Banking Law

There's a community bank in Greeley, Colorado that appears to be on its last legs.

Bank traffic was heavy Friday afternoon amid continued rumors that regulators had planned a takeover. No such takeover occurred, although some customers remained worried.



?They?re busy,? said Eleanore Wiggett of Greeley, there Friday to close an account she held with her daughter, Sara Wiggett. ?We?ve been in there before and there?s usually one or two people but they?re extremely busy today. I think the rumor?s gotten out. They said the checks would all be honored and everything and everybody would have received a (bank statement) next week giving them time to transfer their accounts.?



A car filled with onlookers sat in a parking lot across the street on Friday until 6:30 p.m., when the bank?s drive-through closed.



?They definitely told me in there that it?s just a matter of days,? Eleanore Wiggett said.

It's not as if the bank couldn't have secured the private capital sufficient, perhaps, to stave off failure or, at the least, absorb losses before the FDIC absorbed them. The bank's holding company had struck a deal for additional capital with a couple of rich Colorado businessmen who were attempting to give back to the local community by saving a large (for that particular community) local financial institution from going the way of Dodo bird. The holding company had also applied to the US Treasury Department for a TARP CPP investment. The management and directors of the bank (and, apparently, private investors) thought that the combined additional capital infusions would allow the bank to absorb the losses in its loan portfolio and hang on until the economy in general, and the bank in particular, righted itself.

Within the last week or so, the private investor group pulled out and the government denied the application for the TARP CPP investment. The bank's president, Larry Seastrom, said that the reason the private investors withdrew is because, at the same time they were doing their due diligence on the bank, the FDIC put the bank out for bid, and potential bidders were also doing due diligence on the bank. Learning that the bank you thought you're buying control of is being marketed by the FDIC is the ultimate "WTF?" moment.

Seastrom said the deal was doomed because the FDIC offered a sweeter deal for other banks to bid on New Frontier ? the icing on the cake being that the FDIC would take the bank?s troubled loans out of the deal. He said that jeopardized the private deal still on the table.



?When the FDIC has you out on the bid process, why would anyone buy you?? Seastrom said. ?If and when we fail, it will be as devastating to this community as Citibank was to New York.?

Seastrom had equally strong words about the TARP application process.

He also expressed frustration with the federal Troubled Asset Relieve Program process, $53 million of which New Frontier Bank would have qualified for based on its size. He said the bank was denied. He said that would have been small potatoes compared to how much it will cost to close the bank. He called the process politically corrupt.



?It will cost the FDIC, if we get closed down, $500-$750 million,? Seastrom said. ?If they give us $53 million we could save it.?

I guess the bank's holding company should have called Maxine Waters to open up the CPP floodgates, or perhaps Barney Frank would have been a good choice. "Politically corrupt process." Ya think?

Mr. Seastrom is viewed by the FDIC as part of the bank's problems. The article states that the FDIC has demanded his removal, although it extended the deadline for his departure. Therefore, Mr. Seastrom is not an objective observer. On the other hand, he's also in the position of not having much skin left in the game to protect, which tends to make a man less politically correct and more apt to tell you what he really thinks.

It may very well be that the FDIC decided early on that this bank was a "loser." Since the FDIC is picking winners and losers these days, and favors the Citibanks of the world with colossally screwed-up balance sheets, over community banks with screwed-up balance sheets of lesser size, the FDIC could have predetermined that no amount of capital raising by the bank would be successful. Letting bidders for an FDIC-assisted transaction into the bank to perform due diligence while a private investor group is simultaneously doing due diligence for an unassisted deal is a great way to make sure that the private deal never happens.

Rather than be open and transparent (as the regulators insist the banks they regulate must be) and just telling the bank these facts of life, the FDIC just let the bank futz along with the TARP application, the private equity deal, and, obviously, all kinds of regulatory "make work" necessary to respond to enforcement action, formulate mandated capital plans, etc. That useless rearranging of deck chairs on The Titantic simply adds to the ultimate expense to the FDIC, and it also prolongs and increases the pain and suffering of all involved, including bank employees and outside investors.

As we observed when we discussed the alleged de facto moratorium on new bank charters, there seems to be no concern on the part of some within the bank regulatory agencies that real human beings are involved with these transactions, and that real emotional and financial resources are being wasted chasing outcomes that the regulators have predetermined will never happen. Obviously, those individuals simply don't give a damn.

Good luck to the FDIC if it plans to pursue any claims against officers or directors for negligence. I can think of a number of interesting defenses.