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Could it be the hot money, Mrs. Winchester....
July 4, 2009
For Banks, Wads of Cash and Loads of Trouble
By ERIC LIPTON and ANDREW MARTIN
MACON, Ga. — H. Averett Walker used hot money to turn Security Bank from a sleepy Southern lender into a regional powerhouse. Darrell D. Pittard used hot money to jump-start his brand-new MagnetBank, allowing it to lend hundreds of millions of dollars even though it did not have a single drive-up window or even a customer with a checking account.
It is a formula being replicated at banks across the United States.
Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate.
But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.
Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.
Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.
So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators.
Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow.
The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.
The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive.
It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s.
The brokers receive much of the money from investment firms like Merrill Lynch, which are looking to park high-interest certificates of deposits they have sold to clients. Merrill customers get two things out of the arrangement: high returns on their investments and a haven because the money is placed in a bank insured by the F.D.I.C. One brokerage firm, Finance 500, in Irvine, Calif., started a hot money program in 1997 with seven bank customers. A decade later, it delivered $14 billion to more than 1,500 banks.
But the money is volatile. It can be easily shifted from one bank to another as brokers seek the highest interest rates. Thus the term hot money.
William M. Isaac, chairman of the F.D.I.C. from 1981 to 1985, said he became wary nearly three decades ago after watching the spectacular fall of Penn Square Bank of Oklahoma City, which had grown astronomically by gorging on brokered deposits. Alarmed by the practice, Mr. Isaac moved to eliminate F.D.I.C. insurance for most brokered deposits — a rule that provoked an industry revolt and was ultimately overturned. Congress later made a similar attempt, but it too was defeated. “I have a lot of scars on my back,” Mr. Isaac said in an interview, recalling the fight over the rules. “I don’t have any doubt that tens of billions were lost in the S.& L. crisis because of brokered deposits. And we were on our way to shutting that practice down.”
By 1991, Congress prohibited weak banks from obtaining brokered deposits unless they were adequately capitalized. But because approximately 97 percent of the banks in the United States are considered “well capitalized,” the limit has little impact. Three years later, the F.D.I.C. watered down that rule by repealing the requirement that banks looking to grow rapidly with brokered deposits seek special permission from the agency.
The risks and rewards of brokered deposits played out visibly here in Georgia, where a red-hot real estate market in metropolitan Atlanta drove a lending frenzy that was heavily financed by hot money.
Mr. Pittard built MagnetBank solely on brokered deposits, eschewing even traditional branches. “It was very simple,” he said. “It was clean.” And the F.D.I.C. approved it.
The bank was chartered in Utah, but did much of its lending in Georgia. When the real estate market here turned in 2007, many borrowers fell behind and Magnet began to crumble. Its failure in January 2009 cost the F.D.I.C. an estimated $129 million.
Through this hot-money explosion, the regulators largely watched from the sidelines, offering warnings at times, but declining to intervene forcefully, officials in Washington now acknowledge. The F.D.I.C. allowed many banks that lost their “well capitalized” status to keep taking brokered deposits, approving waivers for about 65 percent of the applicants over the last five years.
“Don’t get in the way, don’t take away the punch bowl,” Ms. Bair said, describing the approach taken by regulators, including her own agency.
Banks won important concessions. The regulator relaxed the part of the rule that required higher premiums if banks grew too fast with brokered deposits, allowing a growth rate of up to 40 percent over four years. And it left open a loophole that lets banks — even those considered unsound — turn to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park. One listing service, QwickRate, based in Marietta, Ga., has just 18 employees crammed into a tiny second-floor office. But it delivered $1.6 billion in hot money to banks in May, up from $450 million last May. The growth is coming partly because banks on the edge of failure are coming to the service for a lifeline.
http://www.nytimes.com/2009/07/04/bu...ef=todayspaper
July 4, 2009
It is a formula being replicated at banks across the United States.
Rather than simply wooing local customers, they have turned to out-of-state brokers who deliver billions of dollars in bulk deposits, widely known as “hot money,” from investors nationwide. In fast-growing regions like this one in central Georgia, the money produced record bank profits and financed whole new communities, built at a phenomenal rate.
But the hot money also came with a high cost. To lure the money from brokers, banks typically had to offer unusually high rates. That, in turn, often led them to make ever riskier loans, leaving them vulnerable when the economy collapsed. Magnet failed early this year and Security Bank is barely hanging on.
Though few people have heard of it, hot money — or brokered deposits, as it is also known in the industry — is one of the primary factors in the accelerating wave of failures among small and regional banks nationwide. The estimated cost to the Federal Deposit Insurance Corporation over the last 18 months is $7.7 billion, and growing.
Hot money has bedeviled regulators for three decades and they are starting to fight back, albeit tentatively, devising new restrictions to keep the practice from taking more banks down. But in one of the hidden lobbying battles in Washington this year, the banks are pushing hard to keep the money flowing.
So far the banks are winning, and the hot money continues to fuel bank growth. The industry has even invented variants to get around the few rules that have been put in place by regulators.
Banks defend the use of brokered deposits as an important tool to bring in money to help communities grow.
The 79 banks that have failed in the United States over the last two years had an average load of brokered deposits four times the national norm, according to an analysis performed for The New York Times by Foresight Analytics, an industry research firm based in California. And a third of the failed banks, the analysis shows, had both an unusually high level of brokered deposits and an extremely high growth rate — often a disastrous recipe for banks.
The data also shows that the problem isn’t likely to go away. The 371 still-operating banks on Foresight’s “watch list” as of March held brokered deposits that, on average, were twice the norm. Even this year, in the depth of the recession, a number of struggling banks have been piling up hot money in a desperate effort to survive.
It is the same mix — rapid increases in hot money and heavy lending for risky real estate development — that brought down many of the savings and loans in the late 1980s.
The brokers receive much of the money from investment firms like Merrill Lynch, which are looking to park high-interest certificates of deposits they have sold to clients. Merrill customers get two things out of the arrangement: high returns on their investments and a haven because the money is placed in a bank insured by the F.D.I.C. One brokerage firm, Finance 500, in Irvine, Calif., started a hot money program in 1997 with seven bank customers. A decade later, it delivered $14 billion to more than 1,500 banks.
But the money is volatile. It can be easily shifted from one bank to another as brokers seek the highest interest rates. Thus the term hot money.
William M. Isaac, chairman of the F.D.I.C. from 1981 to 1985, said he became wary nearly three decades ago after watching the spectacular fall of Penn Square Bank of Oklahoma City, which had grown astronomically by gorging on brokered deposits. Alarmed by the practice, Mr. Isaac moved to eliminate F.D.I.C. insurance for most brokered deposits — a rule that provoked an industry revolt and was ultimately overturned. Congress later made a similar attempt, but it too was defeated. “I have a lot of scars on my back,” Mr. Isaac said in an interview, recalling the fight over the rules. “I don’t have any doubt that tens of billions were lost in the S.& L. crisis because of brokered deposits. And we were on our way to shutting that practice down.”
By 1991, Congress prohibited weak banks from obtaining brokered deposits unless they were adequately capitalized. But because approximately 97 percent of the banks in the United States are considered “well capitalized,” the limit has little impact. Three years later, the F.D.I.C. watered down that rule by repealing the requirement that banks looking to grow rapidly with brokered deposits seek special permission from the agency.
The risks and rewards of brokered deposits played out visibly here in Georgia, where a red-hot real estate market in metropolitan Atlanta drove a lending frenzy that was heavily financed by hot money.
Mr. Pittard built MagnetBank solely on brokered deposits, eschewing even traditional branches. “It was very simple,” he said. “It was clean.” And the F.D.I.C. approved it.
The bank was chartered in Utah, but did much of its lending in Georgia. When the real estate market here turned in 2007, many borrowers fell behind and Magnet began to crumble. Its failure in January 2009 cost the F.D.I.C. an estimated $129 million.
Through this hot-money explosion, the regulators largely watched from the sidelines, offering warnings at times, but declining to intervene forcefully, officials in Washington now acknowledge. The F.D.I.C. allowed many banks that lost their “well capitalized” status to keep taking brokered deposits, approving waivers for about 65 percent of the applicants over the last five years.
“Don’t get in the way, don’t take away the punch bowl,” Ms. Bair said, describing the approach taken by regulators, including her own agency.
Banks won important concessions. The regulator relaxed the part of the rule that required higher premiums if banks grew too fast with brokered deposits, allowing a growth rate of up to 40 percent over four years. And it left open a loophole that lets banks — even those considered unsound — turn to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park. One listing service, QwickRate, based in Marietta, Ga., has just 18 employees crammed into a tiny second-floor office. But it delivered $1.6 billion in hot money to banks in May, up from $450 million last May. The growth is coming partly because banks on the edge of failure are coming to the service for a lifeline.
http://www.nytimes.com/2009/07/04/bu...ef=todayspaper