FDIC taking over WaMu and forcing Wachovia to the altar were unusual events not because the banks were large but rather because the banks were arguably viable when the FDIC acted. WaMu was capital adequate when taken over. My view is that it would – if left to its own devices – have survived – though it was touch and go. Without implicit FDIC support it was done for. Wachovia actually found a buyer without government support.
The FDIC usually waits until very late in the piece to take over a bank. With very few exceptions banks are shockingly insolvent by the time the government acts.
Lets do a comparison. WaMu still had 8 billion of pre-tax, pre-provision income – and that was enough to deal with what I thought were likely losses (30 billion or so – when WaMu was predicting 20 billion).
By contrast Corus bank - not yet taken over - is truly unremittingly awful. The the pre-tax, pre-provision income has disappeared. Banks should probably be confiscated before that event – but whatever – when that happens no amount of “voodoo maths” will save you.
So if you want to see what a truly insolvent bank looks like look at Corus Bank. I am not telling you anything new – they have signed written agreements as to how they will manage themselves and they have paid their senior staff retention bonuses so that they can manage. Here is an extract from their annual results.
Nonaccrual loans have grown to $1.5 billion, more than one-third of total loan balances outstanding at December 31, 2008. Combined with other real estate owned (“OREO”) of over $400 million at year end, most of which was foreclosed on during the last quarter of 2008, Corus’ nonperforming assets at December 31, 2008 totaled $2.0 billion. This extraordinary level of nonperforming assets put such negative pressure on Corus’ net interest income that it fell below zero for the quarter ended December 31, 2008. Empasis added.
To get an idea of how bad this is, non-performers were five times capital. Negative net interest income and there is no future – none, nada, zip. There is no income to bail you out.
In the words of Monty Python, this one is “pushing up daisies”.
Anyway what is strange is that some banks in America look like this – and others have non-performers of well under 1 percent. The system may be solvent (and I think it is) but there will be a few more Corus banks out there.
PS. This is a personal disgrace. I read Corus’s accounts in 2006 and never shorted them. That was despite a stated business model of being a specialist lender to the developers of condo projects.
PPS. The retention bonuses for the staff – critical staff in keeping this thing run – are – wait for it – 125 thousand dollars. When you see multi-million dollar retention bonuses to the people who failed what you see is theft. Whether the 125 thousand is theft is a matter of taste – but it is almost certainly a practical payment to keep people around at a bank with no future.