http://www.nytimes.com/2009/08/14/business/economy/14norris.html Even worse, the bank’s attempt to obtain a federal bailout has prompted a criminal investigation. After a raid requested by the inspector general for the government’s Troubled Asset Relief Program, Colonial said it was being investigated on suspicion of accounting fraud. ************************** If Colonial does fail, it will call... [more]
http://www.nytimes.com/2009/08/14/business/economy/14norris.html
Even worse, the bank’s attempt to obtain a federal bailout has prompted a criminal investigation. After a raid requested by the inspector general for the government’s Troubled Asset Relief Program, Colonial said it was being investigated on suspicion of accounting fraud.
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If Colonial does fail, it will call into question both the effectiveness of the regulation of rapidly growing banks, and of the capital standards regulators use. Even now, Colonial claims to be adequately capitalized. As recently as March, it met the criteria for being “well capitalized,” the highest designation.
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How could a bank be well capitalized and facing government orders to find more capital? One reason is that the government’s rules allow banks to ignore the declines in market value of many loans and other assets in computing how much capital they have. Had Colonial been forced to count the losses it had already acknowledged, its capital situation would have appeared dire earlier than it did.
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But in June 2008, it switched back to being regulated by the Alabama state banking department, even though most of its business was in Florida.
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The move, Mr. Lowder said then, “allows Colonial to continue to evolve in order to remain competitive as we strive to balance our safety and soundness with innovation, both of which are important to our customers.”
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Last December, it appeared that Colonial might get a federal bailout. The Treasury Department agreed to invest more than $500 million in the bank, but only if Colonial could arrange a $300 million capital infusion from some other source.
Colonial announced in March that it had found such an investment. Investors led by Taylor, Bean & Whitaker Mortgage Corporation had agreed to put up $300 million for a 75 percent stake in the bank.
The idea that a mortgage company had that kind of money in 2009 seemed a little improbable, but the agreement did not fall apart until the end of last month. Last week, federal agents, acting at the request of the special inspector general for the TARP program, raided the offices of both Taylor Bean and Colonial, carting off boxes of documents.
In the aftermath, Colonial announced the federal inquiry, and the Federal Housing Administration suspended Taylor Bean’s status as a mortgage company that could deal with government programs. The government said Taylor Bean had failed to disclose that its auditor discovered “certain irregular transactions that raised concerns of fraud.”
Colonial officials did not return phone calls, and a call to Taylor Bean was answered by a recording stating no message could be left because the mailbox was full. Earlier, Taylor Bean had said it was ceasing operations.
Even after selling hundreds of millions of dollars in assets for less than half their face value, Colonial said that as of June 30, more than 12 percent of its remaining assets were nonperforming — nearly three-quarters of which were construction loans.
The Colonial story is not over, but one lesson is an old one: banking profits can be ephemeral. From 1995, when Colonial first expanded outside Alabama, through the first quarter of 2008, its last profitable quarter, it reported $1.7 billion in earnings.
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