Behind the Scenes of a Bank Takeover by FDIC (1986) | Hacker News Reader

Behind the Scenes of a Bank Takeover by FDIC (1986)

latimes.com

See also, from the 2009 major financial crisis:

Anatomy Of A Bank Takeover

> On a mid-January night, some 80 agents of the Federal Deposit Insurance Corp. pull into Vancouver, Wash. Their rental cars are generic, their arrival times staggered. One by one, agents check into a hotel, each quietly offering a pseudonym to the guy at the desk.

> They're here to take over the Bank of Clark County, which the FDIC has decided is insolvent.

https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...

It's getting harder to check into hotels with a pseudonym now. Even if you're paying cash, most hotels require a government-issued photo ID plus a credit card with a matching name.

I wonder how difficult a government agency would find getting around this.

a company I used to work for would sometimes have to bulk book rooms with little notice for certain types of response operations. Sometimes we'd get a room key with a number when we checked into the ops center, sometimes we were simply told what hotel we were at, and all we had to do was give a company name and our name. Sometimes they'd ask to see our company badge but that was about it.

Yup, and it's been like that for a very long time. But I'm sure you could find something like a travel agency to make an arrangement with hotels to just charge room + minibar etc to them, with the condition that the hotel doesn't ask for ID.

Presumably its to stop chatter on the front desk? Most hotels now you can unlock your room with an app so that would work.

There are ways. Company I used to work for would routine bulk block rooms in certain situations. Once we showed up we would either go to the front desk and only have to give our name and company name and we'd be handed a key with a room number. Sometimes as we checked in at the ops center for the situation there would be a stack of keys with nothing but room numbers and you just got whatever was next on the stack.

While it sounds astounding that you have hundreds of forced bank closings, this is actually a well regulated market working as it should.

I am not sure that todays hyper-consolidated megabanks are a better implementation of a well regulated market. As most of them nowadays are just too big to fail. So part of the mandatory market forces cannot be used lest you want to generate broad reaching consequences.

I don’t know that they’re actually too big to fail.

WaMu failed in 2008 and was handled fairly well for a bank with $300B+ in assets.

In the US maybe, but Europe seems to be deeply afraid of the idea alone to dispose of a failed bank.

The Economist has pointed that out. Few countries in Europe seem to be set up to do this.

This is because the EU wants to have a common market but refuses to have a common deposit insurance scheme like the US FDIC, so now they've developed continent-scaled banks without a continent-scaled way to save them.

A bunch of the euro crisis government bailouts happened because governments went underwater trying to save their banks.

And also because governments lied about their eligibility to be on the euro gravy train, and other governments were happy to lend them the money for future gain.

My(uninformed)impression is that the Directive on deposit guarantee schemes is the rough equivalent of the FDIC in the EU. Is there a serious deficiency in the protections that it offers?

The deposit schemes are national and required to cover the branches of their banks in other countries. Pair a big enough bank with a small enough country and you can easily drown the small country.

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There’s also a credibility problem. When the US stress tested its banks, the ones that passed did not fail. When the EU did it, some of the passing banks ended up needing saving, and this happened multiple times, sometimes even with the same bank.

Europe does not have continent-scale banks. It has a few players who dabble their toes in multiple countries.

From a quick investigation I can't see any bank that operates branches in all three of the largest countries (France, Germany and Italy), never mind all 27 member states. And those that do operate in many countries (HSBC must have the most) can have their local subsidiaries insured by the appropriate countries, just as they are insured by the FDIC when they open branches and take deposits in the US.

Cross border activity was much higher pre-euro crisis. Cross-border interbank lending is down 40%. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2130.en.pdf

> While it sounds astounding that you have hundreds of forced bank closings, this is actually a well regulated market working as it should. I am not sure that todays hyper-consolidated megabanks are a better implementation of a well regulated market.

Who do you think runs the FDIC?

Former chair: https://en.m.wikipedia.org/wiki/Jelena_McWilliams

> In December of 2021, McWilliams announced her resignation from the FDIC.[11] Following the election of President Joe Biden, Democrats controlled all the seats on the FDIC except for the one she held.[12] She resigned after expressing her frustrations in an essay published in the Wall Street Journal with what she called the erosion of agency norms at the FDIC and a "hostile takeover" by the other directors.

The FDIC is a captured entity. It is used as a political weapon and as a weapon for industry since it’s inception.

These “inspections” enabled the hostile take over by other banks. The FDIC sells the assets and those assets are purchased by the mega banks for cheap.

Who runs the FFIC? Former employees from these mega banks.

There will always be tension between the regulated and the regulator.

How will we be able to have knowledgeable regulators without being able to employ people from the industry?

The FDIC shouldn’t be regulating, it’s insurance.

It should or could be ran by accountants from accounting firms. Probably would be more suited anyway.

a) Any insurance has a regulating effect on the market. As the insurer is interested in minimizing payouts.

b) How would you take over (especially short term) ownership of a bank without having any idea about how banks work? Don’t get me wrong, the revolving doors between regulators and regulated are a problem. But I fail to see how just removing the door altogether is a successful fix.

I don’t think an execs at a megacorp are all that qualified anyway lol. An accountant can be equally qualified to put stuff up to auction or assess risk.

Second, they aren’t insuring only. In fact, they are typically liquidating. I think that’s part of the issue, it’s not a regulator body or an insurance body. It’s a liquidator that works, in part, at the behest of big banks and politicians.

Thats… a… perspective.

The FDIC pretty much never uses the “deposit insurance” because the banks never get to that point of failure when the FDIC can instead just be a broker to a larger bank.

That means you and I never really have to simulate how many $250,000 balance bank accounts to actually open for our cash millions.

Even in 2008-2009 with the wave of bank failures, the insurance wasnt pulled. And so the behavior of the director composition doesn’t seem to have influence there.

It always amazing to me that there is always someone in the woodwork upset about any organization.

A different comment posted the FDIC failed bank list:

https://www.fdic.gov/resources/resolutions/bank-failures/fai...

It goes a long way to refute your claim (unless you count the buckeye state bank as a mega bank).

My point wasn’t that the failed banks were megacorps, it’s that banking commissions just say “you’re insolvent”, then the FDIC steps in and sells to the highest bidder.

The highest bidder is naturally a mega bank, which the members of the FDIC worked at previously.

The acquiring institutions are also listed, which is what the commenter is saying; they're not really megacorps either. For a failure like WaMu, it was, but WaMu was the sixth biggest bank in the country, so really anyone acquiring its deposits would have to be in the top 5.

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the FDIC does two things; it makes sure that depositors are made whole, and it is supposed to stop bank runs from being contagious. Selling to another bank instead of taking it over makes both of those things much easier, because the FDIC does a good job of making sure the acquiring institution can actually handle it (unlike the EU counterparts, where sometimes the acquisition schemes ended up tanking the acquiring bank too); and because the acquiring bank exists and has money available, depositors have pretty much uninterrupted access to their deposits. (It's also not quite a sale, in that the FDIC voluntells the acquiring bank that they're about to take over a bank: https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...)

One thing to note is that while FDIC does insure deposits, it takes a while for them to get everything sorted, so you could be waiting weeks to get your deposits back. Given that a majority of households survey cannot handle a $400 surprise financial emergency, this outcome is still pretty bad for bank depositors.

Netflix has a documentary series called "The G Word" (about the US government) - episode 3 shows part of a bank takeover.

https://en.wikipedia.org/wiki/The_G_Word

I like how the articles were written in 1986. Even reading what would be mostly boring stuff, you feel like you've descended in the middle of a James Patterson thriller.

The internet seems to have imparted an effect on the writing style for journalists, and it isn’t always positive.

Is it ever positive?

Another story of an FDIC bank takeover, this one from 2009: https://www.npr.org/2009/03/26/102384657/anatomy-of-a-bank-t...

I'm so glad that this was posted. I, too, have recently been thinking about how the FDIC works given the lockout of funds at Celsius. This is an incredible read.

I've also dived into this more, however. It turns out the FDIC maintains a list of bank failures and summaries [1][0], respectively. These are awesome to read. There have been zero failures in 2022 so far, zero in 2021, and four in 2020.

Most failures in the last few years have resulted in assets being sold to acquiring banks. The most recent failure where the FDIC mailed checks to people (this is what I imagine most people think of when they see the FDIC insurance policy) was First NBC Bank in Louisiana in 2017 [3]. Some of the assets were acquired by Whitney Bank, but a large number of assets were not. The bank failed on April 28th of that year, and the FDIC mailed checks on May 1st [2], which is pretty dang good, in my opinion.

I think what I appreciate the most about this article and the recent failures is just how much attention FDIC devotes to keeping services available for customers, even when the situation is changing. Scanning over a few of the bank failure summaries, they all have a similar pattern: bank closes, all ATMs stay online, checks clear as soon as reasonably possible, and branches remain open. In the First NBC Bank failure, the worst "downtime" was experienced by people who had accounts backing other more complex financial products that didn't have immediacy attached (certificates of deposit, which are predicated on being held for a long time, for example). Everything else was "zero downtime", which is really stellar.

Seeing other bank failures on the list, particularly in 2017, that I never heard about, also reminds me of the fact that this is stuff that matters more frequently than I would have expected (i.e., outside of financial crises, like 2007/2008).

[0]: https://www.fdic.gov/bank/historical/bank/

[1]: https://www.fdic.gov/resources/resolutions/bank-failures/fai...

[2]: https://www.fdic.gov/resources/resolutions/bank-failures/fai...

[3]: https://www.fdic.gov/bank/historical/bank/bfb2017.html

I wonder where cryptocurrency will end up. Eventually people will want entities like FDIC to step in and soften the blow. If Celsius auctioned its assets would we be where we are?

I certainly don't want the federal government to get involved in providing insurance to cryptocurrency "investors". It would be a total waste of resources. Let them take some hard blows. If they lose all of their money that's a totally acceptable outcome.

True but I think the crypto companies should be able to buy the same insurance as gambling casinos, since... they are gambling casinos

Crypto companies are more like the gamblers than the casinos. And nobody is going to give a gambler insurance against losses at a casino.

"Insurance" in blackjack is a reasonably popular bet, and gives the house more edge than the regular game. Some people hedge their cryptocurrency portfolios with put options, which is a form of insurance.

You can package almost any financial instrument and sell it to someone.

Perhaps you mean the state shouldn't subsidise gamblers with free insurance - I think most people would agree with that.

Insurance in Blackjack is a losing bet for the player, and nobody with even beginner-level experience takes it.

I'm not sure how anybody can insure against something like Celsius. The "investments" just went poof.

The FDIC operates on a few constraints. One is that is has two roles, both as insurer, and as receiver. The second is that the law requires it to deal with failed banks in the manner that incurs the least costs on its fund.

It should be quite unsurprising that if an offer to buy 100% of the banks assets and liabilities comes in, this is likely to get accepted, since it likely to have the lowest possible costs to the FDIC itself. No costs in insurance reimbursing, obviously, but also fairly minimal receivership costs, as they don't have left over assets to sell, don't have to deal with creditors for any debts that transfer with the sale, leave a relatively small set of creditors (including the shareholders) to deal with.

Whole bank purchase offers are not exactly rare, but offers to purchase only some of the assets while taking on some of the liabilities (often including accounts either in full, or up to the insured limit) are probably even more common. This is obviously more expensive to the FDIC, since they may end up with more unacquired liability (i.e. more creditors to deal with), assets to sell, etc.

The FDIC does move fast, like disturbingly so, but their requirement to minimize their own expenses basically requires it. They generally already have the acquisition offers in hand when they first show up, and for their expected plan of action, have already talked with the relevant state regulators to have them ready to issue any approvals needed. Even things like issuing checks if no-one acquires the accounts, taking any more time than necessary can accrue additional costs.

For things that don't actually cost the FDIC itself any money, like negotiating terms of acquisition, they can afford to be extremely consumer friendly. Requirements on the acquirer for things like keeping all branches open for at least x months, no sweat off the FDIC's back.

As a young lawyer in 2011 I had the chance to work on some of this stuff. The FDIC farms all of the legal out to law firms, and we have to litigate the hijinks (in the cases I worked in, rampant embezzlement (alleged) and terrible loans being made to buddies at the height of the 2008 madness). It was cool work.

This is all fine and dandy for a single bank with a single branch - I wonder how they’ve done the larger ones like WaMu and HomeFed.

For WaMu, some deets at Wikipedia:

https://en.wikipedia.org/wiki/Washington_Mutual#Seizure_by_O...

NYT coverage from the time (2008):

https://www.nytimes.com/2008/09/26/business/26wamu.html

The Times also references the 1984 failure of Continental Illinois National Bank and Trust in Chicago.

I don't know of any insider reports of what transpired at CINB, though Worldcat does have an interestingly-timed title:

A financial analysis of Continental Illinois and the implications of its failure, by Robert C Jones, University of Central Arkansas, 1984(?)

https://www.worldcat.org/title/financial-analysis-of-contine...

(Date ambiguity in Worldcat record.)

A less specific search turns up a few records of interest:

https://www.worldcat.org/search?q=Continental+Illinois+Natio...

In particular:

Views on the Federal Rescue of the Continental Illinois National Bank and Trust Co. U.S. Government Publishing Office 1984.

https://www.worldcat.org/title/views-on-the-federal-rescue-o...

https://archive.ph/rKUK1

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