Wednesday, June 30, 2010

Should anyone care about small bank failures?

By Marcie Geffner ·
Wednesday, June 30
Posted: 9 am ET
The Federal Deposit Insurance Corp., or FDIC, has closed 86 U.S. banks this year, three in the last full week of June.
The biggest and most costly failures naturally get the most attention. Here, in Los Angeles, one biggie that failed earlier this year was First Regional Bank, which cost the Deposit Insurance Fund a whopping $825 million.
The recent failures were much smaller. High Desert State Bank in Albuquerque, N.M., which closed June 25, had approximately $80 million in assets and $81 million in deposits, according to an FDIC statement. Its failure will cost the Deposit Insurance Fund approximately $21 million -- not a pittance, to be sure, but a much smaller sum than $825 million.
High Desert State’s customers needn’t worry about their accounts since First American Bank in Artesia, N.M., signed an agreement with the FDIC to assume all of High Desert State’s deposits, take over High Desert State’s two branches and continue High Desert State’s banking relationships with its customers.
High Desert State was the second FDIC-insured institution in New Mexico to fail this year. The first was Charter Bank in Santa Fe, which failed in January.
Those facts and numbers, interesting as they are, don’t tell us anything about the personal stories of High Desert State Bank. Who worked there? Why did the bank fail? How will the experience of being an employee of a failed bank change the lives of the branch managers and bank tellers?
A local newspaper clipping mentions only one person by name: CEO Doug Lutz. Where is he now? And how does he feel about what happened to his bank on his watch?
The High Desert State Bank website, assuming there was one, is gone along with, again presumably, the sign on the door, letterhead, business cards and other paraphernalia that signified whatever the bank meant to its employees and customers.
Should anyone care about the fate of this small institution with its two branches? Or was High Desert State Bank just another random casualty of our economic times?

Tuesday, June 29, 2010

The Bank Survival Formula

3 FDIC Acquisitions And Strong West Coast Chinese Banking Franchise Makes East West Bancorp (EWBC) A Stock Winner In The Regional Banking Sector Mary Lisanti Interview Excerpt

WST: Were you seeing some opportunities in areas that you wouldn't have found a year ago? You mentioned financial.

Ms. Lisanti: Yes, financial sector is one for sure. There are two things going on with financials that we find interesting. One is that the small bank consolidation has begun. Those companies that are able to purchase companies from the FDIC and consolidate assets are getting fabulous margins, prices that you will never see again for generations. As we consolidate the country from 1,200 banks to 600 banks, there are going to be a lot of winners and a lot of losers and the consolidators are going to really benefit. You look at a company like East West Bancorp (EWBC). They've made three acquisitions out of the FDIC, and I do not believe they are finished making acquisitions of this type. They have a very strong franchise in Chinese banking on the West Coast and I think that will continue to grow.

Mary Lisanti is a 30-year veteran of small cap growth research and investing. She is the Founder, President and Chief Investment Officer and manages the firms' only product; a small cap growth strategy.

FDIC Made Errors In Loss-Share Estimates - Watchdog

By Jessica Holzer

Dow Jones Newswires


    WASHINGTON -(Dow Jones)- A government watchdog has detected certain key deficiencies in the Federal Deposit Insurance Corp.'s internal controls that led to errors in the 2009 draft financial statements of the FDIC's deposit insurance fund that have been subsequently corrected.

    The weaknesses involve the FDIC's estimates for the cost to its insurance fund of so-called loss-sharing agreements it enters into with banks when there is a bank failure.

    Under such agreements, a healthy bank agrees to acquire essentially all the assets and deposits of a failed bank and the FDIC agrees to share in the losses on the assets.

    The FDIC has increasingly relied on such arrangements to protect its insurance fund against losses due to a surge in bank failures.

    The agency, however, failed to catch errors totalling $386 million in its estimates of the cost to its fund of the loss-sharing transactions, the Government Accountability Office said in a report released Monday.

    The errors were spread over 25% of the total 93 individual loss-share estimates for 2009.

    The FDIC, in a letter to the GAO, acknowledged the control weaknesses and said it was working to remedy them.

    "The FDIC believes that additional resources added throughout 2009, control improvements implemented during the fourth quarter of 2009, and control enhancements to be completed by the end of the second quarter of 2010 will largely address the GAO's concerns in this area," FDIC Chief Financial Officer Steven O. App wrote to the GAO.

    Monday, June 28, 2010

    CRE Cracks Exposed: Tom Barrack's Colony Capital Sees Neverland Redemption as Colony Fund Shows 60% Loss

    By Jason Kelly and Jonathan Keehner - Jun 27, 2010

    Rising from the abyss is the biggest challenge facing Barrack and other private-equity managers who spent a record $1.6 trillion on buyouts from 2005 to 2007 before a credit market crash led to the worst financial crisis in 70 years. Now, firms need to persuade investors they have more to offer than wanton dealmaking, piles of debt and meager results.
    Megafunds managing more than $4.5 billion were the worst performers of those tracked by London-based research firm Preqin for the 12 months ended in July 2009, with an average loss of 31 percent of their value. Colony Investors VIII LP, a $4 billion fund launched by Barrack in 2007, had paper losses of about 60 percent as of the first quarter.
    “It’s tough emotionally,” says Barrack, whose firm has delivered an average annual return of 21 percent since its founding in 1991. “In 17 years, the investors have never experienced something like this.”
    Barrack’s biggest misstep was the $8.5 billion buyout in 2007 of Station Casinos Inc., which operates 18 casinos in Nevada and is the largest U.S. gaming company to go bankrupt. In New Jersey, the $2 billion Meadowlands Xanadu retail and entertainment complex Colony acquired in 2006 -- “Xana-don’t,” Barrack calls it -- sits empty and unfinished after one of Colony’s lenders, Lehman Brothers Holdings Inc., went bankrupt during construction.
    “The question for private equity is, What do you want to be when you grow up?” says Barrack, who was raised in Culver City, California, the son of a Lebanese grocery store owner. “Are you making money from investing or managing assets? That’s the dilemma that everybody’s facing.”
    It’s a predicament shared by a handful of elite managers, many of whom Barrack has known for decades.
    Starwood Capital Group LLC -- headed by Barry Sternlicht, who competed with Barrack during the S&L crisis -- has raised new private-equity funds, which will allow it to earn more management fees and pursue buyouts.
    David Bonderman, who founded TPG Capital after working with Barrack in the 1980s buying assets of failed thrifts for Texas billionaire Robert Bass, is doing smaller deals while adding distressed-debt and credit funds.
    Apollo Global Management LLC, which Leon Black started in 1990 after making his own fortune buying distressed debt, is following Blackstone Group LP and KKR & Co. into businesses such as capital markets as it prepares to tap equity markets through a public offering.
    All of them are becoming what Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire, calls “the new, broad-based asset managers.”
    He’s also gone back to his original playbook with a familiar partner, the U.S. government, pursuing deals to buy loans with assistance from the Federal Deposit Insurance Corp., which has $37 billion of assets seized from failed banks. He has already completed eight, including one in January in which Colony bought a 40 percent stake in a company set up with the FDIC to hold $1.02 billion of unpaid commercial real estate loans for 22 cents cash on the dollar.
    Barrack says Colony is focusing on smaller, unconventional deals after getting caught up in leveraged buyouts.
    “If you were to pick the hour, the minute that it could have been the worst investment ever, it was,” he says of the timing of his November 2007 Station Casinos buyout.
    “The LBO certainly couldn’t have occurred at a much worse time than it did, immediately preceding the crash in the Las Vegas market, which has gone on since the transaction,” says Grant Govertsen, a Las Vegas-based analyst at research firm Union Gaming Group LLC.
    The most glaring emblem of Colony’s miscalculations rises 800 feet above the New Jersey Turnpike, not far from the new stadium for New York’s Giants and Jets football teams. It’s the shell of an indoor ski slope, a main attraction at Xanadu.
    The 2.3 million-square-foot (214,000-square-meter) mall, named after the summer capital of Mongolian emperor Kubla Khan, was taken over by Colony and Steven Mnuchin’s Dune Capital Management LP in 2006, after the original developer, Mills Corp., ran out of money. It also features an indoor sky-diving facility and a theater for live concerts.
    Plans called for visitors to be schussing down Xanadu’s ski slope by mid-2009. The collapse of Lehman in September 2008 brought work to a halt seven months later.
    “We had a great team together and started leasing,” Barrack says. “Even the downturn was OK. What killed us is, Lehman went broke. We never envisioned our bank going bankrupt.”
    One potential lifeline is developer Stephen Ross’s Related Cos., which is in talks to partner with Colony on restarting construction, leasing and raising fresh capital. Even if Barrack can renegotiate the debt, it will be at least a year before Xanadu can open.
    To contact the reporters on this story: Jason Kelly in New York at;Jonathan Keehner in New York at

    Saturday, June 26, 2010

    Former regulator looks to capitalize on an industry’s struggles

    From bank regulator to buyer

    By Russell Grant

    The Atlanta Journal-Constitution

    1:55 p.m. Saturday, June 26, 2010

    For years, Patrick Frawley has been on the short list of turnaround artists that troubled banks call for help.

    Along the way, the 59-year-old former bank regulator and CEO-for-hire built a reputation for taking on tough turnaround jobs, and gathered a strong team of managers to help him fix struggling banks.

    Now Frawley has drawn up his own short list — of acquisition targets. Frawley is buying Georgia banks seized by the Federal Deposit Insurance Corp., joining other buyers that experts say are hoping to cash in big by retooling the state’s struggling banking industry.

    With backing from individual and private equity investors, his firm, Community & Southern Bank, has bought two banks so far this year in Carrollton and Ellijay, totaling 425 employees and $2 billion in assets. Frawley’s firm has since taken a break to clean up some of the messes that come with failed banks, but it could be hunting for new deals later this year.

    “We’re not in this thing to make a quick buck,” said Frawley, who splits his time between Smyrna and Huntsville, Ala. “At the end of the day, we want to have a real franchise.”

    That said, Frawley and other players are clearly hoping to profit from buying crippled banks at potentially steep discounts with the help of the FDIC, which often agrees to shoulder some of the risk.

    When the banking industry does recover someday, “the returns to investors will be very, very, very strong,” predicted Jeffrey Adams, managing director in Atlanta for investment banker Carson Medlin Co.

    The deal has “definite upside potential,” countered Frawley, but profits aren’t guaranteed. “There’s a lot of uncertainty.”

    A multi-phase career

    Frawley will be “incredible” in his new venture, predicted former bank director Neal Reynolds, because “he doesn’t panic” and the FDIC trusts him.

    Reynolds hired Frawley in 2007 for a doomed attempt to keep Alpharetta-based Integrity Bank from failing. Frawley’s venture could make him millions when the banking industry recovers, said Reynolds, now owner of an Atlanta marketing firm.

    “Rightly so. He’s been biding his time doing a great job,” said Reynolds.

    Indeed, the slow-burning wildfire rolling through Georgia’s banking industry seems to be just the kind of situation that Frawley has been preparing for his entire 37-year career.

    He is best known locally for his effort to rescue severely damaged Integrity Bank, which sank almost two years ago in a sea of bad real estate loans allegedly created by the bank’s previous management. Two former executives and a Florida developer were indicted on federal conspiracy, bank fraud and bribery charges last month.

    But long before Frawley again rolled into metro Atlanta to take on the Integrity job, he was laying the foundation in a multi-phase career, in which he built ties to scores of bank regulators, bankers and money managers.

    A fast starter

    Frawley grew up in the Washington, D.C., area, third of six sons and daughters of a homemaker and the owner of a commercial paint sales business.

    The family’s income was “middle class at best,” said Frawley. He started working in sixth grade and worked his way through college at Campbell University in Buie’s Creek, N.C.

    He continued the same focus as he began Career One — bank regulator — landing his first job out of college as a bank examiner with the federal Office of the Comptroller of the Currency.

    Frawley was soon promoted to national bank examiner, and more promotions followed. “I went anywhere there was an opportunity, and I told them I would move tomorrow,” he said.

    By 1983, after 10 years and six moves, Frawley was in Atlanta, where he headed bank supervision for the comptroller’s Southeastern region, covering nine states.

    After three years, Frawley, having hit the agency’s pay ceiling, jumped to the private sector. In 1986, he began Career Two: senior credit officer at what was then Atlanta’s Citizens & Southern bank.

    While the bank eventually became part of Bank of America, Frawley rose through the ranks to treasurer and then head of regulatory affairs.

    “That was a very pleasant job because several of the examiners used to work for me or with me at the OCC,” said Frawley.

    By 2002, Frawley was ready to try something else.

    Turnaround expert

    Career Three — bank troubleshooter — began when he got a call from a lawyer friend representing a troubled bank near Birmingham. Community Bancshares’ longtime CEO, Ken Patterson, was close to being indicted for fraud; the bank needed someone to step in and fix the bank, Frawley’s friend said.

    Frawley wasn’t sure he wanted the job, but he paid a visit. Within months he was its CEO.

    Frawley said the bank faced “the typical kinds of things that I had seen in problem bank after problem bank, all of which were fixable.”

    He replaced the bank’s managers, smoothed things over with regulators, raised capital and settled more than two dozen lawsuits. By 2006, he had reached a deal to sell the bank for more than $100 million.

    Soon, he got a call from Integrity Bank’s board. They wanted Frawley to do the same thing there, said Reynolds, the former Integrity director.

    The bank was struggling from losses on soured real estate development loans, and the board had been shopping for someone to replace bank founder and CEO Steve Skow.

    By then, Reynolds said, he was talking almost daily to bank regulators. After meeting Frawley, he ran the CEO candidates’ names by them.

    “When I mentioned his name, they said: ‘Yes, we know Pat Frawley.’ ... They were very impressed,” said Reynolds.

    Surprises at Integrity

    When Frawley came on board in September 2007, soon bringing his management team with him, he did “an incredible job,” said Reynolds. He sent daily reports to the FDIC and confidently put together a rescue plan “when bombs are falling all over the place.”

    Frawley said he worked with the same FDIC case manager who monitored his turnaround efforts in Alabama. “It was like old times,” he said.

    But the Integrity turnaround didn’t work. The FDIC seized the bank a year later — the first of more than three dozen Georgia banks the agency has since closed.

    Frawley said he knew within a few weeks that Integrity’s problems were much worse than he had expected.

    The bank’s directors “were stand-up guys and totally truthful,” he said, but “they didn’t know the total condition of the bank because management wasn’t giving them the kind of information they needed.”

    Because of a loophole in state banking law — since closed — Integrity Bank had exceeded its $25 million legal lending limit with more than a dozen borrowers. One borrower owed $85 million.

    “I was just blown away by that,” said Frawley.

    The bank also was masking its problem loans.

    “It was a lot worse than what I” expected, he said. “I thought about leaving but I decided to hang in there ... because I didn’t create the problems. ... I wasn’t worried about it damaging my reputation.”

    From fixer to owner

    After Integrity Bank failed, Frawley continued to get calls from other struggling banks. He consulted with the ones he thought he could help, but turned aside those he didn’t think would make it.

    “Life’s too short to do that when you know you’re not going to be successful,” he said.

    After about six months, Frawley was ready for Career Four: bank owner. As more of Georgia’s banks began failing, “I started seeing these banks being acquired by out-of-state banks,” said Frawley.

    He gathered some of his former colleagues, got approval from regulators to charter a new bank, and raised $255 million from investors such as New York private equity fund Lightyear Capital. Then he waited to see what soon-to-fail banks the FDIC put out for bid.

    Community & Southern Bank, Frawley’s venture, bought the former First National Bank of Carrollton in January and Ellijay’s Appalachian Community Bank in March.

    Following the two deals, Community & Southern landed on a recent list of Georgia banks with high Texas ratios, an informal measure of the financial strains a bank faces.

    “The Texas ratio is meaningless for us,” said Frawley, because the FDIC, as it has with numerous banks, assumed much of the risk for potential losses on the failed banks’ loans and foreclosed properties.

    Adams, the investment banker, thinks Frawley’s group is one of only a handful of firms in Georgia that is well situated to capitalize on such deals as the state’s flock of nearly 300 banks continues to shrink. He’s in the right place, has access to capital, a bank charter and experience fixing broken banks.

    “I think he’s clearly setting up his bank to be one of the consolidators,” said Adams.

    Friday, June 25, 2010

    Small Bank View of Reform: ICBA Statement on Conclusion of House-Senate Conference on the Financial Reform Bill

    Washington, D.C. (June 25, 2010)—Independent Community Bankers of America (ICBA) Chairman Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich., and Camden R. Fine, ICBA president and CEO, issued this statement today following the conclusion of the House-Senate Conference on the financial reform bill:

    “Congress has nearly completed work on the most monumental financial regulatory overhaul legislation since the Great Depression. This financial and economic crisis has clearly demonstrated that reform of Wall Street is needed to safeguard our financial system, the nation’s taxpayers and our communities from a future catastrophe. ICBA has grave concerns with some sections of the final bill and opposed them throughout the process, but we are pleased that the bill also includes many other provisions that we have long advocated.

    “While the bill could go further to restructure megafirms and hold nonbanks that were the root cause of this crisis accountable, it does include powerful language that will help rein in these culprits from their excessive size and risks they pose to our financial system. In particular, ICBA is pleased that Congress adopted a version of the Volcker Rule that will bar megabanks from propriety trading and investing in or sponsoring a hedge fund or private-equity fund. Ultimately, this will help prevent major financial firms from putting customers, taxpayers and the financial system at risk by conducting risky activities solely for their own profit.

    “ICBA also appreciates that Congress recognizes the differences between Main Street community banks and Wall Street by ensuring megabanks pay their fair share for the risk they pose to the FDIC’s Deposit Insurance Fund (DIF), and ultimately our entire financial system. The change in the deposit insurance assessment base, which ICBA advocated, will save community banks roughly $4.5 billion over the next three years—capital that will be reinvested in the communities they serve. ICBA is pleased that other measures such as the permanent increase in the FDIC insurance limit to $250,000 and the extension of the Transaction Account Guarantee (TAG) program for an additional two years were also included in the bill. Many other sections of the bill recognize the value of a tiered regulatory system that differentiates between small and large banks. Additionally, ICBA is pleased that conferees modified an amendment that would have prevented all financial institutions from including trust-preferred securities in their Tier 1 capital. With the modification, bank holding companies with less than $15 billion in assets, and institutions organized as mutual holding companies, will be able to grandfather the TruPS they issued before May 19, 2010. These provisions will go a long way to help community banks continue to do what they do best—serve the needs of their local communities.

    “However, ICBA is gravely disappointed that debit interchange language was included in the bill. This ‘compromise’ proposal will only compound the harm to consumers and Main Street by imposing new and onerous burdens on debit card issuers, and will fail in any way to adequately account for the significant operational costs and losses incurred by community banks due to fraud and merchant data breaches. Now is not the time to change a proven interchange system just so big-box merchants can reap higher profits and pass their costs of doing business on to America’s consumers. Consumers have already suffered enough thanks to this economic crisis that was triggered by too-big-to-fail.

    “ICBA also continues to have serious concerns about a separate Consumer Financial Protection Bureau (CFPB). While we appreciate that community banks will have some exemptions from the proposed CFPB, we fought hard for further changes and are disappointed that further changes were not included in the legislation. Community banks have always viewed consumer protection as a cornerstone to their business model, so it makes sense that the CFPB focus on those too-big-to-fail and shadow institutions that were at the heart of the financial crisis.”

    Regulators close three banks, total now 86


    7:34pm EDT

    WASHINGTON (Reuters) - Regulators on Friday closed three small banks, the Federal Deposit Insurance Corp said, bringing the tally of total U.S. bank failures so far this year to 86.

    Even as an economic recovery buoys profits for big banks, smaller banks continue to struggle with bad commercial real estate loans.

    The FDIC has said it expects failures will peak in the third quarter, but warned this week that economic threats could cloud recovery for the bank industry, such as concerns about the economic effects of the BP oil spill and European debt problems.

    Last year, 140 U.S. banks closed, compared with 25 in 2008 and three in 2007.

    On Friday, the FDIC said Peninsula Bank of Englewood, Florida was closed, with $644.3 million in assets. Premier American Bank in Miami will assume the deposits of the failed institution.

    In Savannah, Georgia, First National Bank was shuttered. It had about $252.5 million in assets. The Savannah Bank, National Association, agreed to assume its deposits, the FDIC said.

    In New Mexico, regulators closed High Desert State Bank in Albuquerque, which had about $80.3 million in assets. First American Bank, in Artesia, New Mexico, agreed to assume its deposits.

    The newest failures on Friday were expected to cost the FDIC's insurance fund a combined total of $284.6 million.

    The FDIC said this week it expects bank failures to cost its insurance fund $60 billion from 2010 through 2014.

    (Reporting by Roberta Rampton; Editing by Gary Hill)

    A Very Quiet Month: June 2010 Bank Failure Summary

    In June 2010, only 8 US banking institutions failed with a total of nearly $4.9 Billion in combined assets. The FDIC entered into loss-share transactions (an FDIC arrangement with acquiring bank for FDIC to assume a share of future loan losses) in 6 of the failures covering a total of $3.2 Billion of failed bank assets or 67% of the June failed asset balance. The June cost to the Deposit Insurance Fund ("DIF") was $837.5 Million (or 17% of the failed bank asset total).

    Thursday, June 24, 2010

    PE Bank Strategy: Acquire lenders that are still in business


    Moelis, Carlyle Target Live Lenders as FDIC Deters Dud Buyouts

    June 24, 2010, 12:18 AM EDT

    June 24 (Bloomberg) -- Buyout firms thwarted by regulators from taking over failed banks have found a solution: Acquire lenders that are still in business.

    By Dakin Campbell and Jonathan Keehner

    Moelis Capital Partners LLC, Thomas H. Lee Partners LP and the Carlyle Group are among firms that agreed to buy stakes in at least five U.S. banks since April. While most are small, with assets of less than $1 billion, their status as banks means they can buy more distressed lenders that can be merged and sold later -- a tactic that made some private-equity investors billionaires in the 1990s.

    Buyout firms are changing targets in part because the Federal Deposit Insurance Corp. is reluctant to let them control collapsed banks on concern they’ll take on too much risk with insured deposits. Even as banks failed this year at the fastest pace since 1992, the agency awarded private investors just two of the 83 lenders that it shuttered. The rest were sold to banks that already had charters and track records.

    “Private-equity firms are interested in open-bank deals out of frustration,” said Konrad Alt, a San Francisco-based consultant at Promontory Financial Group who was a regulator at the Office of the Comptroller of the Currency from 1993 through 1996. “They are anxious about missing their opportunity.”

    Bank deals offer a chance for private-equity firms that must spend about $500 billion in unused capital or risk being forced to return the funds to investors and forgo fees they charge for managing and selling assets. The investments could also defray costs to the FDIC insurance fund, making it less likely the agency would have to increase its levy on banks or draw on the U.S. Treasury Department’s $500 billion credit line. In the past 13 months, the FDIC has levied a special assessment and asked banks to prepay three years worth of fees.

    Bonderman Erased

    Buyout firms got a warning about the risks of taking stakes in operating banks after David Bonderman’s TPG invested in Washington Mutual Inc. in 2008, only to get wiped out, losing $1.3 billion, five months later in the biggest banking failure in U.S. history. WaMu was later acquired by JPMorgan Chase & Co. After that, the buyout firms tried to buy failed lenders and persuade the FDIC to share losses on loans, something the agency has agreed to do in acquisitions by banks.

    Sheila Bair’s FDIC did allow a group including Carlyle and the Blackstone Group LP to buy the failed BankUnited Financial Corp. last May and inject $900 million. The regulator deterred more purchases by requiring private-equity firms to maintain higher capital ratios and prohibiting sales of banks for at least three years. The only private investor that navigated the process this year was Bond Street Holdings LLC, which bought two failed Florida banks in January.

    Management Revamp

    One advantage of funneling initial investments into open banks is that quality managers remain while poor management teams are removed, Michael Krimminger, a special adviser for policy at the FDIC, said in a June 11 interview.

    “The FDIC doesn’t have to worry about whether an open bank can hit the ground running,” Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut Law School in Hartford.

    Among recent transactions, Angelo Gordon & Co., the New York-based firm that raised $1.1 billion to invest in distressed firms, asked regulators for permission to invest in Georgia’s Hamilton State Bancshares Inc. Hamilton, with deposits of $227 million at six branches, plans to use a portion of the private- equity money to buy “failed or distressed depository institutions,” according to a statement.

    At Patriot Financial Partners, a Philadelphia-based firm scouting for open banks, the aim is “to find good management teams in markets where they can grow,” managing partner Kirk Wycoff said in a June 11 interview.

    Gerald Ford’s Investment

    “By providing banks with additional private capital, we can help them resolve loans and take advantage of consolidation opportunities,” said Wycoff, whose firm is backed by Philadelphia real estate investor Ira Lupert.

    After bidding unsuccessfully on several lenders seized by the FDIC, billionaire investor Gerald J. Ford decided in April to invest $500 million in Pacific Capital Bancorp, a money- losing lender with 48 branches based in Santa Barbara, California.

    Moelis Capital Partners LLC, the private-equity arm of Kenneth Moelis’s boutique investment bank, applied to buy a stake in Opportunity Bank, a Texas lender with assets of $64 million, according to the Federal Reserve’s website.

    In May, THL Partners agreed to pay $134.7 million for a stake in Sterling Financial Corp., a Spokane, Washington-based lender. Funds backed by Carlyle and Anchorage Advisors LLC agreed last month to buy about 46 percent of Norfolk, Virginia- based Hampton Roads.

    Treasury Approval

    In at least three cases, the shift in tactics requires approval from the Treasury, which owns stakes in small banks through its injection of U.S. bailout funds. Capital infusions for Pacific Capital, Hampton Roads and Sterling are all contingent on the government writing down its investment.

    The operating-bank transactions mean “there is less reliance on the loss-sharing arrangements from the FDIC,” said Jay Langan, who leads Deloitte & Touche LLP’s financial services merger & acquisition group.

    Regulators are less likely to oppose investor windfalls as long as government asset guarantees aren’t involved, said Steven Kaplan, a finance professor at the University of Chicago’s Booth School of Business. “It’s much less likely to be politically perilous,” he said.

    Small Banks, Big Risks: Hidden Losses and Looser Accounting Rules Plants Seeds of Extended Banking Malaise.

    JUNE 24, 2010

    By DAVID WESSEL, Wall Street Journal

    Congress is planting the seeds of the next big bank bailout.

    Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week would allow all but the 100 largest banks to pretend they haven't made bad loans. The goal is to prompt them to lend more readily to small businesses.

    The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately.

    This wink-wink accounting, which would allow banks to act as if they have bigger capital cushions than they do, is a remake of an old movie: the savings-and-loan horror show of the 1980s and the Japanese banking monster of the 1990s.

    Allowing a bank that is broke or near-broke to pretend otherwise in the hope that temporarily depressed commercial real estate prices will eventually rise sounds nice. But history shows that too many such bankers realize the only survival strategy is to make more risky loans and pray they're paid back. If they aren't, well, the government deposit-insurance fund, not the shareholders, gets the tab.

    Treasury Secretary Timothy Geithner thinks this is an awful idea. "Could increase costs for the taxpayer by raising the likely losses from future bank failures," he wrote to House leaders. Federal Reserve Chairman Ben Bernanke thinks this is an awful idea: "Banks that are allowed to carry these losses do not engage in sound lending."

    Comptroller of the Currency John Dugan thinks this is an awful idea: "Will undermine the efforts of … regulators to shore up investor confidence in the banking system." Sheila Bair, chairman of the Federal Deposit Insurance Corporation, thinks it is an awful idea: "Encourages … executives to take excess risks with the hope that these bets will pay off. … The taxpayer remains liable for any losses, but the shareholders profit if these investments result in gains."

    "When I get a call from Tim Geithner or I hear from Ben Bernanke, you bet I sit up and take notice," says Rep. Ed Perlmutter (D., Colo.), chief sponsor of the provision. "But after all the testimony I've heard—after my own experiences as a lawyer representing banks, insurance companies, real estate companies, which gives me some perspective that maybe they don't have—I think this is an approach that we need for these smaller bankers and smaller businesses, to get everybody back on their feet and creating jobs."

    "Those aftershocks are still being felt by small businesses and small banks all across the country," Mr. Perlmutter says.Mr. Perlmutter and his allies—Democrats Luis Gutierrez of Illinois, Steve Kagan of Wisconsin and Ron Klein of Florida—don't want to cause a costly banking crisis, of course. They are responding to yelps from small businesses that say they can't get credit and managers of small banks who say they can't make loans because bank examiners are forcing them to value real estate at today's improbably low prices. Small banks, they say, didn't cause the global financial earthquake, but they felt it.

    The administration's response: Put $30 billion in taxpayer capital into these community banks so they have the wherewithal to lend. The House has OK'd this; the Senate hasn't.

    That's not enough for the small-bank lobby, whose power derives from the presence of at least a few community banks in every congressional district.

    "We're talking about banks that are well run, well managed, victims of their local area where the real estate market has just tanked," says Cam Fine of the Independent Community Bankers of America. "Poorly run banks are going to fail anyway," he says, and this won't change that.

    Backers cite precedent, a 1980s analog. But that initiative was restricted to really small banks, deemed "well-managed" by regulators, that lent heavily to farmers. Only 334 banks with total assets of $13.5 billion participated, far fewer than would be eligible under the House bill. (Of those, the FDIC says, 20% failed eventually.)

    Here's another precedent: The Congressional Budget Office estimates that more than half the $212 billion (in today's dollars) cost of the savings-and-loan rescue is attributable to letting thrifts live instead of closing them when they became insolvent.

    The political dynamic here is clear. Big banks are popular villains; small banks are heroes. Big banks—think Citigroup Inc.—are too big to fail; small banks aren't. Big business arouses suspicions among the public; small business seems friendly and entrepreneurial. Big companies can borrow from the bond market when banks are picky; small companies cannot, and thus can't expand and hire readily if they want to. Elected politicians want to do something, anything, to help.

    But pretending helped get us into this mess: pretending that putting enough subprime loans into one security made it AAA, that people without incomes could make mortgage payments, that house prices would never fall across the country, that the CEOs of gargantuan financial institutions could manage risks they didn't fully understand, that supposedly sophisticated investors understood what they were buying.

    Pretending that banks haven't lost a bundle on commercial real estate loans does not seem a smart way out of this mess.

    Write to David Wessel at

    Wednesday, June 23, 2010

    Atlanta leading nation in problem CMBS loans

    Friday, June 18, 2010 | Modified: Monday, June 21, 2010, 2:42pm EDT

    Atlanta Business Chronicle - by Douglas Sams Staff Writer

    Metro Atlanta has 226 problem CMBS loans — the highest total of any U.S. city.

    In May, metro Atlanta had more CMBS (commercial mortgage backed securities) loans in special servicing than Phoenix (215), Dallas/Fort Worth (210), New York (198) and Houston (169), according to Trepp Inc., the New York company that tracks troubled CMBS loans.

    A special servicer handles problem CMBS loans, which can include the possibility of imminent default on the debt.

    Metro Atlanta held this dubious ranking for much of the past year, according to Trepp. And the fact that Atlanta has more loans in special servicing than any other city is yet another sign the region is a poster child for risky real estate deals, insiders say. Georgia already leads the nation in shuttered banks, many the victims of toxic development loans.

    The issue took center stage at an Atlanta Real Estate Investment Advisory Council meeting June 10 that drew the biggest CMBS players in the field, including Berkadia Commercial Mortgage LLC (partly owned by Warren Buffett’s Berkshire Hathaway Inc.), Fitch Ratings and Atlanta-based Trimont Real Estate Advisors.

    In Atlanta, 98 loans secured by apartment complexes are in special servicing, followed by 69 loans secured by shopping centers, 46 by office buildings and 28 by hotels, according to data provided by Transwestern Commercial Services.

    The total balance of all the loans is $9.3 billion, according to Transwestern.

    Atlanta ranks eighth nationally in the loan volume in special servicing, according to Trepp.

    The CMBS issue stems from weak underwriting standards in the boom years between 2005 and 2007 and a 30 percent to 50 percent crash in property values since then. Many of those loans are now under water, and many building owners have less cash flow to work with.

    “The No. 1 issue is that values have fallen as vacancy has risen,” said Jay O’Meara, a senior vice president with the commercial real estate giant CB Richard Ellis Inc.

    “The average loan to value was up to 80 percent. When many owners didn’t put a lot of equity into their deals, there wasn’t much of a margin for error.”

    Nationally, much of the concern in on the nearly $70 billion in highly leveraged short-term loans originated at the height of the market, according to an analysis by Deutsche Bank.

    Many of those loans start to mature this year.

    Since 2005, CMBS debt helped finance the acquisition of downtown’s Peachtree Center, and Midtown’s One Peachtree Pointe and Campanile building.

    In recent months, each of the buildings has been transferred to special servicers.

    One Peachtree Pointe, developed by John Dewberry, was up for foreclosure. It has so far avoided going back to the lender.

    Wells Fargo & Co. foreclosed upon the Campanile building earlier this year.

    The latest notable Atlanta office building in special servicing is Powers Ferry Landing East. A nearly $50 million CMBS loan secured by the office complex was transferred to the special servicer LNR Partners Inc. June 11, according to Fitch Ratings.

    Trouble on the horizon

    There will be more CMBS woes to come. Many borrowers will be unable to get refinancing without injecting a large amount of equity. And, many are going to be unwilling to infuse equity into a loan that is already under water, according to Deutsche Bank.

    Nationally, about 4,560 loans have been transferred to special servicers as of May, representing $81 billion in loan volume, according to Trepp.

    The problems with CMBS speak to broader challenges facing a $3.4 trillion U.S. commercial real estate market suffering from high vacancy, falling rental rates and a weak job market.

    CMBS represents only about 25 percent of the commercial real estate debt market.

    Some help available

    Special servicers have been more apt to foreclose on distressed, signature commercial properties.

    So far, regional lenders have shown a willingness to keep non-peforming loans on their balance sheets, hoping that the economy will improve and that the properties will bounce back.

    The office sector remains the most vulnerable.

    The job market is not expected to improve much this year, putting more pressure on building owners.

    In the Atlanta office sector, about 10 percent of CMBS debt is being handled by special servicers — higher than any other city in the Southeast, O’Meara said.

    Real estate problem

    Cities with the most CMBS loans in special servicing

    Atlanta 226

    Phoenix 215

    Dallas/Fort Worth 210

    New York 198

    Houston 169

    Source: Trepp Inc.

    Tuesday, June 22, 2010

    Waning Gov't Support Reveals Weak Demand: Purchases of U.S. Existing Homes Unexpectedly Fall

    Bloomberg News

    June 22 (Bloomberg) -- Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline.

    Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

    The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.

    “Housing is extremely weak and vulnerable,” John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston, said before the report. “We’re heading into a soft patch.”

    Stocks fell following the report. The Standard & Poor’s 500 Index dropped 0.1 percent to 1,112.51 at 10:05 a.m. in New York. Treasury securities climbed.

    Existing home sales were forecast to rise to a 6.12 million rate, according to the median forecast of 74 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6.5 million. The group revised April’s sales rate up to a 5.79 million pace from the 5.77 million rate previously reported.

    From May 2009

    Purchases of existing homes increased 2.7 percent compared with a year earlier prior to adjusting for seasonal patterns.

    The median price increased 2.7 percent to $179,600 from $174,800 in May 2009.

    The number of previously owned homes on the market dropped 3.4 percent to 3.89 million. At the current sales pace, it would take 8.3 months to sell those houses compared with 8.4 months at the end of the prior month.

    Climbs in inventories have slowed in recent months, posing a risk for the market, Lawrence Yun, the group’s chief economist said in a press conference.

    Federal Reserve policy makers, who begin a two-day meeting today, are forecast to commit to keeping interest rates near zero to help wean the world’s largest economy off government stimulus. The hazard posed by the European debt crisis, joblessness and a lack of inflation add to the reasons why central bankers will focus on sustaining the U.S. rebound.

    Slowdown Looms

    Industry reports signal residential real estate is slowing. Housing starts last month dropped by the most since March 2009, and building permits, a sign of future construction, fell to a one-year low, data from the Commerce Department showed. The National Association of Home Builders/Wells Fargo confidence index for June fell by the most since November 2008.

    The number of mortgage applications filed to purchase houses dropped this month to the lowest level since 1997, according to data from the Mortgage Bankers Association.

    The Standard & Poor’s Supercomposite Homebuilder Index, which includes Toll Brothers Inc. and Lennar Corp., dropped 27 percent through yesterday since reaching a 19-month high on May 3. The broader S&P 500 Index was down 8.6 percent from April 23’s 19-month peak.

    Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said orders fell 17 percent in the quarter ended April 30 from a year earlier, and contract signings slowed in May, indicating the tax credit helped pull some sales forward.

    Builder Concern

    “The expiration of the federal homebuyer tax credit, the lack of job growth and a potential increase in foreclosures all pose risks to a housing industry recovery,” Ara K. Hovnanian, chief executive officer, said in a June 2 statement.

    Senator Harry Reid this month proposed extending the tax credit’s closing deadline from June 30 to Sept. 30 amid concern that a rush of buyers created too big a backlog for builders to complete projects in time. Senate Democrats on June 17 failed to get the 60 votes needed to move forward with the legislation that includes the proposal.

    The window of opportunity for the tax credit has already passed for purchases of new houses, which are tabulated at contract signings and are considered a timelier barometer of the market. A Commerce Department report tomorrow will show new home sales plunged 21 percent to a 400,000 annual pace last month, according to the median forecast of economists surveyed.

    Existing homes account for about 90 percent of the market.

    Builders are being hurt by competition from foreclosed properties that are hurting property values. Foreclosures jumped to a record for the second consecutive month in May as lenders stepped up property seizures, according to RealtyTrac Inc., an Irvine, California-based data seller.

    Cheaper borrowing costs are helping mitigate the damage. The average rate on a fixed 30-year mortgage was 4.75 percent last week, just shy of the record-low 4.71 percent reached in early December, according to data from Freddie Mac, the mortgage-finance company being supported by the U.S. government.

    To contact the reporter on this story: Shobhana Chandra in Washington at

    Monday, June 21, 2010

    When a Bubble Fixes a Burst Bubble: Home Loans Get Easier For Spaniards


    JUNE 21, 2010


    Spain has one of the world's most-troubled housing markets, yet some buyers are suddenly able to get mortgages with 100% financing, and developers are building new homes on empty lots despite a huge glut.

    The reason: Spain's banks took possession of a large inventory of homes, buildings and land two years ago, forgiving the debt in hopes of heading off defaults. The plan was to resell the properties when the market bounced back and evade the worst impact of the looming housing crisis.

    But Spain's housing market has only gotten worse, and now the bill is coming due as the banks labor under the weight of an estimated €59.7 billion ($73.8 billion) in real-estate assets on their books. Under pressure to make further markdowns on the assets by their main regulator, the Bank of Spain, many banks are now scrambling to unload the properties as quickly as possible.

    In some cases, that means offering deals to consumers that are suspiciously like those that got the global housing market in trouble in the first place. The tactics include not just 100% loans, but also low initial teaser rates for buyers or initial payment deferrals for as long as three years.

    At the same time, banks that own big plots of unbuilt land are announcing plans to build new houses to give the illiquid lots more value, despite the country's estimated glut of one million empty homes.

    "On the one hand, they are selling the properties that already exist, and on the other, they are building houses," said Fernando Encinar, the director of research at, a Spanish real-estate website.

    The banks making such financing offers, which range from giants like Banco Santander SA to Spain's small regional banks, say they are for primary homes and only available to credit-worthy buyers.

    To be sure, such financing accounts for a small portion of the Spanish mortgages; 81% of mortgage loans to households in Spain have a loan-to-value ratio below 80%, according to March data from Bank of Spain. The higher the loan-to-value ratio, the riskier the mortgage is considered to be.

    Some analysts, however, suspect the strategy is simply kicking today's housing problems into the future. "They're making a bet," said Alfonso de Gregorio, director of wealth and fund management at Gesconsult, a Spanish fund manager. "Wait for the economic crisis to resolve itself, push forward the problems by three or four years, and try not to let it show too much on the bottom line."

    Others worry that the generous financing, which helps maintain the prices, is muddying the long-term picture for a sour Spanish housing market. Unemployment in Spain is currently 20% and is likely to rise with the austerity measures recently announced by the government of Prime Minister Jose Luis Rodriguez Zapatero. A recent Standard & Poor's report said that housing prices, which have fallen 16% from their peak in 2008, could fall another 12%.

    "In other countries, the prices have adjusted significantly," said Rafael Repullo, professor of economics at the Center for Monetary and Financial Studies in Madrid. "The sooner they adjust in Spain, the better."

    Two years ago, debt-for-asset swaps were seen as a way for banks to get ahead of the housing crisis bearing down on them. The program usually targeted developers who hadn't yet missed payments, but who the bank judged would have problems over the long term. Banco Santander was one of the first to aggressively pursue a debt-for-asset program two years ago. It now holds €4.2 billion worth of these acquired assets, with loan-loss provisions on 33%. Competitors made similar deals.

    But last month, offloading such properties became more urgent as the Bank of Spain unveiled proposals that would require banks that haven't already to set more funds aside against potential losses on these assets. This gives the banks a choice: take more hits in the coming months or unload the assets into a difficult market.

    The Bank of Spain wants "banks to be banks, and not real-estate companies," said Javier Ariztegui, deputy governor, in a speech Friday.

    He said it is reasonable that banks use the tools at their disposal to minimize losses, but that doesn't mean they should postpone recognizing them.

    Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lenderBanco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well.

    "Need a home? Now is the moment!" says Caja Madrid on it website, where it also advertises financing options and special offers, such as an apartment in the small city of Manresa, near Barcelona, for €247,000.

    "Escape your old home!" says the site of Valencia-based savings bank Bancaja, which advertises no payments for as long as three years at the start of the mortgage.

    Such programs are having some impact. Santander sold 2,045 of the 2,745 homes it has placed on sale through its Altamira subsidiary since January, 2009, said a spokesman. Caja Madrid said it sold 10 times the amount of properties in the first five months of 2010 compared with a year earlier.

    Meanwhile, to grapple with illiquid empty lots on their books, banks such as Caixa Catalunya, Banco Sabadell SA and Banco Popular SA are working with developers to build cheap housing on the land to boost its value. In April, Caixa Catalunya announced plans to build 400 apartment units on empty lots in Madrid, and 100 more in Barcelona, through Procam, its property-management subsidiary. Sabadell is in talks to build public housing on some land in Barcelona, and eventually sell it to the local government.

    "You have to find different exit strategies, and how to get your best return on the land," said a Sabadell spokesman.

    Write to Christopher Bjork at