President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. Sound familiar? But this bad bank doesn't solve the central issue, how to value thes toxic assets.
President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. The news is being reported in most financial publications.
Bloomberg writes:
"The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. "
This is of course, TARP redux. The original TARP was supposed to do just that. Buy toxic assets and get them off bank balance sheets. It was abandoned because no one could figure out how to price these assets. The central pricing dilemma is this: price the assets to high and the banks are being subsidized at taxpayer expense. Price them too low and the banks aren't receiving any real benefit from the sale of the assets. Finding the middle ground is extremely difficult and no one has figured out how to do it.
Estimates put the cost of this plan at over $1 trillion. The FDIC is exploring issuing debt backed by the agency to pay for the cost. More debt, dubious outcomes - I don't know but I'm starting to wonder if it might be better to let these toxic assets sit and instead provide funding to banks that don't need to be bailed out.
While the headlines discuss the problems with the nation's biggest banks, many small community banks are doing great. Low borrowing costs and lack of competition from the big boys is helping the community bank grow quickly.
While the headlines discuss the problems with the nation's biggest banks, many small community banks are doing great. Low borrowing costs and lack of competition from the big boys is helping the community bank grow quickly.
Steven Syre of The Boston Globe discussed this in an article and singled out two banks in Massachusetts, Brookline Savings Bank and Hingham Institution for Savings. While the article discussed Massachusetts banks there are thousands of small banks across the country that are also benefiting. As he writes:
"Access to ultracheap money and fading competition from mortgage companies are proving to be powerful advantages for many smaller banks. "Things are going well, particularly in the context of the economy," says Brookline Bancorp's chief executive, Richard Chapman.
Smaller banks are earning an unusually wide spread between the cost of money to them and the rate at which they lend to customers. They can borrow money from the Federal Home Loan Bank of Boston at rates in the range of 2 percent and use it to fund loans earning as much as 4 percent or even 4.5 percent more."
These banks are stable and offer somewhat competitive rates. Brookline is offering a 12 month CD at 2.40% APY, which is 85 basis points below the top 1 year cd rate on the BestCashCow rate tables. Still, that's significantly higher than some of the rates of the big banks. Bank of America was offering a 12 month CD for only 2.10% APY. So, for many, community banks offer stability with an above average return.
1st Centennial Bank in California was closed today by the California Department of Financial Institutions, marking the third bank closing of 2009. And we're still only in January!
1st Centennial Bank in California was closed today by the California Department of Financial Institutions, marking the third bank closing of 2009. And we're still only in January!
As of January 9, 2009, 1st Centennial had total assets of $803.3 million and total deposits of $676.9 million, of which there were approximately $12.8 million that exceeded the insurance limits. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.
What will happen to the $12.8 million is unclear. In the case of Indymac Bank's closure, the FDIC paid out some money above FDIC insurance limits.
Customers with accounts in excess of $250,000 should contact the FDIC toll-free at 1-800-822-1918 to set up an appointment to discuss their deposits. This phone number will be operational this evening until 9:00 p.m., PST; on Saturday from 9:00 a.m. to 6:00 p.m., PST; on Sunday from 12:00 p.m. to 6:00 p.m., PST; and thereafter from 8:00 a.m. to 8:00 p.m., PST. Customers who would like more information on today's transaction should visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/centennial.html.
Beginning Monday, depositors of 1st Centennial with more than $250,000 at the bank may visit the FDIC's Web page "Is My Account Fully Insured?" at http://www2.fdic.gov/dip/Index.asp to determine their insurance coverage.
First California agreed to assume the insured deposits for a 5.29% premium. It will also purchase approximately $293 million of the failed bank's assets. The assets are comprised mainly of cash, cash equivalents and marketable securities. The FDIC will retain the remaining assets for later disposition.
