Banking Law

I was out of town on Good Friday, when New Frontier Bank in Greeley, Colorado was taken down (paid subscription required) by the FDIC (at the request of the Colorado Banking Commissioner). I'll spare you the quips about "good" being "not-so-good" and any blasphemous allusions to crucifixion.  A few days earlier, I'd posted about the complaints of the former president of that bank that the FDIC had sabotaged a private recapitalization of the bank by allowing potential bidders access to the bank to perform due diligence at the same time the private investors were doing their due diligence.

It turned out that none of the potential bidders thought the bank was worth bidding for, which might tell some cynics that the FDIC screwed up the private deal to no purpose. It tells me that the bank had little or no franchise value at the time it failed and, therefore, that the private equity deal might not have been consummated in any event. Whether it might have had some value prior to the end game is a question to which we'll never have a definitive answer, because once word leaked out that the bank's application for a TARP capital injection was denied and that the private investors had pulled out, depositors began withdrawing whatever core deposits might have been worth acquiring. I assume that those of the bank's competitors in the local market that might have been interested in acquiring New Frontier's core deposits from the FDIC were getting their share of the same from frightened depositors, and figured that they couldn't be certain that by the time the FDIC took the institution over, there would be enough core deposits left to make a a bid worthwhile. There's no question that the bank had a heavy reliance on "non-core" deposits.

One of the bank's competitors confirmed that it picked up 100 new deposits on the day after the bank failed, as opposed to the customary two or three deposits it picks up on a normal Saturday. The best part, of course, is that it didn't have to pay the FDIC a premium for those new deposits. In addition, that bank said that it would have taken too much capital to acquire all the insured deposits from the FDIC.

The FDIC couldn't even find a bank to act as paying agent for the deposits. Therefore, it decided to form a deposit bank to assume the deposits and give depositors 30 days to find a new bank. That's a rare form of resolution, and one that the article states has not been used in 25 years.

Sandy Brown, the managing partner of Bracewell & Giuliani's Dallas office, correctly asserted that the FDIC had obviously made a determination that the bank wasn't worth a plug nickel to anyone, at any price.

"If they believed there was some level of value there, they would have run it for a little while and sold it."

If that's the case, why was so much time and effort spent by the bank, its holding company, private equity investors, and what was sure to have been a phalanx of attorneys and consultants, running around for months trying to recapitalize the bank? When did the FDIC make an internal determination that the bank wasn't worth saving, and wasn't going to generate sufficient franchise value to attract a buyer and/or to justify a TARP capital investment? From a purely selfish standpoint of petty personal gain, bank lawyers have to be thankful that regulators allow banks to waste their (and, eventually, the FDIC's) money tilting at windmills, including putting together capital plans, filing applications for TARP CPP funds, filing change of control and holding company applications, responding to enforcement actions, etc. As long as you're being paid on a daily basis, that is. In such situations, bank lawyers and consultants end up performing like oncologists who get paid for trying the latest experimental chemotherapy on a cancer patient, who (as the overwhelming odds would predict) dies anyway.

From the standpoint of someone with no skin in the game, however, who represents other banks whose increased FDIC assessments will have to cover the losses from failures such as this one, I have to wonder in cases like this why the FDIC doesn't simply tell the state banking commissioner to pull the plug much earlier. While the FDIC may try to hide behind the technical requirement that the state commissioner must act first, no one with even as little as a week's experience in this area could fail to understand that the FDIC has all the money and, therefore, calls the shots. If they wanted the bank closed down earlier, they should have been able to accomplish it much sooner than they did.

If a government agency wants to pick the winners and losers, and predetermines that the New Frontiers of the world are doomed, then it ought to close the losers soon enough that the survivors aren't paying through the nose for months of wheel-spinning, months in which a questionable franchise value isn't going to do anything to increase and in which the ultimate hole is being dug much deeper. If it hasn't got the manpower to do it any sooner than it did in this case, then it better get the staff onboard and/or under contract to handle the failures more expeditiously.