Two More Banks Go Belly Up
FDIC seizes, sells assets of defunct institutions.
Already forced to use almost 10% of its stash to repay depositors at now-defunct IndyMac, the FDIC will cough up another $860 million from its deposit insurance fund after seizing two more banks over the weekend.
On Friday, regulators took control of First National Bank of Nevada and First Heritage Bank of Newport Beach, California. Both are units of First National Bank Holding Company, headquartered in Scottsdale, Arizona. The FDIC, however, was able to avoid an IndyMac-style bank run by selling the failed institutions to Mutual of Omaha, a Nebraska bank.
All retail branches opened for normal business this morning, under the Mutual of Omaha name, avoiding check-cashing problems that still plague some IndyMac customers. Last week, after news leaked the FDIC wouldn't cover a portion of uninsured IndyMac deposits, Washington Mutual (WM) and Wells Fargo (WFC) balked at IndyMac checks, placing a hold on deposits until their value could be verified.
While small in comparison to IndyMac's $32 billion in assets, the two banks had almost $4 billion in combined assets, making the failures large by historical standards.
Working with the FDIC, the Office of Comptroller of the Currency issued a statement saying First National Bank of Nevada "was undercapitalized and had experienced substantial dissipation of assets and earnings due to unsafe and unsound practices." First Heritage was simply called "undercapitalized."
Both banks were active issuers of subprime mortgages. Now, with losses that outweigh capital reserves, regulators have taken preemptive action and seized the banks to prevent panic.
While the FDIC is aggressively staffing up in advance of more failures, its Chairman, Sheila Bair, is moving to assuage concerns it won't be able to live up to its obligations. In a press release last week, Bair reiterated the rights of American depositors and sought to inject confidence into the country's banking system:
"The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance. The overwhelming majority of banks in this country are safe and sound and the chances that your own bank could fail are remote. However, if that does happen, the FDIC will be there -- as always -- to protect your insured deposits."
The FDIC expects hundreds of banks to fail as a result of the current credit crisis, straining the cash its saved up to protect depositors. The seven failures so far this year tops the number of banks than went bust from 2004 through 2007, but is nowhere near the thousands that failed during the Savings and Loan crisis of the 1980s and 90s.
Today's financial system, however, bears little resemblance to 20 years ago. The shadow banking system and the vast interconnectedness of the world's financial institutions means no one bank can fail without potentially infecting its neighbors.
The FDIC has a tough road ahead.
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