Failed Banks Pose Test for Regulators
A Terrible Herbst station in Las Vegas. The F.D.I.C. determined Reno-area Terrible Herbst stations could not repay a loan.
WASHINGTON — When regulators took over the First National Bank of Nevada last year, they faced a showdown with the Terrible Herbst, the mustachioed cowboy who boasts of being the “best bad man in the West.”
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Terrible Herbst stations offer slot machines as well as gas.
This was no real gunslinger, but the name and logo of a chain of gas stations and convenience stores in Nevada that feature slot machines next to candy and beer.
The family-owned Herbst chain, auditors at the Federal Deposit Insurance Corporation concluded, did not generate enough sales at its Reno-area gas stations to support the repayment of a loan, leaving auditors with three bad choices: Move to take over those stations and put the government in the gambling business. Cut off any flow of additional loan money. Or sell the loan at a steep loss.
The F.D.I.C. faces tough choices like this every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.
The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.
DebtX of Boston and First Financial Network of Oklahoma City, for instance, sell loans at auction to investors who typically pay 5 cents to 85 cents for each dollar of outstanding principal, according to Bliss A, Morris, First Financial’s president. It is unloading hundreds of houses across the country at bargain basement prices. In November, Lula Smith, 86, of Kansas City, Mo., bought a two-bedroom house across the street from her home for $4,000, one-tenth of its value two years ago.
“I am real satisfied with that price, yes sir,” she said, adding that after about $1,000 in additional costs to repair the house, and some new carpet, her son and daughter-in-law will move in. “It was a nice little deal, indeed.”
And — in the most closely watched tactic — the F.D.I.C. is negotiating a series of billion-dollar deals with private equity partners who will take over huge batches of loans in exchange for a chunk of the sale proceeds.
Even as the solutions to the financial crisis are debated in Congress and among economists, the F.D.I.C., one of the agencies that deals most closely with the nation’s banks, has already been transformed.
The rising tide of foreclosed real estate is so overwhelming that the agency, which had shrunk to a relatively tiny 4,800 employees from as many as 15,000 in the last period of bank meltdowns in the 1990s, is in the midst of a military-scale buildup as it undertakes one of the greatest fire sales of all time.
The agency is frantically calling in retirees and holding job fairs, looking to hire as many as 1,500 people. It has rented a high-rise office building in Irvine, Calif., the new headquarters for a West Coast branch of 450 employees who are wrestling with a real estate crisis in one of the hardest-hit regions. It is also budgeted to pay hundreds of millions of dollars for a small army of contractors to augment its staff. “We are trying to be ready for the inevitable,” said Mitchell L. Glassman, director of the F.D.I.C.’s division of resolutions and receiverships.
The budget for that division is increasing to $1 billion this year, from $75 million last year. Nearly $700 million of the increase is set to go to contractors like RSM McGladrey of Minneapolis, which provides temporary workers to help the agency close banks. These workers come at an hourly rate of $50 to $250. It is a high price, but the F.D.I.C contends the cost is much less than it would have to pay to hire permanent staff.
“It was so painful downsizing after the last banking crisis,” James Wigand, deputy director of the F.D.I.C. receivership division, said, referring to the layoffs after the last cycle of bank failures. “We’re really trying to avoid going through that again.”
The blitz by the F.D.I.C. may offer lessons for the Treasury Department, which is separately struggling with an even more monumental challenge: how to help still-operating banks move giant loads of toxic debt off their balance sheets, in the hope that the banks will begin taking risks again and stimulate the economy.
Tuesday, for example, is the deadline for online bids for $108 million in loans left from the default of Freedom Bank of Bradenton, Fla., which DebtX is selling at auction.
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