F.D.I.C. had seized Silverton last month, creating a bridge bank to run the institution while it sought a buyer

TO BE NOTED:

No Buyout for Silverton as Bank Is Closed

Update | 8:29 a.m. Federal banking regulators have shuttered Silverton Bank, a small, failed Atlanta “bank of banks,” instead of selling it to a group of private equity firms, a person briefed on the matter told DealBook.

The Federal Deposit Insurance Corporation sent a letter to Silverton’s customers — mainly small community banks — on Thursday, telling them it had closed the institution down, this person said.

The move represents a bump in the road for buyout firms seeking to move into the banking sector, a push that seemed to be underway this year. A group of private equity firms, led by the Carlyle Group, had been in talks with the F.D.I.C. to acquire Silverton.

“We have to do what is least costly to our insurance fund and to shut it down for good was less costly than the bids we received,” a spokesman for the Federal Deposit Insurance Corporation told The Financial Times.

Earlier this year, IndyMac and BankUnited Financial were taken over by groups of private equity investors.

The closure of Silverton is likely to be less disruptive than those of other institutions. It accepts only deposits from other banks, not retail deposits. Those banks, primarily small community institutions, can move their deposits elsewhere with relatively less fuss.

The F.D.I.C. had seized Silverton last month, creating a bridge bank to run the institution while it sought a buyer.

– Michael J. de la Merced"

it could not persuade enough banks to sell off their bad assets

TO BE NOTED: From the NY Times:

"Plan to Help Banks Clear Their Books Is Halted

By EDMUND L. ANDREWS

WASHINGTON — The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program. Scheduled to start later this month, the pilot program was aimed at selling off $1 billion in troubled home mortgages.

F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.

“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.

But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans.

“What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

The program was one part of the Treasury Department’s broader Public Private Investment Program to get bad assets off the books of major banks.

The other big component, which Treasury officials say is still being prepared, is aimed at having the government team up with private investors to buy mortgage-backed securities.

No one knows exactly how many losses are buried in the troubled mortgages on banks’ books, but some analysts estimate that the unrecognized losses total more than $1 trillion. Under accounting rules, banks do not have to write down the value of most mortgages unless they sell them or they fall delinquent.

Recent government policies have further reduced the pressure on banks to sell. The Federal Reserve’s “stress tests” on the 19 biggest bank holding companies concluded that only one — GMAC, the former financing arm of General Motors — needed so much additional capital that it would have to turn to the government for a new cash bailout.

In addition, financial regulators relaxed the so-called mark-to-market rules, making it easier for bank holding companies to refrain from writing down the value of assets for which there is no market. That change allowed many big banks to report higher profits, and thus higher capital, for the first quarter of this year.

The Federal Reserve also is pumping hundreds of billions of dollars into mortgage-backed securities, and into other kinds of consumer and business lending. Starting next month, the Fed plans to offer cheap financing for investors who want to buy “legacy” securities backed by mortgages on commercial real estate.

Diane Casey-Landry, chief operating officer for the American Bankers Association, said the lack of interest in selling the assets stemmed from fears that Congress would impose restrictions on executive pay and other issues for banks and investors in the program. “There’s a lot of uncertainty out there in terms of how the program would operate,” she said. “What we would rather see is the market working.”

the pressure will cause “hundreds of banks” to be closed and liquidated.

TO BE NOTED: From Reuters:

"Here comes another set of dodgy U.S. loans

Post a comment (28)

By: James Saft

Tags: General, adc, bank loans, banking system, builder developer, deposit insurance corporation, federal deposit insurance, federal deposit insurance corporation, foreclosures, government aid, problem banks, The Great Debate

– James Saft is a Reuters columnist. The opinions expressed are his own –

Banks in the U.S. face a new source of write-downs and failures in the coming year as loans made to developers to finance residential and commercial property development rapidly go bad.

And as these loans are old-fashioned and concentrated in smaller banks, their fate is particularly interesting as it indicates that issues with the banking system go far deeper than the so-called “toxic assets” belonging to the largest lenders that have thus far gotten most of the attention and government aid.

They are also a great illustration of the difficulties of stopping a housing and deleveraging crash.

Called Acquisition, Construction and Development (ADC) loans, they total 8.4 percent of all bank loans, just below a 30 year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial and office space.

And because they are dependent on a reasonably healthy real estate market — someone who is willing to buy or rent the properties — when projects are completed, they are now in deep trouble.

“Everyone in the media is focused on consumer foreclosures. What they’re not focused on is the builder developer foreclosures which are only in the early innings and which will continue to wreck havoc as these assets are liquidated at depressed prices. Until they are cleared there can’t be a stabilization in home prices,” said Ivy Zelman, a longtime housing analyst at Zelman & Associates, who thinks the pressure will cause “hundreds of banks” to be closed and liquidated.

“The Federal Deposit Insurance Corporation doesn’t have the funds to deal with all this. They don’t have the scalability to deal with all these problem banks. They can’t examine the smaller banks fast enough,” she said.

Zelman estimates that U.S. banks risk having to charge off an additional $84 billion of ADC loans between now and 2013, equal to a hit of nine percent of Tier 1 capital.

That is damage banks can ill afford just about now, given the rising trend in delinquencies on consumer and home purchase loans, not to mention a deteriorating outlook for commercial loans.

Non-performing ADC loans hit 8.5 percent at the end of the year, up from just 3.2 percent the year before. Loans delinquent between 30-89 days are also up, by 25 percent in the quarter to 2.9 percent. And developers, struggling to try to survive without reliable cash flow from sales, are drawing down on commitments from banks that are not secured. The percentage of unsecured construction loans drawn down hit 73 percent, above the peak seen during the 1990s real estate slump and a crucial sign of builder distress.

FDIC FUNDING CRUNCH

Of particular concern is the way in which ADC loans are concentrated in smaller and community banks, which tend to have long and deep relationships with local developers. ADC loans account for 47 percent of non-performing loans at small banks as against 14 percent at larger banks.

And you can’t blame mark-to-market or toxic securitizations for these losses. They are considered held-to-maturity and are not typically included in any complex securities.

Chris Whalen of Institutional Risk Analytics, which specializes in bank risk analysis, sees ADC loans as part of the difficulties banks face with commercial real estate, and believes that regulators will be forced to get tough with banks in forcing them to write down exposure to struggling firms and deals.

“It will be subject to an impairment test and than they will have to start charging it off. The regulators are already beginning to force the community banks,” he said.

And while smaller banks being closed by the FDIC may not get the attention of a bailout of a big bank like Citigroup, every failure depletes resources and hurts credit availability.

The FDIC fund fell by almost half in the fourth quarter alone, touching $18.9 billion as it set aside a large portion of money for actual and expected bank failures. The FDIC has said it needs a bigger cushion but moves to impose special fees on healthy banks will inevitably hit profitability and credit availability.

Democratic Senator Christopher Dodd, chairman of the Senate Banking Committee, is moving to introduce legislation that would more than triple — to $100 billion — the FDIC’s line of credit with the Treasury Department.

But even beyond bank failures, ADC loan woes point to the intractable problems of a real estate bust.

Banks, while trying to reduce their overall exposure to these loans, have been reluctant to pull the rugs from under borrowers because, as with a house foreclosure, they end up owning a hard-to-sell underlying asset. But more foreclosures are coming, and with them fire sales as banks compete with those developers who still are in business and with homeowners and with foreclosure sales to liquidate inventory.

That will drive land and real estate prices down further and suck others into what amounts to a negative self-reinforcing cycle.

That’s true for housing, true for banking and true for the economy.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –"