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Feeding the Sharks
By David Glenn Cox
This week federal regulators shut down Montgomery, Alabama, based Colonial Bank Group. In the end it will cost the American taxpayer an estimated 2.8 billion dollars. It will cost many people their jobs and livelihoods because the operations of the bank have been assumed by BB&T Corporation. The little banks get swallowed by the medium-sized banks, and the big banks swallow the medium-sized banks; then the government bails out the big banks because they’re too big to fail!
Colonial Bank was a medium-sized bank, the brainchild of one Bobby Lowder. If you have any experience with Montgomery or Montgomery real estate you are familiar with the Lowders. They are an old Southern family with their fingers in every pie. In Montgomery they built shopping centers and apartment complexes. They knew all the politicians and where all the bodies were buried.
There was a residential neighborhood development that was quite successful in Montgomery. It was comprised of fifteen hundred to two thousand-square-foot houses with nice yards and landscaping. Problem is that in a town like Montgomery with little real growth, how do you sell more houses? This neighborhood was around ten to fifteen years old and well established, and at the end of the two main roads were dead end streets. It had been assumed that perhaps a phase two might be built at some later date.
But the developers had a different plan; they went to the zoning board and got a variance. For the Lowders it was no more than a formality, like borrowing a cup of sugar. At the end of the dead end streets they built apartments, and not luxury apartments but low-income apartments. The effect on the neighborhood was devastating; overnight the yards filled with for sale signs. The value of the homes plummeted and most homeowners lost their equity.
Just across town a new residential development was opening, offering fifteen hundred to two thousand-square-foot-homes with smaller yards and two dead end streets at the back of the neighborhood. The sign out front said, “A Lowder Planned Community,” and as I drove by I said to myself, “Yep, and I know the plan!”
This is how you use political power in a small town. People who don’t want to move must be frightened into moving, and you, as a realtor and developer, profit on both ends. So when Bobby Lowder formed Colonial Bank in 1981, I knew it would get interesting sooner or later. With the construction company, the residential real estate division and the commercial real estate division, now they had their own bank to finance their projects. They owned the country music radio station in town as well as a string of other radio stations.
The corporate officers list reads like a who’s who of Alabama politics along with Milton McGregor, the father of Alabama’s dog track industry, was ex-head Auburn football coach, Pat Dye. Then, this being Alabama after all, there is Big John Ed Matheson, the preacher at the biggest mega church in town. What could go wrong? A preacher, a gambler, a football coach, and Bobby Lowder.
In May of this year Bobby Lowder stepped down as head of Colonial Bank. He could see the train tracks running out and it was time to get off the train. As a going away present the bank awarded favored directors an average of five thousand shares of stock to cushion the blow. From a high of over $25.00 per share it would have been a bonus of $125,000, but by April the stock price had fallen to just 91 cents a share and closed yesterday at 41 cents.
Bank of America has sought an emergency injunction, freezing one billion dollars in Colonial assets over the mishandling of funds in mortgage lending. Colonial is also under investigation by the Justice Department for accounting irregularities and a criminal investigation in connection for alleged accounting irregularities at its division in Orlando, Fla., which provides financing for mortgage lenders, and a civil probe by the Securities and Exchange Commission concerning accounting issues and the bid for federal bailout funds.
But they had a plan; new management took control under a plan for a $300 million investment led by Taylor, Bean & Whitaker Mortgage Co. of Ocala, Fla. The infusion of cash would make Colonial eligible for as much as $550 million in government bailout funds. Ah, but the best-laid plans of mice and men sometimes go awry.
The deal fell through when federal agents raided the Ocala headquarters of Taylor, Bean & Whitaker and shut down the operation. From failing to file financial reports to "certain irregular transactions that raised concerns of fraud," HUD, Fannie May and Freddie Mac had all suspended T.B.& W. It was the final straw for Colonial, the two mice trying to work together to build a rat. It’s always a bad sign when your merger partner gets raided by the feds!
The seizure of Colonial is the seventy-seventh bank failure this year; it is also one of the largest failures since Washington Mutual. The Federal Reserve always holds their executions on Friday so that maybe you little folks won’t notice what’s going on. Regulators also closed two other institutions in Arizona, one in Las Vegas and one in Pittsburgh.
A report in Bloomberg news says:
"Aug. 14 (Bloomberg) -- More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival. The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full."
Makes you wonder if maybe a program to assist the borrowers, as was done in the last Great Depression, might not have been a wiser course of rescue than to just keep feeding the sharks and allowing them to eat each other. The board members will keep their six figure incomes, but the employees will suffer. Like an autoworker when the plant shuts down, what do you do when the bank you work at is bought out? Everyone loses and the folks who ran the train off the tracks, they just walk away.
Yet no matter how much money the government gives to the banks, the banks customers still can’t make their payments. I guess we need more shark food!
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