Key West Bank Seized & Sold

The Office of Thrift Supervision seized Key West Bank, FSB, at the close of business on Friday, Marcy 26th. The OTS then sold many of the assets to Centennial Bank's parent company, Home BancShares Inc., which acquired the former Marine Bank, about a year ago. CLICK HERE to read the article as it appears in KeysNewsNet.com.

I think about everybody in town was expecting the seizure. There were some very nice people that worked their. I hope they find new jobs. Let's see how Centennial Bank goes about trying to sell some of the many REO assets and managing the many problem loans it acquired. I used to do this stuff for a living many years ago. This might be a small town, a small bank, a small amount of assets as compared to what happens up north in America, but how our hometown banks manage the sale and disposition of troubled assets affects this small town in a very big way.

Other People's Money

I don't like the idea of a bank bailout one bit. It will reward incompetence and greed. It will not teach anyone anything other than that Big Brother will come to the rescue of those who have power and influence. It will cost taxpayers an unimaginable amount of money and lost opportunities.

The Wall Street mavens created this mess by screwing with private home ownership and turning it into investment vehicles that could be bought, sold and traded at a profit (or a loss). The mavens got rich and earned incredible salaries, bonuses and stock options based on the their production. The mavens got theirs. And now the taxpayer is being told we have to make everything better for the common good. Hooey!

Now the Bush Administration is asking the public to go into tremendous debt so that our large financial institutions do not fail. The Administration is raising the specter of mass financial ruin if we do not act now.

What if several real big banks and a lot of small ones were to fail? What if the remaining investment banks were to fail? I know three things would happen for sure. One: the assets would be marshaled and sold to pay creditors.
Two: the stockholders equity would be wiped out. Three: the unsecured or under-secured might get nothing. But the insiders in the banks who created the mess for the institutions would lose all the equity they had in the companies by virtue of stock ownership.

Let's get up close and personal and look at the mess from Key West. Without naming names let me relate a couple of tales that may cause you to question the rationale of a bailout.

Local bank "A" was an aggressive local lender in the Key West market. It made residential and commercial loans. Since it is not a large bank, it had to participate a portion of some loans to larger upstream lenders. That is a common practice among banks to spread the risk. Bank "A" made no qualification loans based on cash down and appraised value upon build-out of the finished property. The assumption was that the market would continue to grow and that the new structure could be sold at a profit. The bank would fund the cost of acquisition, construction, and provide interim financing until the building was completed and sold. The front end and completed appraisals would be used to justify the loans. That scenario does sometimes work in a perfect world.

Local Bank "B" made aggressive loans including one development loan that was used to convert a group of apartment buildings into condos. I'll call this development "Howard's End". I used to work for a couple of big banks in Denver and did commercial loan workouts. One of the first things I'd do when I got a new credit (problem loan) was to read the Credit File and the Collateral File. The Credit File tells you the story of who the borrower is and the purpose of the loan.

The Collateral File contains the documents (loan commitment sheet, deeds, mortgages, notes, security agreements, assignments of rents, UCC filings, etc.) that secure the lender's position on the property (the "collateral"). Most banks have a loan administration department or loan review department that reviews collateral files to make sure that every required document was properly executed and recorded to insure the bank's position is perfected in the event legal action or foreclosure becomes necessary.

I personally did not like the location of Howard's End, and I thought that the workmanship was marginal. When I saw the project two years ago it was about 70% complete. The entire project flooded during Hurricane Wilma and a lot of the work that had been done needed to be repaired. Local Bank "B" had turned off the money supply to complete the project and used the loan reserves to continue paying interest on the construction loan. By so doing Bank "B" did not have to recognize a potential bank loss by writing down a portion of the loan. In essence the bank was advancing new money to hide the eventual loan loss. (I base this on what the developer told me personally. I have no independent verifiable knowledge.)

The developer somehow deeded one unit a new owner and got a title company to insure title. It is my recollection that Local Bank "B" did not get any money from the sale of that unit but that the developer got the cash.

The deal is more complicated because Local Bank "B" did not properly collateralize its loan. It did not have a first mortgage on all of the buildings or ground that makes up the complex. As a result there were competing parties with conflicting legal priorities on different buildings that make up the project. The result was that even if Bank "B" were to foreclose its mortgage, it would not end up owning all of the buildings and all of the ground. At least two different parties owned individual units or a portion of the underlying ground that prevented access to other parts of the property.

As I recall Local Bank "B" had about a $2 million loan to the developer. A private party had a second mortgage of around $500,000 and then there was that buyer who somehow got to purchase a unit inside the complex before a certificate of occupancy was issued or the condominium documents were recorded. Do you see the problem here dear reader? If you do, would you agree with me that such incompetence should not be rewarded by bailout? Shouldn't the bank fire the moron that created this mess. Shouldn't the shareholders in Bank "B" suffer a dilution of their investment for hiring such incompetent people? Where is the responsibility and accountability for management if managers let bankers hide problem loans and let collateral clerks fail to properly secure a loan? Maybe small banks should not exist if they cannot perform the required functions correctly.

Local Bank "A" doesn't get off any easier. That bank profited by charging huge fees for originating and booking its loans in the Go-Go years before 2005. Local Bank "A" and its officers and its directors made calculated bets that they could grow the bank by making aggressive loans. They bet wrong in several notable instances. Local Bank "A" has had to foreclose on mortgages it held and now must try to sell its foreclosures in a declining market. And it has more foreclosures in the pipeline. Neither management personnel nor style has changed.

I know my rants and raves won't stop anything in Washington. But if you are old enough to remember the Junk Bond fiasco of the 1980's and the S&L collapse in the 1990s you may share my disdain for what is being proposed today. Once again the public is being asked to reward the Wall Street players (and small hometown banks like the two I mentioned in Key West) that took huge risks with other people's money. I could care less if the Wall Street players lose their homes in the Hamptons, Aspen, Boca or anyplace else. They did not earn that wealth. They took it. It's time for payback.

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".

Regulators Shut Down IndyMac Bank! Friday July 11th

Regulators Shut Down IndyMac Bank! Re-printed by Permission of Ruben Concepcion, Keys Financial.

Bank regulators today shut the doors of IndyMac Bank and have transferred its assets to the FDIC. IndyMac had stopped lending activities earlier this week due to lack of capital and had seen a run on its deposits over the last couple of weeks due to concerns about its ability to survive.



IndyMac is the largest thrift ever to fail and the second largest financial institution in the U.S ever to do so.

What you may not know about IndyMac, is that it was founded by Angelo Mozilo and David Loeb, the same two geniuses who founded Countrywide and likewise ran it into the ground as well.



What’s important to note here:

The last major round of lender closings (Fall ’07) was primarily due to liquidity problems. Credit markets seized up at that time due to investor fears of exposure to subprime paper. Investors stopped buying mortgage securities and lenders were unable to sell their loans. No cash to continue operations – and therefore no choice but to shut down. Those failings were not due to actual realized losses at that time.

These were primarily mortgage bankers and not banking institutions.



The IndyMac failure is different because now we are seeing a major lender/banking institution failure due to actual losses. Rising defaults at IndyMac deteriorated it’s capital position. That called it’s survivability into question and depositors began a run on the bank – resulting in today’s shutdown.



In my opinion, the best thing that’s happened to the US housing market is Bank of America’s takeover of Countrywide. The takeover will in effect serve to hide the actual level of losses at the nation’s largest mortgage lender. If the magnitude of the actual losses at Countrywide were to become public, the resulting panic in the market would make what we’re experiencing now seem mild by comparison.

Are the failures of Countrywide and IndyMac indicative of systemic problems in the banking industry, and should we expect more of the same?

I don’t think so. What sets Chase Manhattan, Wells Fargo, BB&T (our primary lenders) apart is that they are well diversified banking institutions first, and mortgage lending is simply a component of what they do.

Countrywide and IndyMac were sales companies by design – and financial institutions by default. They had an overly aggressive high pressure sales culture with notoriously poor underwriting standards. If you can believe this, their underwriting departments reported to their sales managers! The end result doesn’t seem so surprising when you think about that one.

Go to Keys Financial to get Reuben's e-mailed analysis of how money market news affects you in Key West.

Our office is doing several short sales right now with Indymac Bank. I worked for the RTC in the early 1990s and we closed dozens of small to very large S&Ls. The first couple of days are always edgy. But things start to move smoothly within a few days. Indmac Bank was doing a credible job in addressing short sales that we presented to them. I hope that the FDIC's takeover will permit the process to continue. If the old RTC model is used by the FDIC, the former Indymac Bank employees will be retained by the FDIC or its successor to perform exactly the same job functions as before the takeover. We shall see.