connect with Laura Layden at www.naplesnews.com/staff/laura_layden.

Smaller Banks Are ‘No Safer’

May 24, 2010, 2:25 PM


By DAVID LEONHARDT, New York Times

Writing at Vox, four Italian economists argue that big banks weren’t the problem:
A world with only small and domestic banks is no safer. … [Such banks] also had to be supported because of bad investment policies. Examples include Northern Rock in Britain and WestLB in Germany. Moreover, the key “raison d’être” of multinational banks – i.e. being able to mobilize funds across countries – could in principle be extremely useful to support global operations in times of distress and not necessarily be a cause of instability.
The riskiness of a bank’s holdings, not its size, seems to be the most important issue. In this country, that helps explain why Lehman Brothers — which was not a huge firm — was able to cause such enormous damage. I think the financial regulation bills favored by the White House and Congressional Democrats have their flaws. But the failure to break up the big banks doesn’t seem as if it should be at the top of the list.
Hat-tip to Marginal Revolution. (And, speaking of Marginal Revolution, Tyler Cowen had a nice column about Greece in Sunday’s Times.)

Proposed Overhaul of Accounting Standards Contains Mark-to-Market Rule

May 26, 2010

By ERIC DASH, New York Times


The group that sets corporate accounting standards proposed an overhaul Wednesday of the way lenders record the value of their assets, hoping that more stringent and consistent reporting rules might help avert another financial crisis.
Under the new rules, banks and other lenders would be required to book their loans at their current market value, a method called mark-to-market accounting. Previously, they had more leeway in valuing assets, so long as they expected to hold them for a long period of time. Critics called that approach “mark to make believe.”
Banks already use mark-to-market accounting for stocks and complex mortgage bonds whose value fluctuates through daily trading. The change in the way they treat the value of loans, however, is expected to be greeted with fierce opposition from banks.
Banks claim that the change would force them to take big losses on loans during periods of economic distress. Doing so would mislead investors, they say, because the loans would probably still pay off over time even if they were trading at lower market prices.
Big investment banks, like Goldman Sachs and Morgan Stanley, should not be affected much by the new rules because they have traditionally used mark-to-market accounting. For regional and community banks that make commercial loans — the vast majority of the nation’s 8,000 lenders — the impact could be drastic.
The group proposing the change, the Financial Accounting Standards Board, an independent body that sets United States accounting standards, said the rules would take effect for the biggest banks as early as 2013. Smaller banks, with less than $1 billion in assets, would be permitted to wait until 2017.
The additional time is intended to give smaller lenders a chance to recover from the financial crisis. If the new rules took effect today, they might force the banks to take tens of billions of dollars of losses on their commercial real estate loans that they have not yet recognized.
Even with the delay, financial companies are likely to put up a fight — just as they did when they were forced to treat stock options as an expense early in the decade, and again last spring, in the aftermath of the financial crisis, when they faced political pressure to start using mark-to-market accounting more broadly.
The American Bankers Association released a statement on Wednesday that said the accounting change would present “significant problems, not only for banks, but also the general economy. If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.”
But officials with the accounting board say the changes would bolster investor confidence by requiring the banks to more quickly recognize their losses.
Investors complained to the group that the old set of rules did not “faithfully represent the underlying economics,” said Robert H. Herz, the chairman of the accounting board. “The financial crisis reinforced the need for better accounting in this area.”
The proposed changes now enter a comment period that will last until the end of September. The board plans to hold a round a hearings on them in the fall. It will then make final revisions, which will take into account a similar set of rules being proposed by the International Accounting Standards Board.
The proposal is the latest in a series of efforts to tighten up banking regulation and improve financial transparency in the wake of the crisis. Congress is weeks away from passing a sweeping overhaul of financial regulation, affecting products as varied as derivatives and debit cards.
Federal regulators, meanwhile, are adopting a more aggressive posture after being criticized sharply by lawmakers for failing to prevent the crisis through enforcement.
The Financial Accounting Standards Board has been attacked by Congress, too. Last March, members of the House Financial Services Committee pressed the group to relax its rules in order to loosen credit and make loans more widely available. When the board did so, critics said it had caved to pressure from politicians and banks, which could suddenly paint a rosier picture of their financial condition.
Accounting board officials see the new rules as a compromise, hoping to ease the transition from old practices to new ones. Assets that a bank plans to trade or sell, like complex mortgage bonds or other securities, will continue to be booked at their current market value. Any increase or decrease in value will directly affect earnings.
Financial institutions, under the new rules, would have to report two types of valuations for loans: their value as set by buyers and sellers in the market, and their so-called fair value, based on the banks’ own assessment.
To mitigate the effect of large swings in market value for loans, the accounting board will allow banks to split the loss on some assets into two categories: one that would affect the bank’s earnings and another that would affect the bank’s book value.
“It’s a smorgasbord of accounting principles,” said Jack T. Ciesielski, an accounting expert who is editor of the trade publication Analyst’s Accounting Observer. “It will messier to read, but if you know what you are doing you can figure it out.”

Wednesday, May 26, 2010

Goldman Sachs Seeking to Invest in Company to Buy Failed Banks

Bloomberg News

May 25 (Bloomberg) -- A Goldman Sachs Group Inc. private equity fund is seeking to join Oaktree Capital Management LP and the Illinois teachers’ pension fund as an investor in a company planning to buy failed U.S. banks, according to public records.

Goldman Sachs applied to acquire as much as 25 percent of SKBHC Holdings LLC, a Corona del Mar, California-based firm trying to win approval to become a bank holding company, according to an announcement on the Federal Register website. Oaktree is also seeking 25 percent of the company and the Illinois fund voted to invest $100 million.

SKBHC is trying to purchase Starbuck, Minnesota-based Starbuck Bancshares Inc. and acquire assets and liabilities from failed U.S. depositories, the company said in its application to the Federal Reserve. Scott Kisting, the former co-head of global banking at Merrill Lynch & Co., is SKBHC’s chairman and chief executive officer, according to the application.

U.S. banks are collapsing amid losses on residential and commercial real estate loans. The FDIC’s list of problem lenders has ballooned to 745, the most since 1992. FDIC Chairman Sheila Bair has said she expects the number of failures in 2010 to exceed last year’s total of 140.

Andrea Raphael, a Goldman Sachs spokeswoman, declined to comment. A telephone message left for an attorney listed on SKBHC’s application with the Fed wasn’t returned. Neither was a message left at an address listed as SKBHC’s headquarters in records filed with the California Secretary of State’s office.
SKBHC’s application to the Federal Reserve listed GS Capital Partners VI Fund LP and “certain related funds” among its potential stakeholders.

Teachers’ Role

The Teachers’ Retirement System of the State of Illinois voted to invest in SKBHC, the fund said in a May 21 statement. SKBHC told the board it plans to raise $1.25 billion, said Dave Urbanek, a spokesman for the Springfield, Illinois-based retirement fund.

“The return that is anticipated long-term, that is something that would be helpful to the retirement fund,” Urbanek said in a telephone interview.

The retirement system had $32 billion in assets as of Dec. 31, it said in a statement.

SKBHC plans to buy a failed bank with assets of up to $10 billion within the first year of its operation, according to a letter Goldman Sachs sent to the Fed about its application to invest in SKBHC. The New York-based investment bank will be a passive, non-controlling investor, according to the letter.

Starbuck Assets

Starbuck, the first bank SKBHC is trying to buy, operates the First National Bank of Starbuck, which had $18 million in assets as of March 31, according to Federal Deposit Insurance Corp. records. The town is about 137 miles northwest of Minneapolis.

Other investors in the company are expected to include Los Angeles-based Oaktree Capital, which has $73 billion in assets under management, according to SKBHC’s application. SKBHC said Oaktree would take an almost 25 percent stake in the bank holding company.

A representative who answered the telephone at Oaktree said the firm declined to comment.
SKBHC also listed San Francisco-based private equity firm Friedman Fleischer & Lowe LLC as an expected investor. A message left with Tully Friedman, co-founder, chairman and chief executive officer of Friedman Fleischer, wasn’t immediately returned.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net .

Monday, May 24, 2010

It's not so peachy for Georgia banks

Monday, May 24, 2010

marketplace.publicradio.org

Listen

Georgia is the state that's seen the most bank failures since the beginning of the financial crisis. You'd think this would be good news for regulators, at least they've got plenty of business right now. But Georgia's been cutting back on the folks who keep the banks in line. Jeff Horwich reports.

A closed bank

TEXT OF STORY

KAI RYSSDAL: Bank number two in our tale today is Georgia's Satilla Community Bank. It was seized by the FDIC Friday afternoon; the 73rd bank to be shut down by federal regulators this year. Satilla Community is in a town called St. Marys, Ga., down in the southeastern corner of a state that has seen more bank failures than any other the past two years. Dozens of small banks in the Peach State turn out to have something rotten at the core.

Jeff Horwich reports.

JEFF HORWICH: Georgia's dubious number-one status is the story of a down-home banking system swept up by big-city dreams. Traditionally, Georgia has had lots of small banks -- a legacy of laws meant to keep banks focused on their local customers. But during the boom when development took off next door, in Florida, small banks saw an opportunity to make a lot of money.

Bert Ely is a banking consultant. He says the banks tapped into a stream of billions in so-called "broker deposits" that flowed in from out-of-state, looking for high interest rates.

BERT ELY: A number of these failed banks did use broker deposits to fuel excessively rapid growth in high-risk lending, often times in markets where they did not understand the lending risk.

Ely says the banks competed to see who could be most generous both with deposits and loans.

Atlanta-based banking attorney Walt Moeling says state examiners might have spotted the risk -- if there had been more of them. He points to one practice regulators didn't police where banks created reserves to cover borrowers' interest payments but never funded them.

WALT MOELING: It wasn't reflected in the banks' data furnished to regulators, and you could only have seen that by being on-site.

Loans failed, depositors pulled out, and 39 small banks have shut down in Georgia since 2007. And the number of bank examiners in Georgia is shrinking. The state doesn't pay for those inspectors -- the banks do. But Moeling says lawmakers directed half the money that was supposed to pay for regulation to balance the state budget.

MOELING: You not only don't get your money's worth, you have a hidden tax on banks.

The examiners' office may be short-staffed, but that doesn't mean it's not hustling. The Georgia Bankers Association says its members are reporting lots of in-person visits from the watchdogs these days.

I'm Jeff Horwich for Marketplace.

Private equity circles over troubled banks

1:44pm EDT

By Sweta Singh and Jochelle Mendonca - Analysis


BANGALORE (Reuters) - U.S. bank regulators may have placed a number of hurdles for private equity investments in failed banks, but that has not stopped the firms from taking a shot at weaker banks.

The U.S. Federal Deposit Insurance Corp (FDIC) has crafted tough guidelines for private equity groups seeking to buy failed U.S. banks, which include maintaining very high capital levels and remaining owners for three years.

However, private equity players are trying to dodge the restrictions by offering distressed banks an option to sell themselves before they get sucked into the FDIC's vortex.

"These PE players are coming to the realization that the FDIC route may not be the most efficient way, so now they are going the open bank route and I think we'll see more of them," Keefe, Bruyette and Woods FDIC analyst Juliana Balicka said.

The deal pipeline is beginning to swell, with billionaire banker Gerald Ford buying a 91 percent stake in Pacific Capital Bancorp, and Thomas H. Lee Partners and Warburg Pincus saying they would invest $139 million each in Sterling Financial Corp.

Cash infusion in the struggling lenders is being seen by private equity firms as a great opportunity to enter into the banking space.

LIMITED UPSIDE SEEN

With few private-equity deals being struck, most firms are trying to take advantage of the upheavals in the banking industry.

"Ultimately (PE firms') goal is to make money on their investment, which would imply that they would like to turn around the bank, get it back to stability and profitability and hopefully generate a respectable return," analyst Terry McEvoy of Oppenheimer & Co said.

But netting a troubled bank without FDIC backing is fraught with risks and there are questions about the gains to be made from such deals.

"There is the expectation or belief that in acquiring a failed institution there may in fact be a lot of upside that can be picked up, at an institutional level or in the process of aggregating or acquiring multiple failed institutions," analyst David Moffat of Huron Consulting said.

But industry watchers believe that the purchases may not be as lucrative as they look, with returns being limited in case of most deals.

"The private equity guys are used to probably a 20 percent to 30 percent rate of return and I think if they get a really good deal they may hit that target," Professor Lawrence White of the Stern School of Business at New York University said. "But more likely I think they'll get 10 percent to 15 percent return on capital."

Additionally, these banks will be raising a lot of equity and investors may be concerned about their ability to earn their cost of capital.

(Reporting by Sweta Singh; Editing by Unnikrishnan Nair)

Thomson Reuters 2010

Defaults on Apartment-Building Loans Set Record for U.S. Banks

Bloomberg

May 24 (Bloomberg) -- Defaults on apartment-building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter, almost twice the year-earlier level, as more borrowers failed to repay debt approved near the market peak, said Real Capital Analytics Inc. in a report.

Defaults on so-called multifamily mortgages rose from 4.4 percent in the fourth quarter and from 2.4 percent during the same period in 2009, the New York-based real estate research firm said today. Commercial-mortgage defaults also rose in the first quarter for loans against office, retail, hotel and industrial properties, Real Capital said.

“Apartment defaults are leading other commercial real estate,” Sam Chandan, global chief economist at Real Capital, said in an interview. “Banks tended to make more aggressively underwritten apartment loans earlier during this last cycle. Credit and pricing reached their peaks for office properties and other commercial assets later.”

The global recession cut demand for U.S. apartments, office space, retail shops, hotels and warehouses during the past two years as jobs disappeared and consumers cut spending. Defaults on apartment-building mortgages surpassed the previous record, set in 1993, for the past three consecutive quarters.

The U.S. savings-and-loan crisis drove apartment-building defaults to 3.4 percent in 1993. Defaults on other types of commercial property debt peaked at 4.6 percent in 1992, according to Real Capital.

The proportion of defaults on office, retail, hotel and industrial properties rose to 4.2 percent in the first quarter of this year, the company said.

U.S. apartments may lead a rebound in commercial real estate as vacancies peak in 2010 and the economy adds jobs, property research firm Reis Inc. said May 19. Reis estimates apartment vacancies will peak at 8.2 percent in 2010, the highest level since the firm began tracking the number in 1980. The number should start to decline in 2011, Reis said.

Real Capital bases its analysis on bank filings and data from the Federal Deposit Insurance Corp.

To contact the reporter on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net

Saturday, May 22, 2010

Wells, LNR Said to Seek Sale of $2 Billion in Loans

Bloomberg

May 21, 2010, 3:38 PM EDT

By Dan Levy, Jonathan Keehner and Dakin Campbell


May 21 (Bloomberg) -- Wells Fargo & Co. and LNR Property Corp. are each seeking to sell about $1 billion of distressed U.S. commercial real estate loans and assets, according to people briefed on the offerings.

Wells Fargo of San Francisco, the biggest U.S. commercial real estate lender, is taking bids on $500 million to $1 billion of office and hotel mortgages and properties, said four people, who asked not to be identified because the sale is private. LNR, the largest special servicer of commercial mortgage-backed securities, is trying to sell about $1 billion of defaulted loans, two people said.

“The availability of capital and better prices than a year ago are driving sellers to move things off their balance sheets,” Matthew Anderson, managing director at research firm Foresight Analytics, said in an interview. “Depending on how the auction goes, you may see more of this.”

U.S. banks and special servicers hold about $185 billion in distressed loans, according to the Oakland, California-based firm. Wells Fargo had $12.9 billion in nonperforming commercial property loans in the first quarter, the firm said, while LNR is the special servicer on $24 billion of delinquent assets, according to data compiled by Bloomberg.

Financial institutions were saddled with real estate debt after the global credit crisis and recession sent U.S. commercial property values down 42 percent from the October 2007 peak, making it difficult for owners to sell properties or refinance their loans. When commercial mortgages are packaged into securities, a special servicer is assigned to manage the assets and help direct a restructuring if the loans become troubled.

Recovery Indicator

Well Fargo inherited most of the assets it’s trying to sell from Wachovia Corp., the Charlotte, North Carolina-based lender it purchased in October 2008, said two of the people. Wachovia’s loans make up about 60 percent of the combined company’s nonperforming total, Anderson said.

Wells Fargo’s delinquent commercial loans, or those more than 30 days past due, almost doubled to 12 percent of loans in the first quarter from a year earlier, and its nonperforming loans, or those more than 90 days late and not accruing interest, more than doubled to 9.4 percent, Bloomberg data show.

A sale would reflect an improved market for the most troubled real estate assets, said Ben Thypin, an analyst at researcher Real Capital Analytics Inc. in New York. Private- equity real estate funds, which have $80 billion to invest, are optimistic that transactions will pick up, London-based researcher Preqin Ltd. said in an April 30 report.

“Until now the major banks haven’t had an incentive to sell off loans they absorbed during the crisis,” Thypin said.

Eastdil Advising

Eastdil Secured, the real estate investment bank owned by Wells Fargo, is advising Wells Fargo and LNR Partners on the sales, said two of the people.

Elise Wilkinson, a spokeswoman for Wells Fargo, referred questions to Eastdil. Martha Wallau, a senior managing director at Eastdil in New York, declined to comment, as did Jen Brown, a spokeswoman for LNR.

“We’re certainly aggressive in terms of liquidating the portfolio,” David Hoyt, head of Wells Fargo’s wholesale-banking business, said at May 14 meeting of investors, according to a transcript. “At the moment there is a lot of liquidity in the market to resolve problems.”

Clean Up

Wells Fargo may be trying to sell the loans to offset profits in other areas, according to Gary Mozer, principal at George Smith Partners, a real estate investment firm in Los Angeles. “This way they get to clean up their balance sheet at the same time,” Mozer said in an interview.

LNR, based in Miami Beach, Florida, is the special servicer on $181 billion of securitized real estate debt, according to Bloomberg data. The loans it has up for sale average $3 million and are all in default, one of the people said. They are on office and retail properties, mobile homes and apartment buildings.

The firm’s plan to sell loans was reported by CRE News in March.

LNR, owned by Cerberus Capital Management LP, hired Lazard Ltd. to help restructure as much as $1 billion of debt, people with knowledge of the matter said on Jan. 14.

--Editors: Larry Edelman, Josh Friedman

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

Regulators shut small Minnesota bank

By MARCY GORDON (AP)

WASHINGTON — Regulators on Friday shut down a small bank in Minnesota, bringing the number of U.S. bank failures this year to 73.

The Federal Deposit Insurance Corp. took over Pinehurst Bank, based in St. Paul, Minn., with $61.2 million in assets and $58.3 million in deposits. Coulee Bank, based in La Crosse, Wis., agreed to assume the assets and deposits of the failed bank.

The failure of Pinehurst Bank is expected to cost the deposit insurance fund about $6 million.

With 73 closures so far this year, the pace of bank failures is more than double that of 2009, already a brisk year for shutdowns. By this time last year, regulators had closed 36 banks. The pace has accelerated as losses mount on loans made for commercial property and development.

The number of bank failures is expected to peak this year and to be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and midsized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.

Friday, May 21, 2010

Big banks prosper but smaller lenders' struggles deepen

latimes.com

The FDIC reports that nearly 10% of all U.S. institutions — most of them community banks — were in trouble as the first quarter closed.

By E. Scott Reckard, Los Angeles Times

May 21, 2010


First-quarter profits tripled for the nation's banking industry as big banks recovered their footing, the government reported Thursday.

But the news was not all good for the industry. Troubles at smaller lenders swelled the number of problem banks to nearly 10% of all institutions, according to the report by the Federal Deposit Insurance Corp.

The agency said that 775 institutions — most of them community banks — were on its list of troubled banks as of March 31, up from 702 at year-end.

That was the most since 1,066 in 1992, as the savings and loan crisis played out. The number peaked at 2,165 in 1987, but there were about twice as many U.S. banks and thrifts then, an FDIC spokesman said.

Names on the list are kept confidential to keep from spooking depositors while regulators work with the problem banks to clean up soured loan portfolios and to raise capital. "The vast majority of troubled banks do not fail," FDIC Chairwoman Sheila Bair said in announcing the quarterly industry results Thursday morning.

Last year 140 banks failed, and 72 have gone under in 2010.

The total assets of problem banks increased to $431 billion from $403 billion, or an average of $556 million per bank, the FDIC said. By contrast, the largest banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — each have more than $1 trillion in assets.

Taken as a whole, the banking industry is looking stronger. Government-insured banks and thrifts reported $18 billion in first-quarter profits, up from $5.6 billion a year earlier and the highest total in two years.

The largest year-over-year improvements occurred at the biggest banks, but 52.2% of the nation's 7,932 insured institutions reported net income growth.

Bair noted that overall lending has yet to pick up, a result of lower demand for business loans and still drum-tight lending standards at most banks.

But provisions for loan losses were down, the balance sheet of the deposit insurance fund improved slightly, and these days there are more bidders and higher bids at failed-bank auctions — which means lower losses for the FDIC when it negotiates loss-sharing deals with acquiring banks.

And banks in need of fresh capital to bolster their reserves have been more successful in recent months at finding investors.

"The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility," Bair said, but she added: "The trends continue to move in the right direction."

In reporting its tale of two sectors, the FDIC said large banks have worked through many of the losses on mortgages and mortgage-linked securities that triggered the near meltdown of the financial system in 2008.

The losses at the small banks, mostly on construction loans and commercial mortgages, have built up as a result of the troubled economy, Bair said.

In a question-and-answer session, FDIC officials said they had not changed their estimate of $100 billion in losses the fund is expected to incur in the latest round of bank failures. But they said they might consider lowering that estimate in the future.

scott.reckard@latimes.com

The Los Angeles Times

Thursday, May 20, 2010

Investors Ease Strain on F.D.I.C.

By ERIC DASH, New York Times

After contending with nearly 240 bank failures since the financial crisis struck, the Federal Deposit Insurance Corporation is finally getting some help from private investors.

A spate of recent banking takeovers and investments suggests that stronger financial institutions and private investment firms see value in the detritus of American banking. That is good news for the F.D.I.C., which has had to shoulder the cost of failures through its deposit insurance fund, causing the fund to sink into the red.

“We are seeing light at the end of the tunnel,” Sheila C. Bair, the head of the F.D.I.C., said in a recent interview.

Now that some troubled banks are being taken over by private investors, rather than closed by the government, the pressure on the F.D.I.C. is beginning to ease. On Thursday, the agency, which administers the fund protecting savers’ deposits, is expected to announce that it lowered the amount of money it set aside to cover future losses by more than $3 billion during the first quarter — the first reduction since the second quarter of 2007.

The news is not all good, of course. Seventy-two banks have collapsed this year, and banking analysts worry that more failures will follow, particularly among small and midsize lenders exposed to troubled commercial real estate.

But with the economy stabilizing, banks that otherwise might have fallen are regaining their footing. The nation’s biggest banks — the ones considered too big to fail — have roared back in terms of profitability thanks to ultralow interest rates. Analysts say the growth of both troubled consumer and corporate loans has begun to trail off.

“We have been out of the recession long enough that it is starting to filter into the banking system,” Ms. Bair said. Not long ago, analysts predicted that the financial crisis and recession might claim 1,000 of the nation’s 8,100 lenders. Now, they foresee perhaps 500 or 750 failures.

“For the U.S. commercial banking industry, the worst is over,” said Gerard Cassidy, a financial services analyst at RBC Capital.

One reason that troubled banks are surviving is that other banks, as well as investors who specialize in companies in distress, are swooping in, looking to buy lenders inexpensively. More buyers are showing up at F.D.I.C. auctions, and to avoid a bidding frenzy, some are doing deals with little or no government help.

On Monday, for instance, TD Bank of Canada announced that it would buy the South Financial Group. Private investors recently have plowed money into other troubled institutions, like Synovus Financial, Sterling Financial and Pacific Capital Bancorp.

Now that the economy is improving, investors are growing more confident that problem loans are at or near their peak. That confidence has been reflected in banking stocks, which have soared 111 percent from their low in March 2009, as measured by the KBW bank index.

In April, Thomas H. Lee Partners spent $134.7 million for a minority stake in Sterling Financial, a lender based in Spokane, Wash., that has been hobbled by bad real estate loans.

More recently, Gerald J. Ford, the billionaire investor who made a fortune during the savings and loan crisis, invested $500 million for a 91 percent stake in Pacific Capital Bancorp of Santa Barbara, Calif. The bank had been trading at around $4. Mr. Ford paid 20 cents a share.

When it bought three banks in April, TD Bank agreed to swallow a bigger share of their future losses than is typical in an F.D.I.C.-assisted deal. On Monday, TD paid a mere 20 cents a share for South Financial. Although the F.D.I.C did not provide any aid, TD did get some federal help. The Treasury Department agreed to sell $347 million of South Financial preferred shares and warrants for a bargain-basement price of $130.6 million.

“Without a doubt, there is more confidence than a few months ago,” said Bharat B. Masrani, the head of TD Bank’s United States operations. “There is more transparency and confidence in the ultimate losses of these institutions.”

Andrew Williams, a Treasury spokesman, said that it had agreed to the discount, as in previous deals, to “minimize or eliminate our chances of incurring further losses” on its investment in the bank.

Of course, such unassisted deals may still be the exception for at least the remainder of the year. The F.D.I.C. is expected to add to its list of problem banks — now 702 — when it releases its quarterly report on Thursday. The agency does not disclose which banks it considers troubled, nor does inclusion on the list mean that a bank is in imminent danger of failure.

Most of the banks on the list are tiny community lenders, largely in the Southeast and Midwest, that would be more attractive if they were bundled together rather than sold as stand-alone entities. Many of the potential buyers for these banks — particularly other lenders that are still trying to shore up their finances — need government help to pursue deals.

“We are not in any danger of running out of failed banks,” said Wilbur L. Ross, a prominent bank investor. “The only question is how much investor demand there will be.”

Wednesday, May 19, 2010

Federal Reserve Bank of Cleveland President and CEO Sandra Pianalto

Forecasting in Uncertain Times

May 18, 2010

Presented to the Economic Club of Pittsburgh


"As we are all aware, we're emerging from the deepest and longest recession since the Great Depression. Our models would tell us that the deeper the downturn in the economy, the more rapid the recovery. You've probably heard this referred to as a V-shaped recovery.

However, my outlook is that our journey out of this deep recession will be a slow one because we face two primary headwinds that I expect will temper growth for awhile. The first is the effect of prolonged unemployment, and the second is a heightened sense of caution on the part of consumers and businesspeople. Let me explain the power of these headwinds, beginning with prolonged unemployment.

Millions of people have lost their jobs during this recession, and while job loss is common to all recessions, this time around it has been more severe. Typically, during a recession, for each 1 percent that GDP falls, the unemployment rate ticks up by about seven-tenths of a percentage point. In this recession, GDP fell by 4 percent, so you would expect unemployment to rise by a little less than three percentage points. Unfortunately, it shot up by more than five percentage points, which means an extra one-and-a-half million people lost their jobs compared with our historical experience.

Just as critical is the length of time people are remaining out of work in this recession. About half of those who are currently unemployed have been out of work for at least six months, and the longer someone is out of work, the harder it is to find a job. In the 1982 recession, which was another severe recession, the average duration of unemployment peaked at 21 weeks, but today the average is already over 30 weeks--a record high. Research also tells us that workers lose valuable skills during long spells of unemployment, and that some jobs simply don't return. So workers who are lucky enough to find jobs may be going to jobs that aren't familiar to them, which means they and the companies they join may suffer some loss of productivity. Multiply this effect millions of times over, and it has the potential to dampen overall economic productivity for years.

The second powerful headwind in this recession is a heightened sense of caution, driven by a deep uncertainty about where the "new normal" or baseline might be. A whole generation of Americans who began their working careers in the mid-1980s had experienced only long periods of prosperity punctuated by just two very brief downturns. Those experiences encouraged an expectation for relatively smooth growth. Now everyone's expectations have shifted as a result of this long and deep recession.

People's attitudes about their own prospects have fundamentally changed. In a recent survey by Ohio's Xavier University, 60 percent of those polled believe attaining the American dream is harder for this generation than ones before. And nearly 70 percent think it will be even more difficult for their children. Many people are now just aiming for "financial security" as their American dream.

This has led many people to delay major purchases until their circumstances are clearer. While home sales have risen slightly as of late, overall sales have fallen by more than two million since 2006. Car sales are also still down to an annualized rate of under 12 million instead of the 16 million or more seen in the years before the downturn.

Businesses are also cautious. Business leaders base many decisions on forecasts, and they tell me that they are attaching the same high degree of uncertainty around their projections as I am. Most business leaders say that they're not planning significant hiring until there's more clarity about how the recovery is going to progress and about policies relating to health care, energy, the environment, and taxes. This caution translates into fewer job opportunities, fewer equipment purchases, fewer building projects--and on and on.

These two factors--overall caution and the effects of labor market damage--lead me to an outlook for relatively subdued output growth through this year and next, with unemployment rates that decline only gradually.

The two headwinds will also have important implications for my inflation forecast. Again, the Federal Reserve's dual mandate compels us to promote maximum employment in a context of price stability. And, as I have noted, the inflation outlook is unusually uncertain when compared with historical norms. Some observers are concerned about the likelihood of much higher inflation. Those who support this view see the possibility of inflation expectations rising as a result of the public's concerns about the Federal Reserve's expanded balance sheet at a time of very large federal budget deficits. However, there are other observers who place more stock in arguments that support an outlook for further disinflation. Where do I stand? In emerging from this recession, there are three key elements that lead me to conclude inflation will remain subdued: current inflation, labor costs, and inflation expectations. Because of the importance I attach to keeping inflation low and stable, I would like to comment on each of these factors and explain how they fit into my inflation outlook.

Let's begin with current inflation. Recent evidence I am seeing puts momentum on the side of disinflation, at least in the short run. Measures of core inflation have been falling during the past year. Core inflation measures are fairly good predictors of near-term inflation because inflation itself tends to move sluggishly. At the Federal Reserve Bank of Cleveland, we track two measures of inflation--what we call the "trimmed mean" and the median CPI series. Both of these series have been on a disinflationary path since the middle of 2008, and the prices of roughly 50 percent of the items we track in our market basket of consumer expenditures have been declining over the past three months. In this economy, companies are really holding the line on prices to boost their sales, and they can do that profitably in part because labor costs are so restrained.

Now let's turn to the second element, unit labor costs, which I also see as a good short-term predictor of inflation. Unit labor costs, or output per labor hour, consist of two components: labor compensation and labor productivity. While higher productivity is always good for long-run prosperity, it is also critical for the near-term inflation outlook. Higher rates of productivity growth reduce the amount of labor needed to produce a given amount of goods and services. In today's labor market, wages are likely to be restrained by the unemployment situation -- labor supply far exceeds labor demand. Combining rising productivity with restrained wages causes the cost of producing goods and services to fall. In fact, the data show that labor costs have fallen by nearly 5 percent since the fourth quarter of 2008, and many of my business contacts continue to talk about wage and price reductions, not increases.

Finally, I pay close attention to inflation expectations. Fortunately, despite the Federal Reserve's accommodative monetary policy stance and well-publicized balance sheet, inflation expectations over the medium to longer term have remained anchored at near 2 percent. Here once more, I must temper my forecasting model with professional judgment. Over the half-century span of data, it is reasonable to expect that, on average, inflation expectations match up with actual inflation. It may sound like a self-fulfilling prophecy--that we get low inflation because we collectively expect low inflation, but it is nevertheless borne out by both models and historical precedent.

Let me bring all the elements of my outlook together. For the next couple of years, I expect employment levels to remain well below what I would consider full employment. Similarly, I expect inflation to only gradually drift up from its currently low level but nonetheless remain subdued. In my view, this outlook warrants exceptionally low levels of the federal funds rate for an extended period of time. That said, there is more uncertainty than usual around my outlook, so it will be critical to monitor incoming information and respond as necessary to promote economic recovery and price stability."