Last Friday, May 8th, the FDIC closed the 33rd bank of 2009. This is totally unprecedented. From 2000-2007 (including the rough economy immediately following 9-11), only 27 banks failed. Zero banks were closed in 2005-2006. In 2008 25 banks were closed. Now in 2009 33 banks have been taken over, and we're not even halfway through the year.

On May 1st the FDIC closed America West Bank, headquartered in Layton, Utah. All of their deposits have been taken over by Cache Valley Bank, of Logan, Utah.



The FDIC guarantees deposit accounts up to $250,000 per depositor. Nobody should fear that their deposited money is at risk. This includes credit unions, which are guaranteed by the NCUA, the credit union version of the FDIC. 60 Minutes recently ran a segment about the process of an FDIC bank take-over. I found it to be really interesting and worth 13 minutes of my time. See it here.



The point I'm trying to make is that opportunities abound. Banks are monitored and regulated very carefully by the government. In Utah the agency that regulates banks is the Utah Department of Financial Institutions. Under the directioning of Commissioner G. Edward Leary, this governing body watches the liquidity of banks very carefully. In an economy like this many banks are struggling to maintain the ratio of cash on hand and/or assets to their liabilities. This is directly linked to the non-performance of loans. If a bank issued a mortgage and that mortgage goes into default, that loan stops performing. If this happens to enough loans, the bank gets into trouble. Although the deposits are guaranteed by the government, the loans are not. When the FDIC steps in and takes over a bank, 2 things happen:



  1. The deposits are sold to a healthy bank. Cache Valley Bank taking the deposits of America West is an example of this.
  2. 

The remaining assets (loans) are taken back by the FDIC. They then attempt to sell these assets to other banks and investors. Some bank assets are healthy (performing loans) and others are distressed (the non-performing mortgage example). It can take many months for the FDIC to organize and sell off all of these assets. Eventually, though, all failed bank assets are resold out into the market to healthy institutions and individuals. Although their goal is to seek top dollar for these assets, many of them sell for a fraction of the underlying value. Consider that the FDIC is dealing with unprecedented volume - 33 banks failed this year alone. It's taking more than 6 months just to untangle the mess and start the auction process. Frankly, there aren't enough buyers to handle the volume of available assets. Consequently, many assets are selling for pennies on the dollar.



Lake City Capital, one of our companies, specializes in the second category above. We see significant opportunity in this investment strategy. If you are interested in understanding this process on a deeper level, or are interested in purchasing failed-bank assets, please contact us.