Thursday, March 4, 2010

FDIC Investigates Failed Integrity Bank

The FDIC has been busy for the past couple of years cleaning up the mess left behind in the wake of the credit bubble. Only the big banks were politically powerful enough to get the bailouts, while the smaller banks are getting shuttered on a weekly basis. The WSJ takes a peek inside what went wrong at Integrity Bank, a Georgia bank that opened in 2000 and was closed by the FDIC in August 2008.

What is interesting about Integrity Bank is that it went belly up because it lent out all of its capital to one borrower, a real estate developer that owned a hotel in Sausalito, California. The hotel went bankrupt and was auctioned off by the FDIC last month. Why on earth would a bank lend all of its capital to one borrower? Don't worry, the FDIC plans to find out. Now. After it has already cost the deposit insurance fund $295 million. Nevertheless, the regulator that was tasked with keeping and eye on banks and making sure they don't do things like lend all their capital to one guy in Sausalito, has launched an investigation. The FBI and Federal prosecutors are also hot on Integrity's tail postmortem.

Everybody's looking for the flight recorder because investigators want to know why the plane crashed so that we can keep it from ever happening again. But do we really need an FDIC investigation to conclude that it was a dumb idea for the bank to give 14 loans totaling $83 million, or 127% of the bank's capital, to one guy? Or that it wasn't a great idea for said loans to have interest reserves so that said guy wouldn't have to pay interest on the loans? I mean, don't banks already know that they should expect their borrowers to pay them interest? Or that dipping into a credit line to pay interest on a borrower's other loans doesn't actually lower the risk associated with the borrower? Really, are we going to have any big epiphanies here? Federal prosecutors just need to put a few people in jail. The FDIC needs to focus its resources on the rest of the regionals that are going to fail.

1 comment:

Hanna said...

Maybe the real estate company opened the bank to fund itself.