By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, August 22, 2009
The federal government is casting more broadly as it seeks buyers for a growing number of failed banks, including entertaining bids from foreign firms and seeking to attract new investors to the industry by easing restrictions.
The results were on display Friday, as regulators seized Guaranty Bank of Texas and immediately sold its branches, deposits and most of its assets to Spain's Banco Bilbao Vizcaya Argentaria.
The failure of Guaranty, with $13 billion in loans and other assets, was the 10th-largest in U.S. history and the fourth-largest since the financial crisis began last year.
Regulators have sharply increased the pace of seizures this summer after months in which they left many unraveling firms untouched. The resulting spike in failures appears at odds with other signs that the economy is starting to mend, but analysts say the failures actually are an important step toward recovery. The seizure of a bank is in many ways the end of a problem, as the federal government absorbs the losses before selling the healthy parts to a new owner, setting the stage for renewed lending.
The greatest threat to that process is the dwindling supply of buyers. Guaranty is the 106th bank to fail since the beginning of 2008, and some healthy banks have sated their appetites for acquisitions. Regulators liquidated a Nevada bank last week after failing to find a buyer.
"The more institutions they are able to sell, the more market demand is met," said Karen Shaw Petrou, managing partner at Federal Financial Analytics.
Petrou said the government is moving too slowly to seize troubled institutions, allowing problems to fester and increasing the eventual cleanup costs. That adds urgency to the search for more buyers.Casting a Bigger Net
The sale of Guaranty to BBVA is the first to a foreign buyer during this crisis. The Federal Deposit Insurance Corp., which sells failed banks, also is considering rules that would make it easier for private investors to participate in the bidding, which is generally restricted to healthy banks. The agency already sold BankUnited of Florida to private investors in May.
Proposed rules issued in July were widely panned by potential investors as overly restrictive, but the FDIC's board is expected to pass a less onerous version when it meets Wednesday. The agency is juggling its need for bidders against a concern that investors will use acquisitions as personal piggy banks. The original proposal required buyers to hold stakes for at least three years and to maintain significantly larger cushions against unexpected losses than the prevailing standard. The rules also strictly limit the use of acquired banks as a funding source for other investments.
The FDIC's board may also reduce the size of the required capital cushion, according to a person familiar with the matter who spoke on the condition of anonymity because the proposal is not final.
Guaranty Bank, based in Austin, has its roots in the nation's previous banking crisis, the savings-and-loan failures of the late 1980s. The company was created from the pieces of several troubled Texas savings and loans, and then later expanded into California.
Guaranty's troubles stemmed mostly from its mortgage lending business. The bank made billions of dollars in high-risk mortgage loans in booming markets such as California and Florida, and it invested billions more in loans made by other companies. Spiraling losses ate through the company's capital cushion, leading it to issue a highly unusual public prediction earlier this month that it would be seized by regulators.
The failure of Guaranty is another black mark against the Office of Thrift Supervision, the federal agency that regulates banks specialized in mortgage lending. Most of the largest firms to fail during the current crisis were regulated by the OTS, including Washington Mutual, IndyMac Bancorp and now Guaranty. As with the other OTS failures, Guaranty's troubles derived in large part from the sale of "option ARM" mortgages, adjustable-rate loans that were specifically structured to allow people to borrow more money than they could afford.
Option ARM loans made up about one-third of Guaranty's portfolio of mortgage loans, according to the company's financial disclosures.
Financial analysts considered it only a matter of time until a foreign bank would prevail in the bidding for a failed U.S. bank. Several foreign banks have large footholds in the United States, including HSBC, Toronto-Dominion and the Royal Bank of Scotland, which owns Citizens Bank. Toronto-Dominion has made bids for failed banks through its U.S. subsidiary, TD Bank, but analysts said many foreign banks have been preoccupied healing their own wounds.
BBVA and its major Spanish rival, Banco Santander, are notable exceptions. Spain's unusually stringent banking regulations kept both banks relatively healthy, and they have emerged from the crisis looking to expand. Santander bought struggling Sovereign Bank last fall.
BBVA expanded its U.S. presence with its $9.6 billion purchase of Compass Bancshares in 2007, giving the company almost 600 branches from Alabama to New Mexico. The Guaranty deal gives the company more than 150 additional branches split between Texas and California.
The company also owns the largest bank in Mexico, Bancomer.3 Other Bank Seizures
Regulators seized three other banks Friday night, including Ebank and First Coweta Bank of Georgia, and CapitalSouth Bank of Alabama. The failures comes one week after regulators seized Colonial Bank of Alabama in the largest failure of 2009.
When a bank fails, the FDIC repays depositors to the extent that the bank's own coffers have been depleted. The money comes from a tax on the banking industry, not the general public, although the FDIC can borrow money from the Treasury Department if the need arises. The rising number of failures have drained the FDIC's insurance fund. About $13 billion remained at the end of March, but the agency estimates it will spend $5.8 billion on the failures of Colonial and Guaranty alone.
The FDIC already has increased the assessments on banks significantly. The agency plans to collect $17.6 billion from banks this year, which it estimates is the equivalent of a 5 percent tax on industry profits. That is more than five times the amount collected in 2008.
The agency already has laid the groundwork for an additional special collection before the end of the year.