The FBOP-FDIC-Mike Kelly debate, continued . . .

These comments in Wednesday Journal on the FBOP-Park National Bank closing at the hands of FDIC frame the argument nicely. 

First, a typical Oak Park response, echoed in dozens of comments in columns, editorials, and letters:

Posted: Thursday, November 19, 2009
Article comment by: Scott

We should be outraged that a community bank like FBOP was taken by the FDIC. Large institutions like Citi and Bank of America received millions of dollars in TARP money and what did they do? Spent most of it to pay our [for?] incentives or severence pay outs to CEOs and CFOs who were so greedy they left the institutions on near bankruptcy. Community Banks like FBOP who care about the communities and their employees were not able to receive any funding from the goverment.

If Mike Kelly was able to obtain money from private investors to put FBOP in a well capitalized state, then why didn’t the FDIC give them that opportunity? Instead they sold to US Bank who will in turn lay off employees and change a quality bank with great customer service and standards to something like Chase and Citi, who’s [sic] only concern is profit and loss. Not helping the communities they serve or the employees that work for them. It is tragic what they did to Mike Kelly and FBOP.

Then a cogent rebuttal:

Posted: Thursday, November 19, 2009
Article comment by: Stephen Micklin

Please excuse my apparent blindness, but I don’t see why everyone is so outraged about the FDIC’s takeover of FBOP Corp. Maybe I need to look at the facts through Oak Park tinted glasses, because with an objective eye the hoopla appears ludicrous and unreasonable. Let me highlight three aspects of the FBOP outrage that are, well, outrageous.

First, FBOP is to blame for its failure, not the FDIC or “Washington.” This obvious fact has someone been misconstrued. When the FDIC seized FBOP and arranged a deal with U.S. Bankcorp it was not acting with a vendetta against FBOP or favoring Wall Street over Main Street. The FDIC was doing its job—protecting depositors from losing all their money. FBOP fell into financial disarray because of misguided and greedy investments. Instead of keeping their money safe by buying Treasury Bills or other secure assets, FBOP decided to make a risky investment in Fannie Mae and Feddie Mac. FBOP wanted to squeeze out additional profits. Unfortunately those wagers backfired when the housing market collapsed. FBOP failed because it made bad investments. What is more, if not for the FDIC and U.S. Bankcorp’s actions, thousands of people could have lost their entire life savings.

Second, just because FBOP and Park National are now U.S. Bankcorp, it does not follow that neighborhood businesses and people will lose access to credit and banking facilities. If businesses and people are worthy of credit, other banks will step in to provide such loans. And if other banks refuse, then maybe those borrowers should never have received credit. Anyone would love a bank that extends credit on extremely favorable terms. Hey, subprime loans were a good idea for those receiving the funds. That does not mean, however, that such actions are sound banking practices. If Chicago and Oak park businesses and people are reliable borrowers then the absence of FBOP will not matter because other banks will rill FBOP’s shoes.

Third, people should not be angry that the FDIC had to spend $2.5 billion, they should be angry that FBOP forced them to spend the money. Had FBOP not made bad investments, the FDIC would not have had to use taxpayer money to protect customer’s deposits. Yet somehow the FDIC is being bashed. During a recent community meeting arranged to discuss FBOP’s failure (The protest gets formal), Oak Park Village President David Pope was quoted as saying “Two and a half billion dollars comes out to $25,000 for every man, woman and child in Austin. If you’re aware of the facts in this case and you’re not absolutely outraged, then you’re not alive.” I agree that the FDIC’s spending of $2.5 billion of taxpayer money is terrible, everyone should be. But we should be made at FBOP for forcing the FDIC to spend that money.

Maybe I am the only one in Oak Park with these views. Or maybe I am the only one looking at the facts without a hometown bias. Either way, the world will survive without FBOP Corp.

Not quite the only one.

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  • Daniel Hurtado  On 11/30/2009 at 9:27 AM

    Micklin’s post misses a key fact. It has been reported that FBOP had arranged the necessary financing to re-capitalize itself and needed just one more week in which to finalize the financing arrangements. The criticism, then, is aimed at the FDIC’s refusal to extend its deadline by a short period to allow FBOP to finalize the recapitalization. Now, one could probably make a reasonable argument that the FDIC acted properly in refusing to extend the deadline, but let’s not use a false premise to try to cast those who are “outraged” by the FDIC’s action as a bunch of bumpkins. No reasonable person would object to the FDIC takeover in the event of FBOP’s insolvency if there were no prospect of recapitalization. But those are not the facts.

    As to FBOP’s “greedy” investments, Fannie Mae and Freddie Mac were not considered by the industry to be “risky” or “bad” investments at the time that FBOP made them. Most of the big banks that were recently bailed out by the taxpayers also invested in Fannie and Freddie. But, unlike FBOP, the big banks also invested heavily in truly risky and irresponsible bets in the form of derivatives, CDSs, etc. And they crashed. Any talk of doing something with the big banks similar to what the FDIC did with FBOP was bitterly opposed by conservatives as “nationalization” of the banks. So, instead, we simply gave the big banks billions of taxpayer dollars, getting virtually nothing in return, and permitted them to continue with the same irresponsible business model. But Micklin pillories people who wanted the FDIC to give FBOP a little more time so that it could arrange its own bailout with private money. Go figure.


    • Jim Bowman  On 12/01/2009 at 7:34 AM

      Haven’t seen that nice distinction much mentioned in WJ stories and letters — about FDIC’s refusal to extend a deadline. Argument and commentary is largely about Mike Kelly’s well-documented community spirit.

      Indeed, Helen Karakoudis’s 11/3 story, “Long road to fed takeover,” recounts (questionable if understandable) delays by Kelly in accepting private investors’ help. Micklin’s point about misplaced outrage seems legitimate.

      I also missed conservative outcry vs. letting big banks fail, nor do I think such an outcry would have moved the feds, even under GW Bush. Not clear why H. brings it up.


      • Daniel Hurtado  On 12/02/2009 at 7:01 AM

        Jim, if you haven’t seen the distinction, you haven’t been paying attention. That was the issue — that FBOP was not able to secure private investment by the deadline. Indeed, Karakoudis’ story is a direct response to that issue. The invocation of Mike Kelly’s community contributions was a primary rationale for wanting the FDIC to have extended the deadline, not a rationale for simply allowing FBOP to remain insolvent. That would be nuts and I am not aware of anyone having made that argument.

        Now, some people have suggested that FBOP should receive assistance from the Feds rather than having been taken over and sold. Again, reasonable people can disagree about that, but it is not an unreasonable or “outrageous” position. That is why I “bring[] up” the big bank/TARP issue. But my point was not “conservative outcry vs. letting big banks fail,” but conservative outcry vs. FDIC-type takeover of the big banks, which conservatives ominously labeled “nationalization” or “socialism.” You are quite right that most conservatives did not oppose the no-strings attached bailout.

        So to be consistent, then, conservatives should at least take seriously the idea of federal assisitance to small banks like FBOP without taking them over. All the more so they should take seriously the idea of giving FBOP a little more time to secure a private bailout.


  • concerned reader  On 12/01/2009 at 3:47 PM

    There are a couple of relevant facts here that need to be mentioned:
    First, FBOP lost nearly a billion dollars in the preferred Fannie/Freddie shares, so the $600 million would not really have righted the ship. Also, they were delinquent on over $240 million in subordinated debt owed to JPMorgan Chase and others (see previous news stories regarding recently filed lawsuit against FBOP).
    The other huge part of the story (also referenced in the written agreement with the Federal Reserve Bank) is that FBOP built a $18 billion dollar loan portfolio that had an 80% concentration in commercial loans- many of which were already in default and probably expected to worsen in the next year or two. $12 billion or so of those loans were made to condo/real estate developers on the west coast where prices have crashed and may not have hit rock bottom yet, and the FDIC obviously felt that there was no way to allocate for current and future loan losses and remain well capitalized.
    Tax payer money is not generally used by the FDIC, because they rely on the premiums that individual banks pay into the various insurance and loss share funds. They technically will have to utilize the treasury line of credit (which is tax payer money) since the DIF has been depleted, but they pay back the borrowed amount with interest, which ends up netting a return to taxpayers.
    I think that paints a better picture, and although FBOP did great things for the community and their employees, they obviously didn’t make the right decisions and have auffered the consequences.


    • Daniel Hurtado  On 12/02/2009 at 11:52 AM

      Thanks concerned reader. Taking your information at face value (since you remain anonymous — which is your right — it is difficult to evaluate the credibility of the information you cite), it still leaves some questions unanswered. First, you imply that FBOP’s liabilities exceeded its assets by more than a billion dollars because of the $1 billion loss on Fannie/Freddie shares. But that’s not necessarily true. The balance sheet would have to account for all assets and liabilities. And you have provided no reason to conclude that the $240 million in subordinated debt is not included in the $600 million shortfall. Thus it does not necessarily follow that the net liability on FBOP’s balance sheet was more than a billion dollars.

      Second, if the value of the outstanding commercial loans was of sufficient concern to justify an FDIC takeover, then I would think there would have been a basis for the FDIC’s action regardless of whether Kelly could come up with $600 million in private funding and regardless of when he came up with it. Surely you are not saying that, had Kelly come up with the $600 million prior to the deadline, the FDIC would have let FBOP stay in business nothwithstanding a remaining $400 million shortfall and billions of dollars of bad loans on its books. So I don’t get it. Was the deadline a ruse?

      Finally, and more broadly, while it is understood that the FDIC does not have the power to bail out banks with taxpayer money, I think there is a not unserious argument that Congress should authorize taxpayer bailouts of small banks just as it has for the big banks. Whatever mistakes FBOP has made are no more serious or egregious — probably less so — then the mistakes made by the big banks.


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