Saturday, September 26, 2009

Political double standard in bank failures

In a recent post we discussed the fact that regional and small banks are overexposed to real estate, which has been the primary reason for their rapid failures. The latest failures in Georgia represent a good example of this exposure.

As the FDIC shuts these Georgia banks down, the state politicians are getting increasingly annoyed, as if the failures are the FDIC's fault. What happened to tough new regulation? Or does it only apply to those banks in New York?

WSJ: Just two days after Reps. David Scott (D., Ga.) and Tom Price (R., Ga.) chastised Federal Deposit Insurance Corp. Chairman Sheila Bair about the rapid number of banks failing in Georgia, a Georgian bank failed. Fittingly, its name was Georgian Bank.

It’s the 19th bank in the state to close so far this year. That means of the 95 banks that have failed in 2009, 1 in 5 have been in Georgia. Regulators have cracked down on banks in the state, in part because real estate losses are extraordinary. Georgia lawmakers are furious and blaming the FDIC in part for overreacting.

Many politicians in Georgia have received political contributions from banks and real estate developers, therefore this reaction should not be a surprise.

WSJ: Georgian Bank was the second-biggest bank headquartered in Atlanta. It had $2 billion in assets, five branches, and roughly 185 employees. It also had major problems tied to real estate. Its chief executive was pushed out in July. In the second quarter, problem loans accounted for 7.6% of its total portfolio.

In fact by the time Georgian failed, it's non-performing loans represented 17% of it's total loan assets. But what got them to that point to begin with was that 77% of it's total assets were for property.

This exposes the broader political issue with bank regulation. When the FDIC wants to be proactive in closing these institutions to limit taxpayer losses, the politicians jump in:
“...the people of Georgia would appreciate very much if the FDIC could review how they’re dealing with the banks in Georgia to work with a plan to see if we can’t stop this very terrible pattern. Because it’s — it’s — it’s just not fair nor right.” David Scott (D., Ga.)
"not fair"? It's easy to bash Citi for it's mess, but when banks in the politicians' back yard need to be dealt with because they put on speculative exposures using taxpayer insured deposits, the FDIC should be using white gloves?

These banks should be shut down quickly, because letting them linger not only puts the taxpayer at additional risk, but makes any economic recovery that much slower. The only way to deal with the bad real estate loan problem is to by auctioning off (repricing) the assets. Otherwise the "head in the sand" syndrome will continue.

“We felt along with most people that the real estate situation in Atlanta would have begun to correct itself by the summer of 2009,” Poelker, who replaced [Georgian Bank] founder Gordon Teel at the closely held bank last month, said in an interview today. “Nobody expected this downturn in real estate to be as widespread and deep as it turned out.” (Bloomberg)

Really Mr. Poelker? You expected real estate in Atlanta to recover by this summer? What planet are you from? And you were actually put in charge of a bank with $2 billion dollars in assets? And according to Georgia's politicians the FDIC should leave your bank alone? Incredible.

Yes you do.

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