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Monday, July 14, 2008

What Happens When a Bank Fails -- My Experience




I have two sets of personal experience dealing with bank failures. I thought my experiences might prove somewhat helpful in understanding the closure of Indymac Bank and the theoretical possibility of more closures in the near term.

In the late 1980's I managed the Special Assets Department of a national bank in Denver. Our bank was on the FDIC's Watch List of troubled banks. Our liquidity was low and we had very limited loan making ability. Everybody knew our bank would either be sold by its owner or that the FDIC would close it. For well over a year various potential purchasers did their due diligence to identify and distinguish performing assets from problem or non-performing assets. The FDIC was in the bank during the same time as well as it prepared for its presumed takeover.

Takeovers normally occur around 4:00 PM on Friday afternoons. Around 11:00 AM on the day when our bank was to get shut down by the FDIC the president of the bank held a meeting of all bank employees and thanked them for their services and explained how the presumed shutdown would occur and what would happen to the employees. At 4:00 PM the suits (FDIC officials and attorneys) showed up with briefcases in hand and walked in to shut the place down. A meeting ensued in the president's office. The suits walked out the front door to the TV news cameras waiting to hear the announcement that the bank had been closed. Didn't happen.

The bank was owned by a man who had made Billions in oil. His name and reputation were associated with the bank. He made a last minute cash infusion that re-established enough liquidity to keep the bank afloat until it could be sold. And that is what happened about a year later.

Fast forward to the summer of 1990 when I joined the Resolution Trust Corporation (RTC), the federal government agency formed as an offshoot of the FDIC to manage the shutdown of failed savings and loan associations.

As I recall the way things occurred the Comptroller of the Currency identified the S&Ls that were in trouble and it made the decision to "resolve" or close those institutions. The RTC knew which S&Ls would be closed but not the specific date. There were so many institutions that it was impossible to do every "bank" in one fell swoop.

RTC employees called "managing agents" were assigned to the bank to learn bank operations and identify assets. The process is laborious and I am not writing a book. A managing agent might have been a former senior level FDIC official or a senior officer in a large bank or thrift. A managing agent would be the defacto CEO of the thrift once the bank was closed. The managing agents often "lived" in the banks for months before the day we actually showed up to shut the old bank down. Other outside contractors, such as Coopers & Lybrand or Arthur Andersen, would perform due diligence and scrutinize the assets and liabilities so that when the resolution date occurred, a potential purchaser or purchasers would have a credible list of assets available to purchase.

Once closure date was known worker bees such as myself would "visit" the bank prior to closure to identify assets for which we would be responsible. The mission of the RTC was to shut down the failed thrifts, not to manage them for years to come. The banking operations were to continue in without interuption to maintain the value of the assets.

On the fateful Fridays we would show up in suits at the appointed time and get the glares from the disheartened employees as they saw their old lives abruptly change. The RTC retained most of the employees on for the short term basis while the assets were sold. The RTC would typically re-open the failed S&L on Monday with an almost identical name with the appendage "Federal Savings Bank or FSB" to distinguish the new entity from its former self.

The RTC usually had a "suitor" or an "acquiring bank" in hand to purchase the cash deposits and "banking" operations of the old bank. In reality the cash constituted liabilities so the RTC paid the acquirer to take on the responsibility. Again that process is way too involved to discuss here. The Western Regional Office of the RTC where I worked sold many of the failed thrifts to Bank of America. And I consider the purchase of all of those failed thrifts as a significant factor in the explosive growth of Bank of America during the 1990's.

The RTC Operations Department did massive conversions of bank loans from their old accounting and reporting functions to the universal RTC system. Again, this is what I recall. I was never a "loan guy" so if I err in my report, forget it. Notices were mailed to borrowers telling them to make loan payments to a new loan servicer. Eventually, the loans were securitized and sold. But the loans were not lost or forgotten. If you happened to have a mortgage with Indymac Bank do not stop making payments. Do not listen to people who do not know what they are talking about. Your credit is valuable. Don't trust people who tell you to do dumb things! You are only hurting yourself and your credit if you do.

Eventually the assets were sold or transferred and the managing agents came back to Denver only to get re-assigned to another failing institution.

The procedures the RTC used are basically what the FDIC use because the FDIC set up the RTC to be run basically the same way.

The process of what happened on Friday with the closure of Indymac Bank is different than a typical FDIC closing because it reportedly came as a surprise to everyone. Indymac Bank was not on the Watch List, meaning it was not being scrutinzied for possible bank closing. It is my understanding that the run on the bank deposits created the liquidity crisis that required the closing. Because the Indymac Bank closing occurred so abruptly the FDIC did not have a "suitor" or "acquiring bank" in place. And since Indymac Bank was so large it may be difficult to find one suitor to buy all of the assets.

The FDIC is organized and they have done lots of bank closings. The FDIC is not FEMA. The FDIC has a new website set up to explain exactly how operations will continue. CLICK HERE to view. For would-be buyers of foreclosed homes in Key West or elsewhere do not think you are going to get a "deal" because of bumbling "Feds".

2 comments:

Toronto real estate agent said...

This is one of the most interesting posts I've read. The fact that you as a realtor have so much experience with saving and loan institutions must be quite rewarding in the job as a realtor. The view from both sides is very interesting, and as a Toronto real estate agent I would like to find out more about these procedures happening in the financial sector.

Gary Thomas said...

Saturday, July 26, 2008 from CNN.com

2 more banks close. read this:
http://www.cnn.com/2008/US/07/26/fdic.banks.ap/index.html

Just like I wrote, the feds had a suitor in waiting on this one.

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Gary Thomas in a Nutshell

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Key West, Florida, United States
I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.