About Ryan Caione

We all know that 2008 has been a tough year for banks. But forget the heavy real estate- and mortgage-related losses endured by the big boys; entire institutions are going under. Eight have failed so far this year, and four have been taken over by the FDIC in the last month alone. By comparison, only three banks failed in all of 2007, and none did in 2005 or 2006.

The latest was small Florida-based First Priority Bank, which fell into receivership on Friday. Superregional SunTrust Banks assumed control of First Priority’s six branches and some $200 million in customer deposits. The week before, California’s First Heritage Bank and First National Bank of Nevada were closed by the Office of the Comptroller of the Currency, and Mutual of Omaha took over the banks’ deposits. The most spectacular collapse this year, of course, was IndyMac Bancorp, which was seized by the FDIC on July 11 and filed for Chapter 7 bankruptcy on Friday. It is the third-largest bank failure in US history.

So what happens when the FDIC steps in? It usually does so on a Friday, so it can take care of business over the weekend, and gives no advance notice, as to not incite panic and a run on the bank. Customers with FDIC-insured deposits (up to $100,000) usually can access their accounts as normal (by check, ATM or debit card, or online), or at a branch when the bank reopens on the following Monday, either under FDIC supervision or by an acquiring bank.

We surely have not seen the last of the bank failures. Indeed, the man who some think shoulders some of the blame for the current mess says there are more to come. The FDIC maintains a watch list of around 90 banks that it deems “troubled”. It doesn’t share its list with the public, for obvious reasons, though some analysts have their own opinions about which banks may be included. Most are small institutions, similar in scale to First Priority.

Of course, with everyone so skittish, naming names can get one in trouble too. Ladenburg Thalmann financial services analyst Richard X. “Dick” Bove was sued by BankAtlantic for suggesting that the bank and its parent company BFC Financial could be next to go under.

The drumbeat of bad news continues for Wachovia, the fourth largest bank in the US. New CEO Bob Steel, the former undersecretary of the US Treasury who joined the company two weeks ago, certainly has his work cut out for him. The company announced Tuesday that it posted losses of nearly $9 billion in the second quarter of 2008, wrote off some $6 billion in assets, set aside more than $5.5 billion to cover future losses, is cutting dividends by 90%, and is eliminating approximately 10,000 jobs, including the layoffs of more than 6,300 employees.

At the crux of Wachovia’s troubles are so-called Pick-A-Pay mortgages, which allow borrowers to choose one of four monthly payment options. The bulk of these loans, most of them acquired when Wachovia bought Golden West Financial in 2006, are secured by homes in the hard-hit Florida and California real estate markets. The default rate of Wachovia’s $122 billion worth of Pick-A-Pay loans is hovering around 6%, and the company says that figure could balloon to 12% by 2009. (The national average for all mortgage defaults is currently around 1%.)

Wachovia has already raised more than $8 billion in capital from investors in 2008 alone, but may also be compelled to divest some of its operations in order to bring in more money. The most obvious candidate to be sold, according to some analysts, is the company’s Wachovia Securities subsidiary. It is perhaps Wachovia’s most successful business, though it has seen its assets under management dwindle by some 10% since its acquisition of A.G. Edwards last year. What’s more, Wachovia Securities’ St. Louis headquarters were raided last week by Missouri state regulators seeking information on the unit’s sales, pricing, and marketing of auction-rate securities after the market for the arcane financial instruments collapsed in February. [UPDATE: Please see the comment from Wachovia spokesperson Teresa Doughery regarding the state's actions.]

For its part, Wachovia is determined to weather the storm. Still, JPMorgan Chase is mentioned as a possible buyer of Wachovia Securities, if not all of Wachovia.

According to a report issued this week by Dow Jones, private equity firms raised more than $130 billion in the first half of the year, only 3% less than the same time last year, when the private equity boom was waning. Warburg Pincus closed the largest private equity fund so far in 2008, worth some $15 billion, while GS Capital Partners raised a record $20 billion for its latest mezzanine fund. Venture capital funds have also seen an uptick in their inflows, led by firms like Kleiner Perkins Caufield & Byers and Lightspeed Venture Partners. Real estate-focused private equity investors are enjoying record fundraising as well.

At the same time, with the credit market dried up, the biggest of the private equity firms, such as Carlyle Group and Madison Dearborn Partners, have had difficulties raising funds for leveraged buyouts and, for the most part, have been sitting on their hands (unless they’re ganging up to buy The Weather Channel). There were no venture capital-led IPOs during the second quarter. Even Warren Buffet’s Berkshire Hathaway, which revealed in its latest annual report that it has up to $20 billion burning a hole in its vault, has only made one major deal on its own (its acquisition of Marmon Group) in the last year-and-a-half or so.

So where is all the private equity and venture capital moolah going? Smaller private equity firms such as Kohlberg & Co. (which announced its acquisition of PPG Auto Glass this week) and Stone Point Capital (investors in 51% of Fiserv Insurance) are still relatively active. With the stock market in bear territory there are bargains to be had, but the same environment makes PE and VC investors wary of commitment. They have amassed their war chest. It’s only a matter of time before they start deploying it.

The American Express card has always seemed to possess an aura of exclusivity. The perception was fomented by the credit card’s ties to its parent company’s jet-setting travel business, as well as a long-standing requirement (since loosened, but still offered) that cardholders pay off their balances at the end of each month. Banks generally did not issue AmEx cards, as they do MasterCard and Visa cards. Well, there apparently was a reason for that: The two competitors imposed restrictions on member banks against issuing rival cards, such as Discover and American Express. In 1998, the US Department of Justice sued MasterCard and Visa on such grounds and, three years later, a court ordered the companies to eliminate the rules.

In the most recent turn of events, AmEx announced this week that MasterCard will pay the company $1.8 billion to dismiss the antitrust claims against them. The settlement comes on the heels of a similar $2.25 billion agreement that AmEx reached with Visa near the end of last year. Together, the $4 billion-plus MasterCard and Visa payouts to AmEx represent the largest antitrust settlements to one company in US history.

Beginning in the third quarter, MasterCard will pay AmEx $150 million per quarter over the next three years. Visa already paid about half of its settlement in the fourth quarter of last year and is making payments of up to $70 million per quarter through 2011. The combined payments will add some $880 million annually, to AmEx’s coffers until then.

The settlements come at a fortuitous time for AmEx. They not only provide the company with a windfall of  cash, which will help AmEx, besieged by credit card account defaults and write-offs, to weather the current credit crunch. They should also allow AmEx, which has already inked card-issuing agreements with big banks such as Citigroup and Bank of America, to further expand its client base by making its products available through even more channels.

Former Wachovia CEO Ken Thompson is the latest casualty of the mortgage crisis, following the high-profile ousters of Stanley O’Neal and Chuck Prince from Merrill Lynch and Citigroup, respectively, late last year.

The missteps at Wachovia, the fourth-largest bank in the US, reach beyond the mortgage mess, though the company finds itself neck-deep in it. That’s due in large part to some $10 billion worth of new home construction loans amid an industry-wide slow down and exposure to adjustable-rate residential mortgage loans in the crummy California market, acquired in Wachovia’s 2006 buyout of Golden West Financial.

Wachovia has also struggled to integrate the operations of A.G. Edwards into its Wachovia Securities unit after acquiring the venerable retail brokerage and asset manager last year, alienating many long-time A.G. Edwards customers in the process. Wachovia has also been embroiled in alleged money laundering and telemarketing scams.

Thompson, who had been serving as the company’s chairman and CEO, got his first no-confidence vote when the company split the roles last month. He was out of a job a little more than three weeks later. Lanty Smith was named Wachovia’s chairman and ended up succeeding Thompson as CEO on an interim basis.

Meanwhile, Washington Mutual (WaMu) made a similar move on Monday in splitting the chairman and chief executive positions, with independent director Stephen Frank to take over the chairman function from CEO Kerry Killinger. If the goings-on at Wachovia are any indication, Killinger shouldn’t get too comfortable in his new, reduced role.

With both Wachovia and WaMu foundering, takeover rumors are rampant, and one of the few financially healthy big banks around, JPMorgan Chase, has been mentioned as a possible suitor for one or the other.