Why is Goldman willing to lose so much on deposits?

Mar 19, 2010 17:29 UTC

Writing my Hotel California column earlier this week, I came across the following interesting tidbit in Goldman’s 10-K (page 206):

The amount deposited by the firm’s depository institution subsidiaries held at the Federal Reserve Bank was approximately $27.43 billion and $94 million as of December 2009 and November 2008, respectively, which exceeded required reserve amounts by $25.86 billion and $6 million as of December 2009 and November 2008, respectively.

This seems a good indicator of the lack of lending opportunities in the economy. But I’m curious: Goldman is probably losing a lot of money parking customer deposits on reserve at the Fed. Why do it?

But first let me try to explain what’s happening here…

Goldman has a bank subsidiary — GS Bank USA — which collects deposits via brokerage accounts. It doesn’t have any bank branches anywhere. And Goldman has grown these deposits a fair bit, from an average of $13 billion in 2007 to $35 billion in 2009.

This is odd for two reasons.

First, Goldman doesn’t have much use for deposits that I can see. They can’t be used to fund investment banking activities.

And clearly they don’t see many good lending opportunities for these deposits. If they did, they wouldn’t park such a big proportion at the Fed, where they lose money.

[Aside: a common misconception is that holding reserves at the Fed is profitable for banks since the Fed now pays interest on reserves. But this ignores the other side of the balance sheet. Banks, after all, have to pay for the deposits that they then put on reserve at the Fed. Math in next paragraph]

Excess reserves held on deposit at the Fed pay 0.25%. But the average interest rate Goldman paid on U.S. deposits in 2009 was 1.06%, implying a negative net interest margin of 0.81%.

Multiply -0.81% by total excess reserves of $25.9 billion held at December 2009, and you get an implied annualized loss of $210 million. That’s a decent chunk of change.*

Another reason these deposits might not make good loans is old-fashioned asset-liability maturity mismatch. Brokerage deposits aren’t sticky like retail deposits. They chase the highest return in the market. Short duration (“hot money”) deposits tied up in longer-duration illiquid loans is a recipe for bank failure.

Now, certain folks might use this as an excuse to bash Goldman (“why aren’t they lending to the real economy!”), but that’s wrongheaded. Don’t get me wrong: I’m no fan of Goldman Sachs. But the problem isn’t that banks are lending too little today, it’s that they lent way too much yesterday. The chief lesson of the financial crisis is that irresponsible lending has dire consequences for the economy. Better that banks err on the side of safety and soundness….better that they lose money parking reserves at the Fed than chase risk making dodgy loans.

But the original question still stands. If Goldman can’t find anything profitable to do with deposits, why keep collecting them?

——————–

*A couple caveats here. The rate Goldman is paying on deposits could be lower today than the average in 2009. Also, to lose $210 million, Goldman would have to hold this balance at the Fed — at a NIM of -.81% — for a full year.

(ht frog)

COMMENT

shame on the fake democracy of US,It’s all about money not politics

Posted by officestory | Report as abusive

Bank failure Friday

Jun 26, 2010 02:25 UTC

#84

—Failed bank: Peninsula Bank, Englewood FL
—Acquiring bank: Premier American Bank, Miami FL
—Vitals: assets of $644.3 million, deposits of $580.1 million
—Estimated DIF damage: $194.8 million

#85

—Failed bank: First National Bank, Savannah GA
—Acquiring bank: The Savannah Bank, National Association, Savannah GA
—Vitals: assets of $252.5 million, deposits of $231.9 million
—Estimated DIF damage: $68.9 million

#86

—Failed bank: High Desert State Bank, Albuquerque NM
—Acquiring bank: First American Bank, Artesia NM
—Vitals: assets of $80.3 million, deposits of $81.0 million
—Estimated DIF damage: $20.9 million

Bank failure Friday

Jun 19, 2010 01:21 UTC

Slow Friday….

#83

–Failed bank: Nevada Security Bank, Reno NV
–Acquiring bank: Umpqua Bank, Roseburg OR
–Vitals: assets of $480.3 million deposits of $479.8 million
–Estimated DIF damage: $80.9 million

Lunchtime Links 6-16

Jun 16, 2010 17:25 UTC

$250k deposit insurance limit to be made permanent, retroactive (Paletta/Luccetti, WSJ) Savers in IndyMac, which failed before deposit insurance limits were raised, can now put in a claim for lost deposits over $100k. I argued a year ago that this bailout never deserved the “temporary” moniker in the first place, that it would never go away. The problem is that deposit insurance, which is supposed to stabilize the banking system, can actually DEstabilize it by compounding moral hazard. That’s what this does.

Housing starts plummet in May (CR) This is good news folks. The economy can’t recover until housing recovers, and housing can’t recover — not sustainably — until supply declines…

Judge releases some Blago wire taps (Kozlov, CBS) Was chatting with a friend over the weekend who worked in Blagojevich’s office briefly. He told a story about how the IL governor refused to take a certain trip to Washington, that would have clearly benefited the state, because his wife refused to go. His wife refused to go because staff thought it a bad idea to grant her request to use state resources to turn the trip into a fun vacation for her and her friends.

Look who decided to show (flickr) For Tetris fans…

Swedish subway system (leenks) Pretty cool…

Stuck man cuts off own arm (MSNBC)

Seen at the Brazil – North Korea soccer match (imgur) Hilarious.

A German student created a major traffic jam in Bavaria when he ‘mooned’ a group of Hell’s Angels, hurled a puppy at them and then escaped on a bulldozer. (Orange News) This has to be a joke…

BP buys 32 of Kevin Costner’s oil cleanup machines (ABC) As Yves Smith remarked: “if you build it, they will come.”

COMMENT

I think this internet site has got some real superb info for everyone . “A friend might well be reckoned the masterpiece of nature.” by Ralph Waldo Emerson.

Lunchtime Links 6-15

Jun 15, 2010 18:06 UTC

Life insurers win capital reprieve (Scism, WSJ) This is a shame. On one hand, life insurers don’t appear as systemically risky as Wall Street banks, since their liabilities aren’t as unstable. You won’t see a run on life insurance policies the way you might on bank deposits, commercial paper or repos. But life insurers nevertheless dramatically overlevered themselves during the boom, and they invested in all sorts of dodgy paper rated AAA. To protect policy-holders, regulators should err on the side of demanding too much capital…

CFTC approves first movie futures contract (Doering/Rampton, Reuters) For “Takers,” starring Matt Dillon. I wonder: will they have to approve contracts for each individual movie? This also a shame

Leverage, Baby! (Kim/Opdyke, WSJ) No doubt the writers liked the idea of taking a contrarian view, but the analysis in this piece is quite awful. Their basic thesis is that rates are low so investors should lever up to buy assets or just to raise cash. Hmmm, last I checked, cash pays 0%. The reason to pay interest to hold cash is…what precisely? As for asset prices, they look too high whether deflation or inflation is on the horizon. A decade of debt deflation is the most likely scenario, in which case asset prices will fall and debts will be ever more burdensome to service. But even inflation would be problematic, contrary to popular opinion. Higher expected inflation would lead to two things that are toxic for asset values: higher interest rates and higher discount rates for future cash flow streams. Borrowing to buy assets only makes sense if they’re substantially undervalued; the writers don’t make any case for that.

What free Wi-Fi looks like in South Korea… (imgur) ….a lot more impressive than anything you can get in the U.S.!

Bin Laden hunter arrested in Pakistan (BBC) News story or Quentin Tarantino film?

Once just a site with funny cat pictures, now a web empire (Wortham, NYT) I Can Has Cheezburger now has 40 employees. Crazy.

Etch-a-Sketch Chicago (reddit) Pretty awesome. Chicagoans will note the sun is rising from an odd direction, but whatever.

He’s a novelist now?!? (GlennBeck.com) Wouldn’t want to be the ghost-writer that worked on this project…

You would if you could…

triceretops

COMMENT

Rolfe

Rolfe,

s_ _ _ happens: there was a run on AIG life policies in Hong Kong in 2008:

“..As Chan Akya reports in Asia Times Online on Wednesday panic-stricken policyholders lined up all day on Wednesday in Singapore to surrender their policies to secure redemption value”

This lifted from: http://www.perceptric.com/blog/China/_ar chives/2008

Posted by crocodilechuck | Report as abusive

Bank failure Friday

Jun 12, 2010 02:07 UTC

Just one tonight it appears…

#82

–Failed bank: Washington First International Bank, Seattle WA
–Acquiring bank: East West Bank, Pasadena CA
–Vitals: assets of $520.9 million, deposits of $441.4 million
–Estimated DIF damage: $158.4 million

On another, far more important topic — the U.S. match against England tomorrow — a British friend suggests the stakes be increased. To wit:

IF THE US WINS: Britain officially becomes the 51st state; the queen becomes a charwoman at the White House and American rock stars are forbidden by law to affect English accents.

IF ENGLAND WINS: American Independence is revoked and you revert to being a colony with Her Gracious Majesty as your head of state. Frisbees, Rollerblades and Jerry Springer-type TV shows are then made illegal.

Bank Failure Friday

Jun 5, 2010 04:01 UTC

Three failures tonight…including one in Nebraska with assets/deposits over $2 bilsky.

#79

—Failed bank: First National Bank, Rosedale MS
—Acquiring bank: The Jefferson Bank, Fayette MS
—Vitals: assets of $60.4 million deposits of $63.5 million
—Estimated DIF damage: $12.6 million

#80

—Failed bank: Arcola Homestead Savings Bank, Arcola IL
—Acquiring bank: None. Insured deposits paid out.
—Vitals: assets of $17.0 million deposits of $18.1 million
—Estimated DIF damage: $3.2 million

#81

—Failed bank: TierOne Bank, Lincoln NE
—Acquiring bank: Great Western Bank, Sioux Falls SD
—Vitals: assets of $2.8 billion deposits of $2.2 billion
—Estimated DIF damage: $297.8 million

Bank failure Friday

May 28, 2010 23:44 UTC

Happy long weekend everyone!

#74

–Failed bank: Bank of Florida – Southeast
–Acquiring bank: EverBank, Jacksonville FL
–Vitals: assets of $595.3 million, deposits of $531.7 million
–Estimated DIF damage:$71.4 million

#75

–Failed bank: Bank of Florida – Southwest
–Acquiring bank: EverBank, Jacksonville FL
–Vitals: assets of $640.9 million and deposits of $559.9
–Estimated DIF damage: $91.3 million

#76

–Failed bank: Bank of Florida – Tampa Bay
–Acquiring bank: EverBank, Jacksonville FL
–Vitals: assets of $245.2 million and deposits of $224.0 million
–Estimated DIF damage: $40.3 million

#77

–Failed bank: Granite Community Bank, N.A., Granite Bay CA
–Acquiring bank: Tri Counties Bank, Chico CA
–Vitals: assets of $102.9 million and deposits of $94.2 million
–Estimated DIF damage: $17.3 million

#78

–Failed bank: Sun West Bank, Las Vegas NV
–Acquiring bank: City National Bank, Los Angeles CA
–Vitals: assets of $360.7 million and deposits of $353.9 million
–Estimated DIF damage: $96.7 million

Bank failure Friday + teachable moment for investors

May 22, 2010 01:40 UTC

Just one small bank shuttered tonight.

#73

–Failed bank: Pinehurst Bank, St. Paul MN
–Acquiring bank: Coulee Bank, La Crosse WI
–Vitals: assets of $61.2 million, deposits of $58.3 million
–Estimated DIF damage: $6.0 million

As a reminder, FDIC still has $63 billion of cash on the balance sheet despite the fact that it showed a negative balance of $20.7 million at the end of Q1.

How’s that? Assets = Liabilities + Equity.

Cash assessments collected from banks are assets on the left side of the balance sheet, but how they’re accounted for on the right side can be complex. Normally FDIC counts these as its own capital, as equity, also called the DIF’s “balance.” But because these were regular assessments collected up front, they’re counted as deferred revenue — a liability — instead of as equity.

So FDIC has more than enough cash raised from banks to pay for bank failures on its radar. The issue is banks that aren’t on its radar, i.e. the TBTFers. Those guys have raised a fair amount of capital, but if any one goes down, it would quickly overwhelm the DIF, forcing FDIC to borrow from Treasury.

TEACHABLE MOMENT…

For those that don’t understand deferred revenue, it’s a simple accounting idea that’s important to master because it’s the key to finding the best investments, the kind that made Warren Buffett rich.

In a nutshell, deferred revenue is revenue that’s been received, but not yet earned. For example, a newspaper business might charge for a yearly subscription up front, but it has to deliver the product over the following 12 months.

The idea behind your basic income statement is to match revenue with expenses incurred to generate it. So if I get paid up front to deliver 12 months worth of newspapers, then I recognize the revenue over 12 months even though I got all the cash on day 1.

On the asset side of the balance sheet, cash is cash. But on the right side, instead of as equity, it’s counted as deferred revenue, a liability I have to work down by delivering my product over the specified period of the contract with my customer.

So why is having lots of deferred revenue the characteristic of a good business? It reduces risk. Wouldn’t you rather get paid up front to deliver a product or service than to put all the work in first? For instance, retailers have to invest in inventory to stock their shelves for the Xmas season. But maybe the retailer screws up, stocking his shelves with tickle-me-Elmos and slap bracelets when kids today are looking for a Blu-Ray PS3 or the latest Justin Bieber album. Retailers can quickly go out of business this way, investing in inventory that doesn’t sell.

There’s also the problem of receivables collection. Powerful customers can demand I deliver my product today, and then not pay me for 30 to 90 days. Sometimes, they may not pay me at all and I have to write off what they owe me as uncollectable.

These risks are removed if the equation is flipped and I get paid before I deliver my product.

Warren Buffett’s path to riches was paved by the ultimate deferred revenue business: insurance. He gets paid premiums up front and only incurs expenses as claims are filed. In the meantime, he gets to hold on to the premiums (called “the float”), which he can invest in the stock market. And if no claims are filed, then he gets to keep the cash collected. Pretty cool.

So, when looking to invest, always pay attention to how cash flows into and out of a business.

In particular, calculate “capital employed” on the balance sheet. There are a few different ways to do it, but the way I was taught:

Capital employed = (receivables + inventories + prepaid assets + net fixed assets) – (accounts payable + accrued expenses + deferred revenue)

If this figure is consistently negative over time, it’s a sign of a good business.

Bank failure Friday

May 14, 2010 21:34 UTC

Ameris Bank, the acquiring institution of the night’s first failure, has now gone to the well three times. The company’s share price hit a low of $5.05 on Thursday 11/5/06, the day before it made its second FDIC-assisted transaction. Since then, the stock has more than doubled to $10.89. This is good business, acquiring busted banks!

(Though Sheila Bair has said FDIC is getting better deals of late…)

#69

–Failed bank: Satilla Community Bank, Saint Marys GA
–Regulator: Georgia Department of Banking and Finance
–Acquiring bank: Ameris Bank, Moultrie GA
–Vitals: assets of $135.7 million, deposits of $134.0 million
–Transaction: Loss share on $101.0 million of assets
–Estimated DIF damage: $31.3 million

#70

–Failed bank: New Liberty Bank, Plymouth MI
–Regulator: Michigan Office of Financial and Insurance Regulation
–Acquiring bank: Bank of Ann Arbor, Ann Arbor MI
–Vitals: assets of $109.1 million, deposits of $101.8 million
–Transaction: Loss share on $95.2 million of assets
–Estimated DIF damage: $25.0 million

#71

–Failed bank: Southwest Community Bank, Springfield MO
–Regulator: Missouri Division of Finance
–Acquiring bank: Simmons First National Bank, Pine Bluff AR
–Vitals: assets of $96.6 million, deposits of $102.5 million
–Transaction: Loss share on $66.8 million of assets
–Estimated DIF damage: $29.0 million

#72

–Failed bank: Midwest Bank and Trust Company, Elmwood Park IL
–Regulator: Illinois Dept of Financial Professional Regulation
–Acquiring bank: Firstmerit Bank, National Association, Akron OH
–Vitals: assets of $3.17 billion, deposits of $2.42 billion
–Transaction: Loss share on $2.27 billion of assets
–Estimated DIF damage: $216.4 million

American bank failures pump up deal flow

May 13, 2010 13:37 UTC

Vulture investors like Wilbur Ross and small-town community bankers aren’t alone in cashing in on America’s steady flow of bank failures. While the mergers and acquisitions business remains largely in the doldrums, a coterie of investment bankers and advisers outside the bulge bracket is minting fees from the banking crash.

The biggest winners are acquirers, of course. As banks are seized by the Federal Deposit Insurance Corp at an accelerating pace — 68 through the first week of May — healthy institutions have scooped up good assets at deep discounts, mainly strong deposit franchises that would be expensive to build from scratch.

But the investment bankers and advisers involved in these FDIC deals have also managed to skim off a fair bit of cream. According to SNL Financial, banks have advised on the transfer of $90 billion of deposits in the five quarters through March. Bankers are cagey about what they make on such deals, but it’s likely in the ballpark of 10-15 basis points of transferred deposits, implying fees between $90 and $130 million.

While big banks like Credit Suisse, Deutsche Bank and JPMorgan worked on the biggest deals, smaller folks are the busiest. Keefe Bruyette & Woods, Hovde Financial, Sandler O’Neill Partners and Howe Barnes Hoefer & Arnett lead the way in terms of number of deals advised on, collecting a healthy share of fees. A small Arkansan consultancy — DD&F Consulting — also pops up regularly.

The complexities of FDIC-assisted transactions mean advisers work for their fees. To avoid runs, troubled institutions are put up for auction just weeks before they’re seized by the FDIC. And bankers that have worked on multiple transactions can help would-be acquirers navigate the vicissitudes of FDIC’s auctions. Indeed, the regulator just recently revamped its standard loss-share agreement.

With U.S. bank failures still expected to peak this year, Friday evenings — when FDIC chairman Sheila Bair sends her troops into battle — will continue to be the most lucrative day of the week for at least a portion of the investment banking community.

COMMENT

why can’t I make comments?

Posted by STORYBURNcom2 | Report as abusive

American bank failures pump up deal flow

May 12, 2010 22:27 UTC

Vulture investors like Wilbur Ross and small-town community bankers aren’t alone in cashing in on America’s steady flow of bank failures. While the mergers and acquisitions business remains largely in the doldrums, a coterie of investment bankers and advisers outside the bulge bracket is minting fees from the banking crash.

The biggest winners are acquirers, of course. As banks are seized by the Federal Deposit Insurance Corp at an accelerating pace — 68 through the first week of May — healthy institutions have scooped up good assets at deep discounts, mainly strong deposit franchises that would be expensive to build from scratch.

But the investment bankers and advisers involved in these FDIC deals have also managed to skim off a fair bit of cream. According to SNL Financial, banks have advised on the transfer of $90 billion of deposits in the five quarters through March. Bankers are cagey about what they make on such deals, but it’s likely in the ballpark of 10-15 basis points of transferred deposits, implying fees between $90 and $130 million.

While big banks like Credit Suisse , Deutsche Bank and JPMorgan Chase worked on the biggest deals, that’s a lot of money for the collection of smaller folks that are the busiest. Keefe Bruyette & Woods, Hovde Financial, Sandler O’Neill Partners and Howe Barnes Hoefer & Arnett lead the way in terms of number of deals advised on. A small Arkansan consultancy — DD&F Consulting — also pops up regularly.

The complexities of FDIC-assisted transactions mean advisers work for their fees. To avoid runs, troubled institutions are put up for auction just weeks before they’re seized by the FDIC. And while bankers that have worked on multiple transactions can help would-be acquirers navigate the FDIC’s processes, these are changing regularly. Indeed, the regulator just recently revamped its standard loss-share agreement.

With U.S. bank failures still expected to peak this year, Friday evenings — when FDIC chairman Sheila Bair sends her troops into battle — will continue to be the most lucrative day of the week for at least a portion of the investment banking community.

Bank failure Friday

May 7, 2010 23:13 UTC

#65

—Failed bank: The Bank of Bonifay, Bonifay FL
—Regulator: Florida Office of Financial Regulation
—Acquiring bank: First Federal Bank of Florida, Lake City FL
—Vitals: assets of $242.9 million, deposits of $230.2 million
—Estimated DIF damage: $78.7 million

#66

—Failed bank: Access Bank, Champlin MN
—Regulator: Minnesota Department of Commerce
—Acquiring bank: PrinsBank, Prinsburg MN
—Vitals: assets of $32.0 million, deposits of $32.0 million
—Estimated DIF damage: $5.5 million

#67

—Failed bank: Towne Bank of Arizona, Mesa AZ
—Regulator: Arizona Department of Financial Institutions
—Acquiring bank: Commerce Bank of Arizona, AZ
—Vitals: assets of $120.2 million, deposits of $113.2 million
—Estimated DIF damage: $41.8 million

#68

—Failed bank: 1st Pacific Bank of California, San Diego CA
—Regulator: California Department of Financial Institutions
—Acquiring bank: City National Bank, Los Angeles CA
—Vitals: assets of $335.8 million, deposits of $291.2 million
—Estimated DIF damage: $87.7 million

COMMENT

Man, its a shame all those small banks are having to pay extra FDIC assesments to pay for closing all those big banks.

Posted by Beezlebufo | Report as abusive

Bank failure Friday — PR banks go down

Apr 30, 2010 21:43 UTC

Taken together, the estimated loss for the Deposit Insurance Fund for the three failed Puerto Rican banks is a whopping $5.3 billion (add another $2.1 billion for the night’s other 4 failures).

That’s the largest hit to the Deposit Insurance Fund since IndyMac failed nearly two years ago, costing the DIF $10.7 billion.

Though its “net worth” stood at -$20.9 billion as of 12/31/09, FDIC reported that the DIF had $66 billion of cash on hand. So Sheila won’t be asking Treasury for funds any time soon. Failures have been, and will continue to be, paid for out of assessments on banks.

By assets, WesternBank and R-G Premier Bank rank #2 and #8 on CR’s unofficial problem bank list.

It’s also worth noting that the pace of bank failures has picked up significantly. This week there were 7, last week there were 7, the week before there were 8. Year-to-date, FDIC has closed twice as many banks in 2009 (64) as 2008 (32).

#58

–Failed bank: Eurobank, San Juan, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Oriental Bank and Trust, San Juan, Puerto Rico
–Transaction: loss share on $1.58 billion of assets
–Vitals: assets of $2.56 billion, deposits of $1.97 billion
–Estimated DIF damage: $743.9 million

#59

–Failed bank: R-G Premier Bank of Puerto Rico, Hato Rey, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Scotiabank de Puerto Rico, San Juan, Puerto Rico
–Transaction: loss share on $5.41 billion of assets
–Vitals: assets of $5.92 billion, deposits of $4.25 billion
–Estimated DIF damage: $1.23 billion

#60

–Failed bank: Westernbank Puerto Rico, Mayaguez, Puerto Rico
–Regulator: Puerto Rico Commissioner of Financial Institutions
–Acquiring bank: Banco Popular de Puerto Rico, San Juan, Puerto Rico
–Transaction: loss share on $8.77 billion of assets
–Vitals: assets of $11.94 billion, deposits of $8.62 billion
–Estimated DIF damage: $3.31 billion

#61

–Failed bank: CF Bancorp, Port Huron MI
–Regulator: Michigan Office of Financial and Insurance Regulation
–Acquiring bank: First Michigan Bank, Troy MI
–Transaction: loss share on $808.1 million of assets
–Vitals: assets of $1.65 billion, deposits of $1.43 billion
–Estimated DIF damage: $615.3 million

#62

–Failed bank: Champion Bank, Creve Coeur MO
–Regulator: Missouri Division of Finance
–Acquiring bank: BankLiberty, Liberty MO
–Transaction: loss share on $113.5 million of assets
–Vitals: assets of $187.3 million, deposits of $153.8 million
–Estimated DIF damage: $52.7 million

#63

–Failed bank: BC National Banks, Butler MO
–Regulator: OCC
–Acquiring bank: Community First Bank, Butler MO
–Transaction: loss share on $37.9 million of assets
–Vitals: assets of $67.2 million, deposits of $54.9 million
–Estimated DIF damage: $11.4 million

#64

–Failed bank: Frontier Bank, Everett WA
–Regulator: Washington Department of Financial Institutions
–Acquiring bank: Union Bank, National Association, San Francisco CA
–Transaction: loss share on $3.04 billion of assets
–Vitals: assets of $3.50 billion, deposits of $3.13 billion
–Estimated DIF damage: $1.37 billion

Bank failure Friday: 7 in Illinois, one tied to Obama

Apr 24, 2010 01:41 UTC

FDIC may be using up all available hotel rooms in Chicago this weekend as it closes five banks in the city and two others elsewhere in Illinois.

But the big news is that one in particular has close ties to the whippersnapper Democratic candidate for IL’s U.S. Senate seat, and peripheral ones to President Obama. The Senate Candidate, Alexi Giannoulias, was an executive at Broadway Bank, owned by his family. While he was there, the bank morphed into an aggressive commercial real estate lender, funding itself primarily with high interest-rate brokered deposits.

Using brokered deposits to expand quickly in CRE is a common recipe for failure ever since the S&L crisis.

Most interesting are the characters that Broadway lent to. The Chicago Tribune reported earlier this month that it had lent $20 million to two known felonswhile Giannoulias was a senior loan officer.

It’s a must read story:

Shortly after Broadway began lending money to a Chicago firm the pair formed, Giorango and Stavropoulos used that company to launch their own lending business and make more than 40 short-term loans to borrowers who might not qualify for traditional bank financing, the Tribune found. Such so-called hard-money loans are typically riskier than long-term mortgages offered by banks.

Broadway officials say they were unaware of the pair’s lending operation and believe the bank’s loans were used solely to fund real estate purchases. They acknowledged they did not inspect or audit the company’s business records, though Broadway’s loan provisions allowed the bank to do so.

They were lending millions to these guys and they didn’t even know where the money was going?!?

In a two-hour interview this week with the Tribune, Giannoulias’ older brother, Demetris Giannoulias, the bank’s president and CEO, said he established Broadway’s relationship with Giorango in the mid-1990s. Giorango began investing in Chicago properties after completing two federal prison stints for running bookmaking schemes….

Demetris Giannoulias said the bank learned of Giorango’s bookmaking and prostitution promotion convictions from a spring 2004 Tribune report detailing those cases.

“But we’re a relationship bank,” he said. “So somebody comes in and in all his dealings with the bank seem to be on the level, everything makes sense, nothing seems illicit or untoward. Just because somebody gets a bad article written about them there’s no reason to say, ‘Hey, listen, I’m going to kick you out the door because you don’t win a popularity contest.’ We didn’t think he was doing anything illegal.”

Alexi Giannoulias happens to be an old basketball buddy of the President and his is just the latest seedy story in Chicago politics. He was elected state Treasurer at 29 thanks to an endorsement from then Senate candidate Barack Obama. His only experience had been at Broadway.

How did he get elected Treasurer? Because Obama endorsed him. Why did Obama endorse him? Because the Giannoulias family had been big financial supporters for Obama’s Senate campaign (Alexi continued his financial support for presidential candidate Obama).

Another well-known felon also got loans from Broadway: Tony Rezko.

Giannoulias continues to dodge questions about his time at the bank. As I noted in February, he won the Democratic primary despite Broadway having received a rebuke from FDIC just days before the election.

Now that the bank has officially been seized, it will be a tougher topic to avoid. Hopefully Democrats will lean on Giannoulias to quit the race. He has no business being there in the first place.

——

Here’s the run down of tonight’s failures:

#51

–Failed bank: Amcore Bank, National Association, Rockford IL
–Regulator: OCC
–Acquiring bank: Harris National Association, Chicago IL
–Transaction: loss share covering $2.0 billion of assets
–Vitals: assets of $3.8 billion, deposits of $3.4 billion
–Estimated DIF damage: $220.3 million

#52

–Failed bank: Broadway Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: MB Financial Bank, National Association, Chicago IL
–Transaction: loss share on $878.4 million
–Vitals: assets of $1.2 billion, deposits of $1.1 billion
–Estimated DIF damage: $394.3 million

#53

–Failed bank: Citizens Bank&Trust Company of Chicago, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Republic Bank of Chicago, Oak Brook IL
–Transaction: Republic pays small premium for deposits, FDIC retains assets
–Vitals: assets of $77.3 million, deposits of $74.5 million
–Estimated DIF damage: $20.9 million

#54

–Failed bank: New Century Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: MB Financial Bank, National Association, Chicago IL
–Transaction: loss share on $429.1 million of assets
–Vitals: assets of $485.6 million, deposits of $492.0 million
–Estimated DIF damage: $125.3 million

#55

–Failed bank: Lincoln Park Savings Bank, Chicago IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Northbrook Bank and Trust Company, Northbrook IL
–Transaction: loss share on $141.5 million of assets
–Vitals: assets of $199.9 million, deposits of $171.5 million
–Estimated DIF damage: $48.4 million

#56

–Failed bank: Peotone Bank and Trust Company, Peotone IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: First Midwest Bank, Itasca IL
–Transaction: loss share of $57.5 million of assets
–Vitals: assets of $130.2 million, deposits of $120.0 million
–Estimated DIF damage: $31.7 million

#57

–Failed bank: Wheatland Bank, Naperville IL
–Regulator: IL Dept of Financial and Professional Regulation — Division of Banking
–Acquiring bank: Wheaton Bank & Trust, Wheaton IL
–Transaction: loss share on $300.2 million
–Vitals: assets of $437.2 million, deposits of $438.5 million
–Estimated DIF damage: $133.0 million

COMMENT

7 bank failures in Illinois only on 04/23.
Here is the list and graph of bank failures :
http://portalseven.com/banks/Failed_Bank s_List_2010.jsp

About todays bank failures :

Total Assets of failed banks = 6.33 billion
Total Deposits of failed banks = 5.80 billion
Total number of branches of failed banks = 73
Total cost to DIF = 973.9 million

Check more on bank failures at:
http://portalseven.com/banks/

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