Corporate Governance

From the Pages of The Pomerantz Monitor: Shareholders of Seized Banks Take It on the Chin

By Carolyn Moskowitz

As Robert Axelrod reports in the December issue of The Pomerantz Monitor, amidst the seemingly daily exposés of Wall Street gluttony and Potemkin Village-like banking accounting tricks is a lesser known banking phenomenon that may just as significantly impact pension and union funds and other institutional investors with substantial banking stock portfolios. When a state or federally chartered savings and loan or commercial bank is taken over and sold by a state or federal regulatory agency, the agency often does not sell the entire bank, but instead typically sells only the deposit assets and loans to another banking institution. The impact on banking consumers is often negligible. But when a failed bank or its holding company is a public company, its liability to its shareholders and most bondholders is not transferred to the buyer. The remains of the defunct bank go into receivership, and under federal law the claims of stockholders have the lowest priority. Not only is their stock now worthless, so, too, may be their claims against the bank for securities violations. 

Unfortunately, this has become a growing problem. Between October 2000 and October 2007, 27 banks and thrifts were placed under FDIC receivership, an average of less than four per year. Just in the four months from July through October 2008, however, 12 banks and thrifts failed. In 2008 to date, a total of 17 banks failed, including the savings and loan IndyMac, which was rechartered as a federal bank. The list of failed banks and thrifts within the last four months includes the spectacular failure of the nation?s largest savings and loan, Washington Mutual (?WaMu?). 

WaMu was seized by the OTS on September 25 and Chase bought its banking assets the same day. It did not, however, acquire its non-banking liabilities, including pending securities fraud claims, which stayed with WaMu?s parent company. The day after the seizure and asset transfer, the parent filed for bankruptcy, and the securities fraud claims lost all their value.

The outcome to investors as a result of other bank acquisitions may well play out differently. A detailed case-by-case analysis is critical in determining whether there is anyone left on the hook who can potentially make investors whole.  

Full post as published by PomTalk on December 04, 2008 (boomark / email).