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Franklin Bank, Security Pacific Bank, bank failures

Banks in California and Texas Fail

November 09, 2008 11:24 AM
by findingDulcinea Staff
State regulators close banks in Texas and California, the 18th and 19th U.S. banks to fail this year.

Franklin, Security Pacific Latest Financial Crisis Casualties

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Franklin Bank of Houston and California's Security Pacific Bank have joined the ranks of financial institutions that have failed this year, according to CNNMoney. State regulators closed the two banks on Friday. 

The deposits held at Franklin are going to be taken over by Propserity Bank of El Campo, Texas. That includes “those that exceed the insurance limit and brokered accounts,” CNNMoney said. 

A Los Angeles bank, Pacific Western, will take over Security Pacific’s assets and branches. Branches of Franklin and Security Pacific will open as Properity and Pacific Western, according to CNNMoney.

The FDIC (Federal Deposit Insurance Corporation) Web site has extensive information for Security Pacific and Franklin customers.

The two banks join a long list of 2008 bank failures. Additionally, other major banks, including Wachovia, have been bought by larger institutions during this financially tumultuous year.

Background: Security Pacific and Franklin Join WaMu, Others

The federal Office of Thrift Supervision closed down Washington Mutual in September, making the FDIC (Federal Deposit Insurance Group) the receiver. JPMorgan Chase stepped in with $1.9 billion, formally putting WaMu’s long decline to an end.

JPMorgan is now the largest U.S. bank in terms of deposits. Bloomberg quoted JPMorgan CEO Jamie Dimon as saying, “This is a fabulous franchise. … We think we got this at a price that protects us, where if we were wrong, it still protects us.”

WaMu customers had pulled out $16.7 billion in deposits since Sept. 16, draining the bank’s liquidity and signaling government authorities to step in. “With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business,” the Office of Thrift Supervision was quoted as saying by Reuters.

WaMu’s credit rating had previously been downgraded to junk status. 

JPMorgan had considered investing in WaMu as early as March but negotiations fell through after private equity fund TPG agreed to inject $7 billion of capital into WaMu bank in April. WaMu’s skidding share price continuously “decimated” the value of TPG’s investment over the following months, as Investment Dealer’s Digest put it.

Under the tutelage of WaMu CEO Kerry Killinger, who became president of the bank in 1988 and chief executive two years later, WaMu expanded from regional saving-and-loan crisis survivor to the nation’s largest bank through acquisitions. Snappy commercials on network TV promoting WaMu’s free checking and bank branches with hipster allure that the Seattle Post-Intelligencer likened to that Starbucks increased its appeal across the country.

But unlike the savings-and-loan scandal, which helped WaMu get a leg up in the industry, the sub-prime mortgage crisis depleted the bank’s liquidity and left the bank with a “financial position … among the worst of any major U.S. financial institution,” writes The Wall Street Journal. Killinger was axed as WaMu CEO on Sept. 8, replaced by Alan Fishman, chair of Meridian Capital Group, suggesting that the bank was prepping for a merger.

In addition to drowning in sub-prime debt, the bank’s customer service ratings also took a hit: the Los Angeles Better Business Bureau gave WaMu a D rating, meaning that the bureau has concerns about the company’s dealings and recommends “caution in doing business with it.”

The Puget Sound Business Journal in 2002 rounded up other sets of complaints from customers and mortgage brokers, claiming WaMu failed to record mortgage payments, resulting in borrowers getting artificially lower credit scores and, in one case, saw their house foreclosed. Customers took up a class-action lawsuit against the bank filed by law firms in Seattle and San Francisco.

The shaky state of the financial sector was a big reason WaMu did not have a line of suitors in waiting. FAS 157, a new rule instituted by the U.S. Financial Accounting Standards Board, is another. Set to become effective in December, FAS 157 stipulates that any major write-downs to assets that have gone unaccounted on balance sheets must be noted on accounts following a merger or acquisition. Seeking Alpha’s Edward Harrison writes that the regulation could have dissuaded regional banks from buying into larger ones like WaMu.

“With loans fetching their greatest discounts since the Great Depression, it sharply reduces the value of a target’s assets,” Harrison quotes Columbia Business School instructor Robert Willens as saying. “That will force an acquirer to raise additional capital in this very difficult environment.”

At least three possible buyers had shied away from investing in WaMu or National City Bank, based in Cleveland, because of the rule, said two bankers involved in the negotiations.

Reference: Guide to Finance

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