1. Nada De Novo ~ Not a Single New Bank in 2011
While banks continue to fail at an alarming rate (12 just since the beginning of this year), an even more disturbing revelation came to light this week: 2011 was the first year in many decades that no new banks were established in the United States. Completely new banks (as opposed to ones formed by merger or acquisition) are referred to as de novo. But it looks like investors are just not interested in launching new lending institutions. With rates stuck near zero there is little opportunity for lending margin. (The old banker credo was “borrow at 2%, lend at 3% and you’re on the tee by 4.”) In fact all three charters submitted to the FDIC last year were for mergers—meaning still fewer banks. Credit unions have seen a jump in new accounts as customers left in protest of bank fees and worries about bank stability. But, despite the media attention given credit unions, the National Credit Union Administration chartered only one federal credit union in 2011.
2. The Family That Embezzles Together… Husband & Wife Admit Defrauding AIG & Deutsche
Horse farms are expensive. Heidi Walker and her now ex-husband, Peter Pfabe, owned one in upstate New York. In her role as managing director at AIG Global Investment and later at Deutsche Asset Management she and Pfabe moved $450,000 to accounts controlled by the pair under the pretense that the payments were for service vendors. The funds were used to operate the aforementioned horse farm. The pair have pleaded guilty and each face up to 5 years in prison and substantial fines. The lesson here is an old one. Don’t rubber-stamp a deal because a senior officer said so. Even senior staff should not be given authority to wire funds externally without a second authorization from someone who understands the rationale for the movement of funds. Every compliance and operation manager should have that tattooed somewhere on their body. The shorter version—“No Rubber-Stamping”—is also okay.
3. Money Market Myths ~ Making the Public Understand
When people don’t understand the investment they are making, problems—and often lawsuits—ensue. The failure of Lehman Brothers demonstrated yet again that money markets are not the investment the general public thought they were. The name implies that they are “money” or liquid and, as such, principal is not at risk. The massive Reserve Fund of Boston was the first of the large funds to show that the net asset value of a money market fund could drop below par and that principal was indeed at risk. In the past, large money market firms have explicitly stated or implied that they would protect their investors from loss of principal. Now regulators are proposing that money market firms allow net asset value float, thereby removing any suggestion that principle is protected or guaranteed. Some major firms have already endorsed the idea while others oppose the suggestion on the grounds that their product would then look like any other short-term mutual fund. The good news is that, whether money markets ultimately allow NAV to float or not, new disclaimers will make the public well aware that principal will be at risk—and that may mean less litigation. Better disclosure and less litigation is always welcome news.
4. FDIC Files its 23rd Lawsuit Against Failed Bank Officers ~ Here’s Why You Care
The directors of Freedom Bank of Georgia are not drastically different from many of the other directors of the 22 failed banks that the FDIC has decided to sue as a result of the mortgage crisis. But recent evidence suggests that the directors shouldn’t worry too much. So far none has gone to court, and three of the banks have settled. The directors from the three settling banks have not been required to pay a dime from their own pockets. First National Bank of Nevada is a good case in point. The FDIC lost $900 million when the bank failed in 2008. The regulator traced $200 million directly to the negligence of the two defendants. As part of a complex settlement, the two executives agreed to a judgment of $20 million against each of them, a figure derived from “what a jury might reasonably award (the FDIC) as damages,” according to the FDIC’s court motion. Disturbing, however, is that as part of the deal the FDIC promised not to collect from the two former bankers, and instead to go after the bank’s insurer only. The insurer has denied coverage and is fighting the claim asserting in a court filing that coverage was “specifically excluded by the terms of the policy.” The FDIC has claimed that the settlement was “a good example of directors and officers being held accountable.” It’s certainly a good example of insurance companies being held accountable.
5. Iceland: Home of Bjork, Volcanos, Financial Crisis and Political Trials
How can a country with a population less than Wichita cause such drama? Pop singers and natural disasters aside, Iceland’s financial crisis of 2008-2011 makes the U.S. economic problems seem quaint by comparison. By 2008 the country had external debt of $66 billion. That equates to $200,000 for every man, woman, and child in this charming little country. The nation’s three commercial banks, all since collapsed, accounted for 80% of this debt. Now the drama continues. This week the government announced that it will be bringing charges of negligence against the country’s former Prime Minister, Geir Haarde. Haarde will be the first politician anywhere in the world to go on trial as a direct result of the economic crisis. The former politician maintains that the banks were to blame and that the current charges are “preposterous.” Will other countries follow Iceland’s lead? I mean trying politicians, not that whole “Bjork-thing.”