MagnetBank failure as a canary in the coalmine

In 2008, the FDIC successfully shut down 25 banks.  That is a good record. This year it has already been six.  To date, the FDIC had generally been able to find a buyer of one of the failed banks’ deposits.  After all, outside of IndyMac, the large majority of the failed banks had assets under $1 billion.  However, the FDIC failed to find a bank to take over the assets of MagnetBank, one of three FDIC seizures this past Friday.

Below is the press release from the FDIC. I have highlighted the relevant sections in bold.

The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of MagnetBank, Salt Lake City, Utah. The bank was closed today by the Utah Department of Financial Institutions and the FDIC was named receiver.

After an extensive marketing process, the FDIC was unable to find another financial institution to take over the banking operations of MagnetBank. As a result, checks to the retail depositors for their insured funds will be mailed on Monday morning. Brokered deposits will be wired once brokers provide the FDIC with the necessary documents to determine if any of their clients exceed the insurance limits. Customers who placed money with brokers should contact them directly for more information about the status of their funds.

MagnetBank, as of December 2, 2008, had total assets of $292.9 million and total deposits of $282.8 million. It is estimated that the bank did not have any uninsured funds. Customers who have questions about today’s transaction can call the FDIC toll free at 1-800-822-0412. The phone number will be operational this evening until 9:00 p.m. Mountain Standard Time (MST); on Saturday from 9:00 a.m. to 6:00 p.m. MST; and on Sunday from noon to 6:00 p.m. MST; and thereafter from 8:00 a.m. to 8:00 p.m. MST. Interested parties can also visit the FDIC’s Web site at www.fdic.gov/bank/individual/failed/magnet.html.

MagnetBank is the fourth FDIC-insured institution to fail this year and the first in Utah since Bank of Ephraim, was closed on June 25, 2004.

What does this mean? As with IndyMac, uninsured depositors, those with deposits in excess of $250,000 could get stiffed. Think small businesses here. I see this as a development to watch because this small bank does not have a significant asset base. Yet, the FDIC was forced to take all the risk onto its balance sheet. What does this say about the state of banking in the United States? And what’s more, what should we make of the FDIC’s ability to do the same often in the future without running out of money?

This does not look like a harbinger of good things to come.  Watch this development.

Sources
PR-12-2009 FDIC Approves the Payout of the Insured Deposits of MagnetBank, Salt Lake City, Utah
PR-13-2009 Bank of Essex, Tappahannock, Virginia, Acquires All the Deposits of Suburban Federal Savings Bank, Crofton, Maryland
PR-14-2009 CenterState Bank Acquires All the Deposits of Ocala National Bank, Ocala, Florida