IBJOpinion

SKARBECK: For numerous banks, times still troubling

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Every Friday after the markets have closed, my e-mail starts getting dinged by the FDIC. That is when the government agency publicly announces the names of banks that failed during the past week.

By releasing the names late Friday, the bank’s constituency and the markets have the weekend to digest the news. So far this year, 77 banks have failed.

The messages follow a standard format, in which the FDIC declares it has become receiver of the failed bank and announces a new institution is taking over the bank’s business. The bank’s customers are instructed to continue to conduct their normal banking functions over the weekend, such as writing checks, using ATMs and debit cards, and making loan payments. Clearly, the FDIC wants banking customers and the financial markets to experience as little disruption as possible.

The releases go on to list the total assets and deposits of the failed banks and discuss the basic terms of the purchase between the FDIC and the acquiring institution. They explain the assets being acquired and the deal the acquirer made with the FDIC regarding future loss-sharing on bad assets.

Next, the FDIC gives an estimate of what the failure will cost the Deposit Insurance Fund. The announcement concludes with the updated number of total bank failures for the year and within the particular state where the institution was located.

Troubling regulators today is that, while bank failures are fewer in number than in the last banking crisis in the early 1990s, the banks failing today are in worse shape. The Wall Street Journal reports that, of 102 banks that have failed in the past two years, the cost to the FDIC’s DIF has averaged 34 percent of assets, versus a rate of 24 percent for bank failures between 1989 and 1995, when 747 financial institutions were closed.

At the end of March, the DIF had fallen to $13 billion even while the FDIC’s undisclosed list of troubled institutions numbers more than 300. The DIF is funded by premiums assessed to banks, and in the second quarter of 2009 the agency imposed an emergency fee to raise more than $5 billion.

The DIF took a big hit on Aug. 14, with the failure of Colonial Bank, a regional bank headquartered in Montgomery, Ala., that will cost the fund $2.8 billion—the largest bank failure year-to-date.

As failures have risen, the FDIC has sought to expand buyers for bad banks with the agency in recent months courting private equity funds. However the FDIC’s initial set of proposed guidelines to buy failed banks did not endear the private-equity crowd.

Investor Wilbur Ross called the guidelines “harsh and discriminatory” as one requirement would have a private-equity-owned bank maintain a 15-percent equity-to-assets ratio, or three times higher than the regulatory standard for banks today. There will likely be some compromise on terms since private equity has the capital to buy bad banks, even though critics contend their investment strategies are not well-suited for the fragile banking system.

So, while most large banks avoided an unceremonious demise courtesy of the taxpayer, a number of smaller banks will not be rescued. Their losses will be absorbed by the DIF and deals will be cut with new owners on the “good” assets. And with problems in commercial real estate escalating, I shouldn’t expect any let-up in those Friday e-mails.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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  1. Aaron is my fav!

  2. Let's see... $25M construction cost, they get $7.5M back from federal taxpayers, they're exempt from business property tax and use tax so that's about $2.5M PER YEAR they don't have to pay, permitting fees are cut in half for such projects, IPL will give them $4K under an incentive program, and under IPL's VFIT they'll be selling the power to IPL at 20 cents / kwh, nearly triple what a gas plant gets, about $6M / year for the 150-acre combined farms, and all of which is passed on to IPL customers. No jobs will be created either other than an handful of installers for a few weeks. Now here's the fun part...the panels (from CHINA) only cost about $5M on Alibaba, so where's the rest of the $25M going? Are they marking up the price to drive up the federal rebate? Indy Airport Solar Partners II LLC is owned by local firms Johnson-Melloh Solutions and Telemon Corp. They'll gross $6M / year in triple-rate power revenue, get another $12M next year from taxpayers for this new farm, on top of the $12M they got from taxpayers this year for the first farm, and have only laid out about $10-12M in materials plus installation labor for both farms combined, and $500K / year in annual land lease for both farms (est.). Over 15 years, that's over $70M net profit on a $12M investment, all from our wallets. What a boondoggle. It's time to wise up and give Thorium Energy your serious consideration. See http://energyfromthorium.com to learn more.

  3. Markus, I don't think a $2 Billion dollar surplus qualifies as saying we are out of money. Privatization does work. The government should only do what private industry can't or won't. What is proven is that any time the government tries to do something it costs more, comes in late and usually is lower quality.

  4. Some of the licenses that were added during Daniels' administration, such as requiring waiter/waitresses to be licensed to serve alcohol, are simply a way to generate revenue. At $35/server every 3 years, the state is generating millions of dollars on the backs of people who really need/want to work.

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