Sunday, March 08, 2009

60 Minutes Your Bank Has Failed What Happens Next?

60 Minutes Gets A Rare Look At How The FDIC Takes Over Banks And Reassures Depositors

Subscribe to All American Investor via Email

(CBS) As staffers of the Federal Deposit Insurance Corporation enter the Heritage Community Bank on a Friday night - surprising employees with the news they are taking over the failing institution - 60 Minutes cameras and correspondent Scott Pelley are there to report on a process that's happening more and more in a foundering economy.

Pelley's report, including an interview with FDIC chair Sheila Bair, will be broadcast this Sunday, March 8, at 7 p.m. ET/PT.

Bair says 25 U.S. banks failed last year and expects many more this year. "It's going up. There have been 16 already now," she says. 60 Minutes was there for one of the latest ones.

On Friday evening Feb. 27, 60 Minutes recorded the arrival of the FDIC team as they entered Heritage Community Bank in Glenwood, Ill. The employees reacted mostly with shock and dismay. "I would say a large majority of the employees don't know that the bank is in trouble and is about to close until we walk in the door," Arthur Cook, the FDIC supervisor of the Heritage takeover, tells Pelley.

Heritage Community operated for 40 years, had 12,000 deposits totaling more than $200 million and was warned by the FDIC and Illinois state banking regulators more than four months ago that it was in trouble due to bad real estate loans. The FDIC takes total control. "We have accountants, asset specialists who specialize in loans…the physical facilities," says Cheryl Bates, the FDIC’s closing team manager. "We have a group of investigators that come in and do a review on the reasons of the bank failure."

Cook and Bates work for the FDIC's Division of Resolutions and Receivership.

Then they alert the media and the bank opens the next day, in this case under the name of the new owner, MB Financial, which bought the bank in a secret auction. This is one of the ways that the FDIC takes over a bank; in other cases, it may close the bank and pay off depositors or it may choose to run the bank itself.

The next day, the doors open, and as 60 Minutes cameras roll, anxious customers - including one carrying an empty briefcase - came into the bank. Only one withdrew a great deal of her money. The man who intended to close his account left with his valise empty, satisfied that the bank was in good hands. MB Financial is now in control and it's almost as if nothing happened. "Almost nothing did happen," says MB's CEO Mitchell Feiger, there to greet his new customers. "It's the same products, the same services, it's the same people taking care of the same customers."

The cost to the FDIC insurance fund of taking over Heritage and making a deal with MB Financial to buy it could end up costing $41 million and none of that money comes from taxpayers. "It is money from our reserves…and we are funded by insurance premiums that are assessed on banks," says Bair.

Asked why large, troubled banks like Citibank can't be saved by the FDIC and must rely on taxpayer bailouts, Bair explained that the FDIC deals only with federal or state chartered depository institutions.

She would not comment specifically on any bank but said "[these institutions] are really very large financial organizations….it's more than a bank. It's a broker dealer. It's offshore operation. It's foreign deposits," says Bair. Companies like Citigroup are large holding companies, with a variety of assets operating around the world.

She says because of this, there is no equivalent resolutions procedure to what the FDIC currently does that could encompass such an broad-based financial company with so many entities.

But Bair believes Congress should consider whether to let such banks get so large. "I think taxpayers rightfully should ask, that if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold?" she asks.

Produced by Henry Schuster

Follow us on Twitter

Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

More from All American Investor