Alex Giannoulias

Reuters relays an FDIC inspector general report that concluded the seizure of Chicago’s Broadway Bank, owned by the family of U.S. Senate candidate Alexi Giannoulias, was not politically motivated. The critical issue here is that it was known for months Broadway would go under (the bank made excessive subprime loans and, most notoriously, loaned to mobsters), including when Giannoulias was running in the Democratic Primary that he narrowly won in February. FDIC took over Broadway and transferred its assets to MB Financial in April.  This may have been the best time for such news to hit the Giannoulias campaign: after the primary but well before the general election.

The FDIC IG found that the delay was due to “increased regulatory workload” from escalating bank failures as well as the federal agency’s need to coordinate with state regulators.

However banal, such a finding makes sense — other banks that the FDIC took over have also been subject to endless rumors of impending doom. This blog spent months covering a likely federal takeover of Chicago’s ShoreBank. The FDIC took over the lender just last week. Last year, a similar fate greeted Park National Bank of suburban Oak Park.  In the end, there are hundreds of banks that must be closed and only so many FDIC regulators to close them.

Hundreds of other banks showered with TARP funds, however are paying back the Treasury. Paletta writes:

Officials who designed the program had said the money was intended to go to companies that weren’t at risk of toppling, and regulators have sought to downplay the failures of TARP-connected banks.

As much as hatred of TARP is widespread, the program hasn’t been a complete bust. The nation’s financial system continues to operate, albeit at an impaired rate. Meanwhile federal officials haven’t made an inexcusable number of bad bets. About 100 banks have skipped payments totaling $146 million, though the amount in arrears is only a fraction of the $9.5 billion already repaid.

Sonoma Valley wasn’t the only California bank failure over the weekend, Emma Ward of Topnews reports that Solvang-based Los Padres Bank, Chico-based Butte Community Bank, and Stockton’s Pacific State Bank were also taken over by the FDIC.

It’s unclear how many of the bank failures are linked to bad mortgages, but the months of reckoning in that sector continue unabated. According to the web’s Mortgage Lender Implode-O-Meter, 384 major home loan issuers have shuttered since late 2006.

Wall Street power players like Goldman Sachs and Bank of America assisted local investors in forming Urban Partnership. The help raises suspicions that President Obama, whose Chicago residence lies right by ShoreBank headquarters, pushed Wall Street firms to help the lender.  Daniels writes:

Given the severity of ShoreBank’s loan losses — the $2-billion-asset bank suffered a net loss of over $100 million last year — it’s remarkable that a bank dedicated to carrying on its work is emerging from the wreckage. Lenders in far better shape that have gone through the FDIC’s failure process generally have been absorbed into larger banks.

A more optimistic take is that ShoreBank benefited from its reputation as a socially responsible lender ravaged by a financial meltdown beyond its control. It bears watching how Urban Partnership will operate as the federal government debates whether to subsidies for home ownership.

The AP has an interesting explanation for the increase in bank takeovers: losses on loans made for commercial property and development. In the recession, and a “recovery” that’s seen no rebound in consumer spending, companies vacate shopping malls and office buildings and then stop their mortgage payments for these properties. Bank failures were once viewed as a direct result of the subprime mortgage crisis. Now they’re part of the wider economic malaise and an increasing number of lenders require FDIC intervention.

One is a straight liquidation, in which the FDIC would reimburse insured depositors, close the branches and dispose of the assets later. In that scenario, ShoreBank would be consigned to history.

The other is a management-led buyout, most likely funded in large part by some of the investors who committed $150 million to save ShoreBank but whose investment was predicated on an accompanying $75-million federal bailout that now is not forthcoming because of regulators’ concerns that it won’t be enough to keep the bank solvent.

As Daniels explains, the second scenario is a “good bank, bad bank” approach. Management acquires the “good” remaining in the bank — branches, deposits, good loans — and the FDIC purchases the bad loans it has insured.

This blog has walked through the larger political context of the teetering ShoreBank.  The bank had well-intentioned but sometimes poorly executed investments in poor communities. It had friends on Wall Street like Goldman Sachs and Bank of America that were ready to help with a bailout. However, some Republicans say that Chicagoan Barack Obama improperly coerced these firms to help.

Here is one bit of economic context: foreclosures are soaring in Illinois – up 33 percent in July. So the awful performance of Shore Bank this year is hardly an anomaly.

Chicago-based ShoreBank may be a goner after it lost at its attempt to get $75 million of Treasury Dept. TARP money. James Sterngold and Robert Schmidt of Bloomberg News explain that the bank applied to a TARP bailout program for community banks that invest in poor areas. Indeed, the case for saving ShoreBank revolved around its investment in Chicago’s South Side as well as blighted neighborhoods in Cleveland and Detroit. Also, a group of Wall Street firms viewed ShoreBank as a salvageable institution: They offered a total of $150 million contingent on the bank getting a TARP loan.

The case against saving ShoreBank, though, has grown. House Republicans have investigated whether Chicago southsider Barack Obama forced Wall Street to get involved. Then, as the Obama administration faced accusations of favoritism, the bank lost even more money. After a terrible 2nd quarter, the Treasury Dept. estimated that ShoreBank would need to raise $190 million to stay afloat. With Treasury deciding ShoreBank doesn’t deserve a bailout, the lender will likely join several other Chicago community banks placed in FDIC receivership.

In May, it looked like the private investment came through. That’s when Wall Street’s heaviest hitters like Goldman Sachs, Bank of America, and Citigroup gave $150 million. Some House Republicans claimed that Obama coerced Wall Street firms to save a lender based in Obama’s old Hyde Park neighborhood. Now Wall Street firms might not want to invite more controversy by giving ShoreBank the additional private investment it needs. Also, Yerak reports that the Treasury Dept. might be tight with its remaining TARP money after the financial regulatory reform bill ushered in the supposed end of taxpayer funded bailouts.

There is some justice in big banks that received multi-billion TARP bailouts helping out smaller banks that weren’t immediately rescued by the Treasury Dept. The Fed’s skepticism, though, reignites questions about political pressure to save ShoreBank, headquartered in Barack Obama’s old Hyde Park neighborhood. Why, after all, would these financial firms want to save a specific South Side Chicago bank with a spotty recent history? Some GOP lawmakers have suggested that the reason is that the White House inappropriately pushed Wall Street firms to help save ShoreBank. The president has denied any involvement. Regardless, ShoreBank may be a lost cause even with Wall Street’s help.

Wehmer’s plan is another instance of still functional Chicago banks profiting off the misfortune of failing lenders. If anything, Wintrust buying into these banks has an air of community responsibility. The prevailing practice is for banks like Wintrust to bide their time until the failing lender collapses and is taken into FDIC receivership. The bank is then bought from the FDIC.

In other words, when one bank loses, another expands its market share. FDIC has the power to disallow claims and repudiate contracts that the old bank can no longer keep. So Wintrust Financial Corp. acquired Lincoln Park Savings assets but avoided many of the former bank’s liabilities. Such transactions have typified Chicago-area banking this year. The day Lincoln Park Savings failed, six other Chicago banks were also seized by the federal government. Just as mega-Wall Street banks like Goldman Sachs have grown bigger in the post-financial meltdown world, select regional lenders like Wintrust have also expanded.