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ECONOMIC ANALYSIS:

Thinking About Interventions

by Fred Cederholm

It is the large money center banks and the regional banks which were overly aggressive in their lending and investment decisions where the current problems reside. Community banks are not the problem.

I’ve been thinking about interventions. Actually I’ve been thinking about IndyMac, the media, community banks, FDIC insurance coverage, cash, and fear. Last week saw a frenzy of media coverage in the aftermath of the US government/FDIC’s takeover of the IndyMac financial institution. What I saw was both horrific and “pornographic” in the sense that “the stories were sensational with the aim to titillate/stimulate without providing any redeeming social importance.”

You see, I have first-hand experience in financial institution intervention/receiverships, having worked for the FDIC/ RTC for over three years on the Savings and Loan crisis some 15 years ago. While “takeovers” are justifiably traumatic for the employees, management and stockholders; the depositors, borrowers, and customers—if they had played by the rules/regulations of the FDIC coverage—literally don’t have a thing to worry about! A government intervention keeps 99%+ of the prior staffing in place. A “managing agent” is installed as the chief executive officer, and “credit specialists” are put in place to oversee lending operations, credit restructurings, and asset sales. A lead investigator is assigned to coordinate the case development for potential negligence and fraud.

An intervention is really an amazing feat/operation to behold. The government team of professionals and an army of workers—contracted from an independent outside public accounting firm—go in at the close of business on Friday night or, if applicable, at the close of business on Saturday. What happens over the following 48 or so hours is an institution-wide verification, gathering, and securing of items and documents. Cash, notes, investment securities, collateral, and pre-determined items are verified 100%. The teams have detailed assignment/mission lists and work non-stop to insure that the institution will open for normal business the following Monday morning. The institution actually re-opens as one of the safest places in the country to do your banking. The government team stays in place until the investigations are completed, the problems are fully resolved, a buyer for the remaining franchise/operations is found, and the residual sale is closed.

Remember... it is stockholders—and not depositors—who ultimately take the real hit on the losses from any intervention/resolution.

I found it unconscionable that the major TV/press media ran items with footage and clips of “the Great Depression bank lines” or headlined their stories with: “How Safe is Your Community Bank?” Community banks are not the problem in this present global financial crisis. I have personal accounts (or am the treasurer for organizations with accounts) at the six community banks in the area. I observe the FDIC coverage guidelines and do not have one bit if concern about any one of them for any reason. I personally know most of their management, officers, and directors. It is the large money center banks and the regional banks which were overly aggressive in their lending and investment decisions where the current problems reside. Remember... it is stockholders—and not depositors—who ultimately take the real hit on the losses from any intervention/resolution.

We in the U.S. have the most pervasive and highest amount of depositor insurance guaranteed coverage on planet Earth. Individual accounts are covered up to $100,000 and, by varying the signatories/names on the accounts, that coverage can double, triple, or more. Furthermore, any retirement accounts on deposit are covered 100% regardless of the amount. Those are the rules!

The California event raised questions about IndyMac’s not having the cash on hand to pay off the depositors who wanted to close out accounts and walk out the door with currency. This is not surprising, as financial institutions rarely even have 1% of their total footings (assets) on hand in actual cash—including their due-from-bank (correspondent) accounts. Cashiers' checks work fine!

I really felt for Treasury Secretary Paulson and FED Chairman Bernanke during their last week’s testimonies before Congress. We have a good system for interventions/resolutions, with the best coverage for depositors on the planet. IT will work just fine—if, and only if, there is no fear-driven panic running amok. Even the safest, most solvent, and best-run institutions can be pushed over the edge if a fear-driven public decides to yank all their “safe and fully insured deposits” from them and go elsewhere.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2008 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on JuLY 21, 2008.