When OneWest Bank opens its new Paseo Delicias, Rancho Santa Fe branch across from Mille Fluers, on Monday, Aug. 9, one might well say 'Who'? Who as in who the heck is OneWest Bank and 'Who' as in the legendary rock band The Who whose iconic song "Won't Get Fooled Again" features the memorable lines: "Meet the new boss/same as the old boss."
That's sorta what Rancho Santa Fe gets when the notorious La Jolla Bank gets replaced, amazingly enough, by an even more notorious OneWest Bank. Next story down in the queue, you'll find our Saturday story touching on some of the particulars of this peculiar changing of the financial guard. Or follow this link: http://tiny.cc/soms3
Want to learn more about failed La Jolla Bank's disposition by the Federal Deposit Insurance Corporation? Go to the source at http://www.fdic.gov/bank/individual/failed/lajolla.html.
On a personal level, I've had more than my share of misery courtesy of local, rip-off banks. Union Bank, just across the street, totally ripped me off with an unwanted "draft overcheck courtesy" service, then refused to close it while they stole $50 to $120 a month for a year. Then, they demanded I repay them for other money they stole despite a court ruling they had to close this bogus account.
I went to the bank to complain in person. The branch manager directed me to "customer service downtown." Turned out to be a collection department number. This office...Well, I digress. I made a video about it outside the bank last year you can access at http://tiny.cc/r7iwl if you want to see more.
By the way, I receive monthly demand notes from the collection agency to whom the Union Bank pigs sold their fradulent paper about me for pennies on the dollars.
A lot has been said, and posted, about OneWest and its infamous predecessor Indymac Bank. Let's learn a bit about our new corporate neighbor. As part of our continuing Sunday Opinion series, Ah-Ha Rancho Santa Fe News presents a series of views about OneWest and Indymac Bank from Bill Zielinsky.
Zielinsky's Problem Bank List: Tracking Problem Banks and Failed Banks blog at http://problembanklist.com/ provides a fantastic journey through the looking glass into the Alice in Wonderland disconnect between many Americans struggling to make ends meet and this criminal class of bankers and financial rip-off artists getting away with financial murder, some legal and some decidedly otherwise.
Also included at the end of the blog posting is the February video from fiercefreelancer about OneWest Bank.
-- Dan Weisman, founder/editor Ah-Ha Rancho Santa Fe News
FDIC Loss-Share Guarantees Balloon To $177 Billion Putting Taxpayers At Risk
FDIC’s Increased Use Of Loss-Share Program Enriches Some At Taxpayers Expense
The FDIC’s use of loss-sharing agreements has grown into a huge multi-billion dollar program that almost guarantees profits for the purchasers of failed banks. Originally introduced in 1991, loss-share agreements have now become a standard tool of the FDIC for moving failed bank assets into the private sector.
Under a loss share agreement, the FDIC agrees to absorb losses on up to 80% of a failed bank’s assets that are purchased by an acquiring bank. The loss protection provides the incentive for private equity investors or other banks to purchase failed banks from the FDIC.
From 2007 to date there have been 254 banking failures with the FDIC taking into receivership $616 billion of failed banking assets. With potentially hundreds of additional banking failures and weak property markets, the FDIC has had to provide generous loss-sharing agreements on the majority of banking failures since 2007. Through the end of June 2010, the FDIC has entered into 167 loss sharing agreements covering $176.7 billion in assets of failed banks acquired by other institutions.
The FDIC insists that loss-sharing agreements save the FDIC’s Deposit Insurance Fund money. From the FDIC’s standpoint, loss share transactions are simpler, reduce cash outflows and allow troubled assets to be sold or restructured in an orderly fashion instead of being sold at steep discounts in a poor market. To investors in failed banks, the program means huge potential upside gain with very limited downside loss.
According to the FDIC, a competitive bidding process is used to ensure that the best sales price is obtained on a failed bank. In addition, a financial analysis of asset values is performed by the FDIC which dictates the terms and conditions of the loss-share agreements. Nonetheless, as Problem Bank has noted in the past, there are examples of buyers of failed banks reaping huge profits due to the loss protection guarantees provided by the FDIC:
OneWest Makes Billions On Failed Bank Purchases -
The FDIC has been heavily criticized lately by those who question whether OneWest got too good of a deal on its purchase of failed banks. Indy Mac was the most costly banking failure in U.S. history at $10.7 billion and the FDIC could still face billions more in losses under its loss-share transactions with OneWest. The question of whether OneWest received a windfall at taxpayer expense became even more relevant this week when OneWest reported huge profits of $1.6 billion last year.
The private investors who formed OneWest had initially contributed only $1.55 billion. Bert Ely, a well respected banking consultant remarked that “This is one hell of a deal for those owners, but hardly a good deal for the banking industry, which pays the FDIC’s bills. These are just incredibly sweet numbers..The public policy question is, why are they so good? Particularly given the magnitude of the loss estimated at the FDIC.”
Insiders Reap Huge Profits On Purchase Of Failed South Carolina Bank -
This week’s bank closing is certain to raise the level of debate over the FDIC’s competence in resolving banking failures on the best terms for the taxpayers.
Investors also apparently view the purchase of failed Beach First as a huge profit opportunity for BNC Bancorp. The stock of BNC Bancorp skyrocketed 12.5% in after hours trading, up $1.03 to $9.28. Bank management and insiders who hold almost 20% of BNC’s float of 7.34 million shares, have instantly reaped a $1.5 million windfall, courtesy of the US taxpayer who ultimately pays for the cost of failed banks (in this case alone $130 million). Keep in mind that BNC Bancorp “purchased” failed Beach First with no money down and an FDIC guarantee to pick up most of the losses on the failed bank’s assets.
“Loss-Share Agreements” - Is The FDIC Postponing Losses On Bank Failures? -
The ultimate gain or loss by the FDIC on their long tailed obligation to absorb losses on the ultimate disposition of failed bank assets is impossible to predict. If property markets eventually recover, the FDIC’s losses should be less than estimated.
It will be some time before the results of the loss share programs can be evaluated, since certain assets are covered by loss share agreements for up to 10 years. The cost of expected losses on a failed bank’s assets covered by a loss share transaction is included in the FDIC’s estimated cost of a banking failure.
The FDIC has used the loss-share program to unload failed banks which has resulted in huge gains for certain investors, while the losses on the failed banks have ultimately been borne by the taxpayers. If property markets continue to weaken and credit losses are more than expected, the FDIC could be liable for billions of dollars in additional payments, exposing the American taxpayer to additional losses. Meanwhile, the Deposit Insurance Fund, which is used to cover banking losses, has been depleted and currently has a negative balance of $20.7 billion.
The most expensive banking failure in U.S. history was the closure of IndyMac Bank (IMB) in July 2008. The original estimated loss to the FDIC of $8.9 billion has recently been increased to $10.7 billion or 33% of IndyMac’s assets at the time of closure. The story of how IndyMac Bank was allowed by regulators to pursue its reckless strategy of rapid asset growth and risky lending is detailed in a recent report by the Office of Inspector General (OIG).
In its role as insurer, the FDIC identified and monitored risks that IMB presented to the Deposit Insurance Fund by participating with the OTS in on-site examinations of IMB in 2001, 2002, 2003, and again shortly before IMB failed in 2008 and through the completion of required reports and analysis of IMB based upon information from FDIC monitoring systems. FDIC risk committees also raised broad concerns about the impact that an economic slowdown could have on institutions like IMB that were heavily involved in securitizations and subprime lending. Nevertheless, FDIC officials consistently concluded that despite its highrisk profile, IMB posed an ordinary or slightly more than ordinary level of risk to the insurance fund. It was not until August 2007 that the FDIC began to understand the implications that the historic collapse of the credit market and housing slowdown could have on IMB and took additional actions to evaluate IMB’s viability.
IndyMac’s high risk business profile (as detailed below by the OIG) was well know by both of IndyMac’s primary regulators. Despite this fact, regulators did not recognize the risks until after the real estate markets had started to collapse and IndyMac’s subprime loans began to default.
Table 1: IMB’s Business Profile
Pursued an Aggressive GrowthPosture
− IMB pursued an aggressive growth posture from its
inception as an insured financial institution. Rapid growth
in lending was facilitated by increasingly lax underwriting
within a very competitive market, primarily southern
− IMB grew to become the seventh largest savings
association and ninth largest servicer of mortgages in the
Focused on an Originate-to-Sell Platform
− Originated residential loans for the purposes of sale,
securitization, and its own portfolio. Because IMB’s
business market model was an “originate-to-sell” platform,
its aggressive posture is reflected more in its originations
than asset growth.
− During 2006, the bank originated $91.7 billion in loans. In
the first half of 2007, the bank originated $46 billion in
Relied on Alternative A Paper (Alt-A) Loan Production for Growth
− The bank’s Alt-A loans (a type of mortgage between prime
and subprime) were generally jumbo loans that were
underwritten largely based on the borrower’s credit score
and the loan-to-value ratio. Many of these loans did not
have a full verification of income or assets. These are
referred to as “no doc” or “low doc” loans.
Created High-Risk Asset Concentrations
− Concentrations included non-traditional mortgages with
negative amortization potential, Alt-A mortgage loans, and
geographic concentration of loans in California that were
rated high- or very high-risk by several mortgage companies.
Relied on Non-Core Funding
− To finance its operations, IMB relied heavily on non-core
funding from Federal Home Loan Bank (FHLB) borrowings and brokered deposits.
Source: OIG analysis of FDIC documents.
The non-core funding sources IMB relied upon increased the FDIC’s resolution costs at the time of failure because FHLB borrowings must be repaid first, and many brokered deposits are not transferred when the FDIC sells an institution’s assets. As of December 31, 2007, IMB had $11.2 billion in FHLB borrowings and $5.8 billion in brokered deposits for a total of $17 billion compared to total assets of $32.5 billion.
The Treasury IG’s material loss report stated that although OTS conducted timely and regular examinations of IMB and provided oversight through offsite monitoring, its supervision of the thrift failed to prevent a material loss to the Deposit Insurance Fund. The Treasury IG reported that IMB’s high-risk business strategy warranted more careful and much earlier attention. The report further stated that OTS viewed growth and profitability as evidence that IMB management was capable, and OTS gave IMB favorable CAMELS ratings right up to the time it failed. Moreover, the OTS did not issue an enforcement action until June 2008, less than 2 weeks before
The report by the OIG provides scant assurance that future major banking failures will be prevented since current regulatory “reforms” are likely to keep intact the existing regulatory agencies - see Will Regulatory Reform Prevent Future Financial Crises?
The OTS and FDIC were not the only regulators oblivious to the risks of subprime, no doc and low doc mortgage lending. The entire regulatory apparatus consistently turned a blind eye to repeated warnings of lending excesses and abuses until the financial crisis was upon them. Consider - As Subprime Lending Crisis Unfolded, Watchdog Fed Didn’t Bother Barking.
The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending.
They began to present research in 1999 showing that large banking companies including Wells Fargo and Citigroup had created subprime businesses wholly focused on making loans at high interest rates, largely in the black and Hispanic neighborhoods to the south and west of downtown Chicago.
The groups pleaded for regulators to act.
But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders’ compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.
But since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers.
During the boom, however, the Fed left those powers largely unused. It imposed few new constraints on mortgage lending and pulled back from enforcing rules that did exist.
The financial crisis has exposed how multiple regulators, responsible for ensuring safe and sound lending practices, all failed in their primary mission. To date, there has been no fundamental restructuring of the financial regulatory agencies. Those who believe that future crises can be averted by a “reformed” financial regulatory system are not thinking clearly.
Problem Bank List provides news and reporting on the status of the FDIC’s Problem Bank List and information on troubled and failed banks. The site is edited and written by Bill Zielinski with other contributing writers. Our coverage attempts to bring light to the ongoing problems in the financial system and scrutiny to regulatory and legislative measures.
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Problem Bank List Staff
Problem Bank List
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