Small enough to fail but still pretty friggin big

With $25 billion in assets and $20 billion in deposits, Colonial is 100 times larger than the typical bank to have failed this year.

The Colonial Bank failure will be the sixth largest in US history. This sounds like an apt-time to refer readers back to a previous post where we quoted a delusional bullish report saying:

Government Back Stop: If the government was going let these banks fail they would have done it already, and they are obviously not. There is a lot of more room for growth now, and the economy is improving significantly.

Already the cost of this latest Bank failure is straining the system of government deposit insurance:

The fund took a $35.1 billion hit in 2008, and an additional $4.3 billion decline in the first quarter of this year, leaving it [FDIC] with assets of only $13 billion as of March 31.

The FDIC said Colonial’s closing will cost the Deposit Insurance Fund $2.8 billion. “That’s a significant share of the FDIC fund,” he said.

via CNNMoney

And for those who are interested in the warning signs of bank collapse, here’s an old complaint about Colonial Bank on the web:

Colonial Bank is a dud! I have had accounts with this bank for many years and have always had problems with them. Lately, this has been getting worse. I electronically transfer funds from a bank in another country with no problems, but as soon as I deposit a check the trouble starts. They usually hold the checks for 5 to 8 days, but now they are holding a check for 15 days! I received a letter today telling me that they cannot verify the check with the paying bank and that there is reasonable cause to doubt collectability.

I wrote the check that I deposited on my account with Met Life. This is a large insurance company and I have been writing checks, and depositing them in a Colonial Bank, for the past year. The money is from the life insurance of my dead husband. I have had holds put on these deposits every time I put one into Colonial, they don’t seem to know that Met Life is a very large company, not something I dreamed up to put on home-made checks!!!

Now, I put in a check for $8,794.25, which is all that remained in the Met Life account. I need the money, now, to pay my bills. I have heard from people who are supposed to know, that a bank likes to hold the money as long as possible so that they, not you, get interest on it. I don’t know if this is true, but the banks do like to make their money, as much as possible. The days of their giving away toasters, etc. when you open an account are long gone. Nowadays, we are made to feel that we are damned lucky that they will even open an account for us!!

So, my advice is to avoid the Colonial Bank, at least until it modernizes it’s banking practices and comes out of the horse and buggy era!

In retrospect it would seem that it’s not so much that Colonial was in the horse and buggy era as it was in the insolvency era. Colonial was tied up in the warehouse mortgage market and the complaint appears to have been written after sub-prime reared its head. By all accounts a big part of Colonial’s collapse was due to the huge decline in the Florida property market.

Which makes you wonder how long the bank had been effectively insolvent for(if  a bank can’t afford to advance a sub-$10k cheque issued by a reputable insurance company then one has to wonder why..).

New York Times says the bank has been ’embattled’ for a few months but in my opinion the bank  was probably bluffing its solvency for even longer than that(probably before that online complaint was lodged over a year ago). SIGTARP(investigators responsible for policing TARP) raided Colonial offices possibly in relation to a sham deal to get itself into TARP:

The story, as we understand it, goes something like this: Colonial BancGroup, finding itself under increased pressure by both federal and state regulators including the FDIC, Federal Reserve, and the Alabama State Banking Department to bump up capital, thought it had a $300 million deal in the bag with Florida-based Taylor, Bean & Whitaker

Our emphasis/edit. Long story short, the Taylor, Bean & Whitaker deal was never a go and Colonial shares have been in full-on death watch ever since.

And from the newspapers a little over 10 days earlier:

Colonial and Taylor Bean negotiated a $300 million deal earlier this year in an attempt to obtain more than $500 million from the TARP fund. The deal would have given Colonial badly needed capital as it struggles with huge losses in its real estate lending business.

But last Friday, Colonial said the deal had unraveled as a deadline passed for its TARP petition.

Again no idea if SIGTARP are investigating whether the $300m deal was a fraud concocted to get the bank into TARP, let some insiders to get their money out, or other unrelated accounting regularities. However, at least on the face of it, it appears as if Colonial has been insolvent for quite some time and had fradulently concocted a deal to bump up the share price and/or save itself via TARP.

If Colonial was able to maintain the outward appearence of solvency for so long before people really started to notice, how many other bigger banks are also coasting on petrol fumes?


2 thoughts on “Small enough to fail but still pretty friggin big

  1. Concerning, but arguably small potatoes in the scheme of things to come…

    HARRY Markopolos — the whistleblower on Bernie Madoff who proved to be much smarter than the SEC — says there are evildoers out there who will make the Ponzi scum “look like small-time.” Markopolos gave a speech to 400 of the faithful at the Greek Orthodox Church in Southampton and predicted major scandals will soon be revealed about the unregulated, $600 trillion, credit-default swap market. “To put it in simple terms, it is like buying fire insurance policies from five different insurance companies on your neighbor’s house and then burning down the house,” he said.

    1. Absolutely. Was not intending to cite Colonial as an extremely bad case, it IS however, a good example of how a large bank can be dead long before it is officially declared so. In other words Colonial should be taken as a warning about the appearance of solvency among the bigger banks.

      The fact that a lot of these larger banks have repaid the money and pulled out of TARP should actually be cause for concern rather than anything else. Colonial was only caught out when SIGTARP started investigating, how long is it going to take for accounting irregularities at other banks (particularly with regard to derivatives) to be found out now that they are free from the prying eyes of SIGTARP?

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