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Hi Guys,

Here's an interesting post from duane1x on the METAR bde. If a bank is 'too big to fail', then it apparently doesn't matter...

That is the question. Let's take a sidetrip into the bowels of the Colonial failure. First, a few observations over this new genre of bank failure reporting. Take this representive article from the NYTimes. http://www.nytimes.com/2009/08/15/business/15bank.html?em

Why do we need to be told regulators "simultaneously brokered a rapid sale" of Colonial, as if to convey that, somehow, one bank was closed and another stepped into the breach, all in realtime? We know it did not happen that way. In fact, the idea of a rapid sale should be insulting, shouldn't it? Billions of taxpayer dollars are in play here, both for what to assume of the bad debt immediately, and in agreements over what the taxpayer will be on the hook for, going forward.

Wouldn't it make us feel better to hear, After extended due diligence and tough negotiations, over the past several months, the FDIC brokered a deal...
why does everything have to sound as though it occurred seamlessly and with no pain?

All right, that's just a pet peeve, but now to the heart of the matter. We are also told that BB&T "has emerged from the financial crisis as one of the industry’s strongest players."


We are told that Colonial "had been embattled for months, and its failure was considered imminent." It was? By whom? Why, then, did CNB share price go from a low of 42 cents Aug 4 to 77 cents on Aug 6th? UP 80% just days before getting the FDIC hook? Either failure was not, in fact, so obvious, or maybe it was, and the price got one final pump before annhilation.


Who is this Colonial bank that "rode the excesses of the nation’s real estate boom"? Well, actually quite well-diversified in terms of their loan book with roughly a third in construction & dev, a third in CRE, and a third in 1-4 family (4.6B, 4.4B, and 5.2B respectively, out of a loan book of 16.4B).

Then, maybe Colonial's loans were simply terrible? It's true, the construction loans are not performing well, with 18% in past due or non-accrual status. But the 1-4 Family are performing better (4% past due or non accrual) than those of the acquiring bank BB&T (6%).

Let me say that again. CNB - the "bad" bank that "rode the excesses of the real estate boom" - has a significant part of their loan book in 1-4 Family that is performing better than BB&T - the "good" bank that is "one of the industry's strongest players." Scratching your head yet? Yeah, they've got the construction loans, which gives them a blended past due rate of 7.83%, higher than BB&T, but really not much different than Citi at 7.67%.

Okay maybe it's not about the loans. Maybe it's about something else, like Tier 1 core capital (remember the stress tests?) In this area Colonial is neither the worst nor the best, with 1.4B Tier 1 capital out of 16.4B loans. In my spreadsheet that prints at 9%, lower than some, higher than others.

OK, BB&T is 11.8B Tier 1 on 97.7B net loans, or 12%. Better, no? But good enough to be one of the industry's strongest players? And maybe a clue to how they got that way is the fact that BB&T got $3.1B in TARP money.
{rk: at the time of the test, BBT had the TARP money still} http://bailoutsleuth.com/2009/01/citigroup-inc-new-york----1......

CNB got shut out at the TARP door. Maybe they deserved it, I don't know. But if you take $3.1B away from BB&T's Tier 1 capital, what do you get? 8.7B over 97.7B is what? Oh...9%.

rk
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Very interesting analysis. I wonder what the real story is behind all these maneuvers anyway ... and how long it will be before we find out?
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I agree with the general comments on the weird way bank failures get reported. But I don't get this one.


CNB got shut out at the TARP door. Maybe they deserved it, I don't know. But if you take $3.1B away from BB&T's Tier 1 capital, what do you get? 8.7B over 97.7B is what? Oh...9%.


A 9% Tier 1 ratio is still considered well capitalized and has been pretty much forever. So I don't think you can be to harsh on bank which is still paying a almost respectable dividend (albeit cut by 2/3) and is profitable.
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I think you missed his point. Colonial had a Tier 1 Capital rate of 9% and yet they are deemed a failed bank, while their white knight rescuer has the exact same rate after the rescue. In other words, what is the sense in this?
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well it seems colonial was trying to stave off implosion and as such had not written off bad loans as much as others had, thus their Tier 1 was make believe......
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