Eight Banks Fail; Canada's Second Largest Lender Buys Three Of Them

It's bank failure Friday and today was no disappointment. Today regulators stepped up to the plate with Eight Bank Seizures as the number of failures in 2010 hits 50.

U.S. regulators on Friday seized eight banks with assets totaling more than $6 billion, raising the tally this year to 51 failed banks and adding to the carnage of small institutions that is expected to peak this year.

The eight banks were the most authorities closed since nine were seized last October.

The failed banks were spread across the United States, from Washington state and California to Massachusetts and Florida. Banks have been failing at a consistent pace as the industry still works through large portfolios of troubled mortgages and commercial real estate loans.

The Federal Deposit Insurance Corp said the eight banks that failed were:

• City Bank of Lynnwood, Washington, with assets of about $1.13 billion
• Tamalpais Bank of San Rafael, California, with assets of $628.9 million
• First Federal Bank of North Florida of Palatka, Florida, with assets of $393.9 million
• AmericanFirst Bank, of Clermont, Florida, with assets of $90.5 million
• Riverside National Bank of Florida, with assets of $3.42 billion
• Butler Bank of Lowell, Massachusetts, with assets of $268 million
• Lakeside Community Bank of Sterling Heights, Michigan, with assets of $53 million
• Innovative Bank of Oakland, California, with assets of $284 million.

The recovery of the bank industry is lagging behind the recovery of the overall economy, which is regaining footing after the worst financial crisis since the 1930s.

FDIC Chairman Sheila Bair recently said bank failures will likely peak in the third quarter of this year.

Toronto-Dominion Buys Three Failed Banks

Inquiring minds are reading Toronto-Dominion Buys Three Failed Banks as 2010 Toll Hits 50

Toronto-Dominion Bank, Canada’s second-largest lender, agreed to buy three Florida-based financial institutions as those and five other failures brought the number of 2010 closures to 50.

“These were all in locations that were in our master plan,” for new branches, Toronto-Dominion Chief Executive Officer Edmund Clark said yesterday in a telephone interview. “It would have taken us five years to have built that many branches, so it just speeds up our development.”

Lenders are collapsing amid losses on residential and commercial real estate loans which pushed the FDIC’s list of “problem” banks to the highest level since 1992 in the fourth quarter. Banks in Michigan, Massachusetts, California and Washington state were also closed yesterday by U.S. and state regulators, who named the Federal Deposit Insurance Corp. as receiver, according to statements on the agency’s Web site.

FDIC Chairman Sheila Bair said on Feb. 23 that the pace of failures may exceed last year’s total of 140.

State regulators and the FDIC were unable to find a buyer for Lakeside Community Bank, of Sterling Heights, Michigan, which was closed and deposits paid out, the FDIC said.

Toronto-Dominion's Master Plan

Given enough time, this might be a good move by Toronto-Dominion. Certainly it is a far better move that it would have been a year ago, two years ago, and especially three years ago.

I believe Florida real estate will bottom first as it was ground zero along with Nevada in plunging. However, I do not know exactly what assets Toronto-Dominion bought, or what the deal was.

Assuming Toronto-Dominion did its homework, these purchases might work out very well. That said, better bargains are likely coming up. I sense a massive wave of bank failures is coming up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Numerous Derivative Swap Deals Blow Sky High In Europe

Lost in the turbulence of a market focused on fraud charges against Goldman Sachs (see Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed), there are some interesting derivatives blowups in Europe to consider, similar in nature to swaps that blew up Jefferson County, Alabama.

Please consider Saint-Etienne Swaps Explode as Financial Weapons Ambush Europe

The worst global financial crisis in 70 years arrived in Saint-Etienne this month, as embedded financial obligations began to blow up.

A bill came due for 1.18 million euros ($1.61 million) owed to Deutsche Bank AG under a contract that initially saved the French city money. The 800-year-old town refused to pay, dodging for now one of 10 derivatives so speculative no bank will buy them back, said Cedric Grail, the municipal finance director. They would cost about 100 million euros to cancel today, he said.

Saint-Etienne is one of thousands of public authorities across Europe that tried to shave borrowing expenses by accepting derivatives deals whose risks they couldn’t measure. They may be liable for billions of euros, according to the Bank of Italy and consulting and law firms in France and Germany. As global economies climb out of recession, the crisis is hitting Saint-Etienne in central France, Pforzheim in western Germany and Apulia, an Italian regional government on the Adriatic. They may pay for their bets into the next generation.

From the Mediterranean Sea to the Pacific coast of the U.S., governments, public agencies and nonprofit institutions have lost billions of dollars because of transactions officials didn’t grasp. Harvard University in Cambridge, Massachusetts, agreed last year to pay more than $900 million to terminate swaps that assumed interest rates would rise.

Under the interest-rate swap deals popular with European municipalities, a bank would agree to cover a locality’s fixed debt payment and the government or agency would pay a variable rate gambling its costs would be lower -- and taking on the risk that they could be many times higher.

Use of swaps in Europe soared in the late 1990s and early 2000s because banks pitched them as the easiest way to reduce costs on fixed-rate loans, according to Patrice Chatard, general manager of Finance Active, which helps more than 1,000 localities across Western Europe manage their debt.

The financial institutions that sold the derivatives were many of the same ones that received government bailouts to weather the worst global credit crisis since the 1930s.

“These municipal swaps are the same thing as Greece,” said Fruchard, a former banker at Credit Lyonnais, now a unit of Credit Agricole SA, who designed swaps in the early 1990s. “It’s all trying to dress up your accounts.”

Germany, Italy, Poland and Belgium also used derivatives to manage fiscal deficits, Walter Radermacher, the head of Eurostat told EU lawmakers in Brussels yesterday without being specific.

Municipalities are having to rewrite their budgets. Saint-Etienne raised taxes twice, slashed by three-fourths a plan to renovate a museum commemorating the region’s extinct coal mining industry and sparked the cancellation of a tram line. Pforzheim, on the edge of the Black Forest in Germany, is scrimping on roads, schools and building renovations.

The town followed the advice of Deutsche Bank in taking out bets on interest rates in 2004 and 2005, according to Susanne Weishaar, Pforzheim’s budget director until March.

For cities like Saint-Etienne, the risks from buying swaps were out of proportion to the potential savings.

“This isn’t traditional asset management,” Fruchard said in reference to swaps based on currency moves in general. “It’s speculative, like a hedge fund. And it’s done in bad faith. An elected official who takes the benefit from the guaranteed low rates without understanding what happens after his mandate ends is acting in bad faith.”

Accounting rules in Europe help keep derivatives deals hidden. Most local governments have no obligation to set aside cash against potential losses, and reflect only current-year cash flows in balance sheets.

“It’s only transparency that will make elected officials scared to invest in dangerous products,” said Jean-Christophe Boyer, deputy mayor of Laval, in western France, which has swaps covering about 25 percent of its total debt of 86 million euros. “Even if we banned them today, the impact is coming now, tomorrow and 10 years from now,” he said, because of the number of derivatives contracts still in force.

For more on how swaps recommended by JPMorgan destroyed Jefferson County, please see Jefferson County Alabama Considering Bankruptcy.

This is a huge story with many participants, and one of longest articles I have ever seen on Bloomberg. It's well worth a closer look.

Also take another look at the actions required by two of the many cities mentioned.

Saint-Etienne raised taxes twice, slashed by three-fourths a plan to renovate a museum and sparked the cancellation of a tram line. Pforzheim, on the edge of the Black Forest in Germany, is scrimping on roads, schools and building renovations.

Those who think derivative blowups will be inflationary need to think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

Goldman Sachs Shares Drop After Goldman Sachs Accused of Fraud in Mortgage Deals

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

In recent months, Goldman has repeatedly defended its actions in the mortgage market, including its own bets against it. “We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”

No One "Knows" Anything

While Goldman can claim it did not "know" anything, the statement rings as hollow as saying we do not "know" if the sun will come up tomorrow.

Goldman is nothing more than a giant hedge fund that front runs trades and bets against advice it gives clients, with one important exception. Goldman is a bank holding company deemed "too big to fail" with the explicit backing of the Fed.

There is no fiduciary responsibility in any of the large corporations in my opinion.

I gave an example a while back where fund managers at two large broker dealers told me they do not collect fees if client positions are in cash.

Thus, whether or not those managers I spoke with thought that being invested was the correct thing to do, there was intense pressure to invest client money not only from the manager holding cash, but also from upper management at these firms.

That my friends is the origin of "you can't time the market, so be 100% in 100% of the time, for the long haul." Over the long haul, Wall Street wants you all in all the time so it can collect fees.

Worse yet, clients are steered to speculative products because those are the ones that make the broker dealers the most money.

Corruption, Greed, Lack of Ethics

The corruption, greed, and lack of ethics in the industry is appalling. I still want to know Where is The Indictment of Ex-CEO Dick Fuld? over fraudulent action Lehman made.

Here is a list of some of the things the SEC has ignored.

March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

January 26, 2010: Questions Geithner Cannot Escape

January 07, 2010: Time To Indict Geithner For Securities Fraud

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Where is the Fiduciary Responsibility?

I am tired of ethics (or lack thereof) that allows front running and betting against clients whether legal or not. I am tired of corporations talking about "walls" between their proprietary trading units and their investment groups. In practice the walls are invisible, if they exist at all.

Moreover, I am tired of accounting rules that allow hundreds of billions of dollars of assets to be held off balance sheets (Citigroup had $1 trillion in off balance sheet assets at one point), and I am tired of mark-to-fantasy pricing (Goldman has more level 3 assets than anyone else).

In client relationships, the first and most important thing is to never do or advise a client in any way that is not in their best interest. Instead, we have ethics that allow (even encourage), making profits at client expense.

Don't expect anything to come from this SEC investigation. If there is a fine it will be with a nudge and a wink and trivial to the amount of money Goldman Sachs clients lost.

Complete Ethics Overhaul Needed

We need a complete ethics overhaul but we will not see it until people are thrown into prison and corporations have to choose which business they want to be in as opposed to the current state of affairs where anything for a profit is acceptable.

• Firms give advice based on how much profit the firms will make on it
• Firms trade their own books to the detriment of clients
• Firms make upgrades and downgrades after they take positions themselves
• Firms front-run trades
• Firms engage in dark pools
• Firms deemed too big to fail take advantage by upping leverage
• Firms like Goldman Sachs (which is nothing more than a giant hedge fund with no ethics) have access to Fed funds at low interest rates to do whatever the hell they please

Sadly, this business screws the client for a fee time and time again because there is no ethics, no sense of fiduciary responsibility, and no walls on separation of duty to prevent fraud.

Some misguided souls will blame the free market for this.

Nothing could be further from the truth. One of the legitimate roles of government is to protect property rights, prevent fraud, and level the playing field so that everyone has an equal chance and equal protection under the law.

Instead, we have rules, procedures, and taxpayer bailouts specifically designed to make sure the playing field is not level. This is not a free-market concept and desperately needs to change.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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