If you Google "Bank Failures 2009" you'll get quite a list of doom and gloom to pour through. Most of the articles just state the fact that more banks are failing, and that the FDIC is neck-deep in red ink. There have been too many stories to count explaining how mortgage scammers and credit default swaps screwed up the world with bogus financial transactions. And, some people are blaming poor people for the mess.
But I recently came across one activity that I hadn't seen mentioned a lot before. Start-up banks whose only purpose is to be flipped for a profit. It sounds a lot like purchasing a condo in Florida knowing that condos don't really increase 45%/year in value, and then selling that very same condo for a 45% profit the next year. It's all fun and games until somebody gets stuck with the crappy, worthless condo.
According to Donnelly Penman Capital, an investment firm that specializes in investment in community banks, as little as five years ago a community bank that was mediocre could be flipped for twice its book value. A strong performer could garner three or more times its book value. Strong reason to gamble your investment money on a community bank.
The Community Bank of Lemont, Illinois, (est. 2001) like many failed banks this year, was started up after January 2000. It was the brain child of Richard Meade and William Brower, who claim that they only started the bank because they felt Lemont was not being served by larger banks. The area between Orland Park and Lemont was going through a huge growth in housing developments. Its proximity to Chicago with lower taxes made it attractive to new homebuyers. Massive tracts of farmland were being converted into "affordable" housing, including the McMansion craze. It was easy for these guys to pull in investors. The bank stood to gain lots of business in the growing population of the area.
But don't confuse these guys with George Bailey! These guys were investors first and stewards of their community last. For a while there, this was common practice. Community Bank of Lemont is not an oddity, and this practice is not illegal. The newer banking institutions are called "de novos" and the whole point of starting one is to sell it within seven years to larger and more established banks.
So, with not much to show for itself yet, Community Bank of Lemont sprang up on a sizeable plot of land in a brand new, large, prosperous-looking building. Most of the people moving into the area wanted loans and mortgages to go with their new homes. The Bank had deposits and plenty of investors, and soon they claimed their business had grown to $70 Million in assets. But most people using this bank were buying houses during the height of the bad-mortgage era. They needed their new car loans to keep up with the Jones, and they had very little to save themselves.
Along about April, 2007, the investors at Community Bank of Lemont decided it was time to sell to a larger bank. Meade himself invested $750,000 to start up the bank in 2001 and says he expected to cash out $1.5 Million after an expected sale to Standard Bank & Trust Corp. in 2007. But the whole transaction hit a snag.
FDIC smelled a rat in Standard's lending practices and held up their purchase of Community for about a year while they investigated. When the sale was finally approved, the housing market was collapsing and Standard no longer wanted to purchase Community. Community's loan portfolio had deteriorated so much that nobody wanted to purchase it. Now, instead of those massive profits Meade was envisioning for himself, he's facing bankruptcy and he says he owes Bank of America $353,000 for money he borrowed to buy out other investors in Community Bank.
The Chicago Tribune's Business section on November 3, featured an article about foreclosure activity both in the city and in the surrounding counties. The largest increase in foreclosure activity in all the areas surrounding Chicago (and the second largest increase including all neighborhoods in Chicago)was the area that would have been serviced by Community Bank of Lemont. From the Third Quarter of 2008 to the Third Quarter of 2009, the Homer Glen/Goodings Grove area showed a 617% increase in foreclosures.
A 617% increase in foreclosures. That number implies to me that recent banking practices have not served that community well. That's not Meade's take on his circumstances. His main concern is that government regulators held up the sale of Community Bank to Standard, and he was therefore unable to unload his bad bank before its loans started to deteriorate. Apparently Brower agrees, recently stating that the sale was needlessly delayed and, "If I make a mistake in my business, I have to pay for it. The regulators are the reason I get nothing. The regulators have unbelievable power, and I wish they could be held accountable." They aren't alone. Other investors have recently expressed their anger that they were ineligible to tap into TARP funds. Once again, only interested in themselves and not in the community.
Suck it up and quit whining gentlemen. Starting a business IS a risk, and you lost. Expecting to double your money on a bank in five years should have seemed unrealistic. You have other investments and apparently you know how to use our bankruptcy laws to protect yourselves. The families and communities you used as investment props aren't faring as well. Perhaps at the end of the day we will have some rules that will give regulators teeth when they investigate your banking practices, and we will all be protected. I'm glad to read here and there that the FDIC was finding problems, but I don't think it made any difference.
This activity must stop. These banks are not being created to provide competition. There has to be a way to encourage people who want to have a long term investment in their community without also helping people who only want to take the money and run.