41 Colorado Banks, $676 Million Troubled Assets, FDIC to the Rescue with Legacy Loans Program?

19 U.S. Financial Institutions Deemed 'Too Big to Fail' - What About Colorado's 'Little Guys'?

The Federal Reserve Bank announced Friday that "Stress Tests" of 19 of the country's largest financial institutions revealed that some are undercapitalized now and others will need additional capital if the economic recession continues. Fed and Treasury officials continue to reassure capital markets that they will provide necessary assistance to these institutions, leading most observers to believe that they are considered 'too big to fail.'

Colorado banks have been a primary source of housing development finance for our dynamic Front Range population growth. As the national financial crisis deepened in 2008, banks around the country and in Colorado were increasingly impacted by troubled assets.  The majority of these assets are real-estated related, and housing-related in particular, from home loans to individuals to land development and construction loans to developers and homebuilders. 

One measure of the health of a bank is the ratio of its troubled assets divided by its total capital plus reserves.  The national median Troubled Asset Ratio (TAR) of 5.0 percent at the end of 2007 nearly doubled to 9.9 percent by the end of 2008. 

The Genesis Group analyzed the Troubled Asset Ratio (TAR) of nearly 150 banks based in Colorado.  Although the majority of Colorado banks have maintained relatively healthy balance sheets, our analysis revealed that 43 of them had double the national median TAR as of Year-End 2008.  Two of the worst of these banks with a total of $178 million in troubled assets have been closed.  Colorado National Bank in Colorado Springs has been sold (TAR 163.2%) and the FDIC is liquidating New Frontier Bank in Greeley (TAR 80.2%). 

Of the remaining Colorado banks, 41 banks with total assets of $20.3 billion had TAR’s more than double the national median at the end of 2008 (TAR’s ranged from 20.1% to 74.7%).  These banks had a total of $676 million in troubled assets and $1.975 billion in capital plus reserves, for a combined TAR of 35.1%. 

However, the bulk of bank troubled asset problems in the state are in 12 banks with $500 million in troubled assets.  These banks had assets of $15.1 billion and capital plus reserves of $1.46 billion at the end of 2008. 

The Genesis Group is helping private investors analyze troubled bank assets for purchase so they can be restored to financially productive use, a critical step in our economic recovery process.  The government's new Legacy Loans Program proposed by the FDIC and the U.S. Treasury may be another alternative for Colorado banks wanting to get these assets off their books. 

Legacy Loans Program – Boon, Bane or Not a Factor for Colorado Banks?

FDIC's Legacy Loans Program will provide banks that request government assistance with a means to clear distressed loans from their balance sheets.  Public-private investment funds (PPIFs) will be formed to purchase these loans and other assets from banks.  By provided up to 85 percent financing of the asset purchase price, the government apparently hopes to prevent banks from being forced to sell assets at liquidation prices, thus helping to stabilize real estate and financial markets. 

Briefly, each bank will be allowed to identify a pool of assets it wishes to sell, the FDIC will analyze the pool to determine an appropriate amount eligible for an FDIC loan guarantee, and then the pool will be offered to private equity bidders with the U.S. Treasury to provide a 1:1 equity match.  The highest bid will be awarded the asset pool purchase, although the bank would then have the final right to refuse the offer. 

FDIC accepted comments on the program through April 10 and will soon announce details of how the program will be structured.  Many of the comments received relate to the divergent interests of private investors (maximum financial gain) and the government (stabilizing the financial system).  Some of the unresolved issues to date include:

• Will private investors really bid more than liquidation price for PPIF assets because of the FDIC guaranteed "seller financing?"

• Who will have final say on the timing and price of resales of PPIF assets (private investors or Treasury)?

• Will there be profit limits for investors or compensation limits for asset managers and their employees?

• What will be the price of FDIC’s loan guarantee and the cost of FDIC's ongoing audits of the asset pool? 

• If the bank is allowed to cancel the sale at the end of the process, won’t investors be reluctant to spend the time and money to analyze the pool of assets and simply bid low, thus defeating the purpose of the program?

• Will FDIC’s analysis of the asset pool be available to potential investors?  When?

• The process may be inordinately costly for smaller Colorado banks with smaller dollar amounts of assets – will pools of assets from multiple banks be considered for the program?

In addition to these concerns, there appears to be rising public opposition to any government program that uses more taxpayer money to prop up privately owned failing financial institutions.  And some believe that while this program may prevent massive bank failures in the short run, it will just delay the final day of reckoning at greater taxpayer expense. 

See FDIC's website at http://www.fdic.gov/llp/index.html for more info on the Legacy Loans Program. 

Comments

[Neena]

Good post.