Georgia on my mind

The FDIC closed three banks on Friday, but other than a blip on the FDIC’s bank failure list, no one seemed to notice or care. Except maybe some people in Georgia, where citizens of the Peach State have now seen a staggering number of bank failures.

In contrast to the other bank failures, where the FDIC has been able to work some magic by swooping down Friday night and selling off deposits to regional banks who opened up the branches under a new name Monday morning, the latest Georgian bank failure has been a little less graceful. So many Georgian banks have failed, that there simply isn’t anyone left to pick up the pieces. According to the FDIC website:

An assuming institution could not be located; therefore, the FDIC will fulfill its obligation to insured depositors by mailing checks for their insured amounts.

FDIC on FirstCity Bank of Stockbridge

Got that? No fancy turnaround miracles, no “it’s all the same – your bank just changed names!”… just a check from the FDIC in the mail. Not exactly the kind of situation that instills confidence in the financial system.  I hope the memo field on the check will fit “Oops, your bank doesn’t exist anymore, but here’s some money we borrowed from the Chinese”.

What could be worse than closing three banks in a single day? Well, two credit unions also had their doors shuttered on Friday. Worse still, these weren’t exactly your friendly neighborhood credit unions. They were so-called “corporate” credit unions and acted as credit unions to credit unions. So, some kind of super credit unions? Hmm – they wouldn’t be involved in some kind of obscure derivatives now, would they?

The two super credit unions were taken into conservatorship by the normally quiet National Credit Union Administration. Combined, the two credit unions held $57 billion in deposits. What went wrong? Something about failing a stress test, and – wait for it – mortgage backed securities:

Specifically, this review determined that an unacceptably high concentration of risk resided only in the two conserved corporate credit unions. Securities held by US Central and WesCorp deteriorated further since late January 2009…

…Additional mortgage and asset backed security analysis and assessment of the two credit unions by NCUA staff enabled NCUA to refine NCUSIF’s required reserve for potential loss.

NCUA Statement

How quaint. The super credit unions were assigning a value above $0 to mortgage-backed securities they held in January. They probably don’t even know what they are, let alone how to value them. I could have told them: When you can’t sell something you own that means it isn’t worth anything.

The super credit unions will continue to operate normally under the NCUA. Presumably there will be some kind of “capital injection” and “troubled-asset relief”. Let’s just hope the Chinese continue to be in such a generous mood…