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Don't Bank On It - The Bank of Clark County Story (posted 3/25/2009)

the view through the windshield

automobile blogIn January 2009, the Bank of Clark County was closed by federal regulators. Ten years earlier, the bank opened for business as a community-based, locally-owned bank. Organizers were initially able to raise $8.6 million from 400 shareholders.

The bank grew rapidly and was - for several years - one of the most profitable banks in the Western U.S. It became a prominent construction and real estate development funder in Clark County, Washington. As long as property values kept rising, developers kept building homes, selling them and paying the bank on time. Everybody was happy.

In its quest to compete for developer business, the bank sometimes pushed its own guideline envelope when approving loans. And, when there was insufficient money available from local depositors, the Bank of Clark County sought brokered deposits (jumbo CDs and the like, which paid higher interest rates) from outside the community to underwrite loans. Brokering reduced the 'spread' or profit on the loan.

When the real estate market turned cold, the bank's loan security began to vaporize. Some borrowers, mostly residential developers, stopped making loan payments. In all of 2006, the bank charged off a mere $2,000 in loan losses; in 2007, it charged off $1.4 million. In the first nine months of 2008, it charged off $1.8 million and moved another $2.6 million into reserves to protect against further losses.

During the period, the interest rate spread (the difference between loan rates and interest rates) narrowed significantly. This reduced all U.S. banks' operating profits. During that time, the Federal Reserve's extremely tight credit policies caused short-term rates to move well above long-term rates for an extended period. That played a major role in producing the credit crunch. Economist Mark Perry has written, "The Fed's long-lived credit-tightening also wreaked havoc on home prices and was directly responsible for the recession that began in late 2007."

car blogAs for the Bank of Clark County, the combination of the credit squeeze, low-spread and loans gone bad proved a toxic brew. "These guys fell fast. They fell hard, and they didn't have much to fall back on," said one insider. One of my acquaintances - a bank examiner - was stunned by the failure. To him, the FDIC's closure came completely out of left field.

Why didn't the bank obtain funds from the Troubled Asset Recovery Program? Because initially, TARP funding was available only to publicly-traded companies, not privately-owned banks such as Bank of Clark County. By the time the U.S. Department of the Treasury extended the program to private banks in November 2008, the bank's mounting financial difficulties made it ineligible based on the rules.

On January 16th, the bank was taken over by Umpqua Bank (headquartered in southern Oregon), which used TARP funds (it got $214.2 million in October 2008) to buy the assets of the Bank of Clark County. (Oh Irony! Thy name is Umpqua. Or TARP.) Umpqua bought the assets and insured, non-brokered deposits; none (or almost none, depending on whom you ask) of the loans.

Many Bank of Clark County business borrowers - financially stable firms which never missed a payment - found their lines of credit canceled and loans called. (One of my business friends had this done to his firm ... despite an excellent credit/payment record and his firms 40+ year profitable business history.) Nice way for Umpqua to introduce itself to the community, no?

the view through the windshieldThe Bank of Clark County story is significant personally, because my wife was one of its founding shareholders. While we have other investments, it is no fun erasing a six-figure component from our net worth statement. But, there seemed to be no hanky-panky at Bank of Clark County - just some bad bets, so we accepted our loss. You make investments, you assume the risks.

Then I read about Congresswoman Maxine Waters (D-California) and OneUnitedBank.

The Wall Street Journal reported that Ms. Waters and her husband have both held financial stakes in OneUnited, a Boston-based bank. Ms. Waters' husband, Sidney Williams, had served on the bank's board of directors until early last year and has owned at least $250,000 in stock in the institution. At the same time, Ms. Waters had publicly boosted OneUnited's executives and criticized its government regulators during congressional hearings.

Maxine's Democrat buddy, Barney Frank, had also intervened on the bank's behalf, inserting a special provision in last year's $700 billion financial-system rescue plan. "I did feel that it was important to frankly try and save them since it was federal action that put them into the dumper," Mr. Frank said. Ummmm ... didn't "federal action" put every troubled bank "into the dumper?"

In October 2008, regulators demanded that OneUnited raise fresh capital and name an independent board. The bank was ordered to stop paying for a Porsche used by one of its executives and its chairman's $6.4 million beachfront home in Pacific Palisades, a luxury enclave between Malibu and Santa Monica, CA.

Ms. Waters has acknowledged that "she made a call to the Treasury on OneUnited's behalf. The bank's capital, which was heavily invested in shares of Fannie Mae and Freddie Mac, was all but wiped out with the federal takeover of the two mortgage giants, and the bank was seeking help from regulators.

OneUnited eventually secured bailout funds under the government's $700 billion Troubled Asset Relief Program, which was set up later that month."

The Bank of Clark County's CEO didn't have a Porsche or a luxury beachfront enclave. My wife's bank didn't have two Congressional pimps. Her bank didn't get a bailout, even though in late 2008 it was apparently in better shape than OneUnitedBank.

Specifically, OneUnited's loan portfolio continued to deteriorate during the fourth quarter of 2008. The bank's past due and nonaccruing loans surged to $16.6 million, up from $10 million in the prior quarter. The bank only had $15.2 million in land development and construction loans but 46% - or $7 million - was delinquent at the end of 2008. FDIC filings show that OneUnited had a negative equity of $6.6 million in the third quarter of 2008.

In his budget summary, President Obama wrote about investing: "There's nothing wrong with making money but there is something wrong when we allow the playing field to be tilted so far in the favor of so few." Well, Mr. President, here's your chance to reduce the tilt.

It's time for a do-over - the FDIC needs to immediately shut down OneUnited or cut a check to every Bank of Clark County shareholder for investment losses. And it's time for all elected representatives who are supposed to be serving us in Congress to call for the impeachment of Maxine Waters. And Barney Frank.

PS: I wrote to my Congressional Representative (Brian Baird), both Senators (Patty Murray and Maria Cantwell) and President Obama about this matter. No response was received.

Update: In 2009, 140 U.S. banks had failed. OneUnitedBank is still in business, although the U.S. House Ethics Committee is investigating California Representative Maxine Waters for her role in pimping for the bank.

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