Sterling Savings Bank first to go?

In a little-noticed AP article in Friday’s Missoulian (10.15.09), a major controversy with one of the regional banks was brought to our attention. Sterling Savings Bank, headquartered in Spokane and the largest Washington-based bank, also has branches in Missoula, Billings, Bozeman, Hamilton, Livingston and Big Timber.

It may be the first bank operating in Montana to fail in the current economic cycle.

To a bank with $12.4 billion in assets, being asked to raise $300 million within 60 days might not seem like much. But, with the stock price (Nasdaq: STSA) having plummeted from $12 a year ago to $1.20 at last trade on Friday, it is unlikely investors will be rushing to open their wallets. One analyst said that investors can choose among several Northwest banks in need of capital and that Sterling may not be the most attractive proposition. Fitch Ratings has cut its credit rating down into junk bond territory.

Furthermore, the bank has been found to have “engaged in unsafe or unsound banking practices and violations of law and/or regulations“. That’s extremely stern stuff, by regulator standards. The FDIC (Federal Deposit Insurance Corporation) cites Sterling for “operating with inadequate board of directors oversight; operating with inadequate capital in relation to the kind and quality of assets held by the Bank; operating with a large volume of poor quality loans; and operating in such a manner as to produce operating losses.” That the FDIC has given Sterling 4 months to develop a new strategic plan to improve profitability also doesn’t bode well. The Chairman of Sterling Financial Corp, Harold Gilkey, as well as Heidi Stanley, chairwoman of the subsidiary Sterling Savings Bank, both submitted their resignations effective immediately. The new Chairman, William L. Eisenhart, has been a director on the board since 2004 and was chairman of the company’s audit committee.

Oh, and Sterling had borrowed $303 million through the Troubled Asset Relief Program, which it still has to pay back.   By missing its Aug. 17 TARP dividend payment, it is now on the TARP deadbeat list.

Nov. 19 update: The bank’s quarterly report (Oct. 22) shows that Sterling lost $463.7 million or $8.93 per common share in the first three quarters of 2009. Share prices plummeted on the announcement, to the 50 to 75 cent range.

Says Eckhart, President of Sterling Savings Bank, of the requirement to raise $300 million in new capital: “It may not happen by Dec. 15, but I’m not concerned that the government will come in and shut us down by that date. We’ve shown a great deal of focus and I think they will give us the flexibility to meet our goals.”

Dec. 17 update: No word on the FDIC deadline.

In other news, Hagens Berman Sobol Shapiro (a Seattle-based law firm devoted to protecting the rights of investors, consumers, workers and the environment) is investigating Sterling Financial Corp for potential violations of the Employee Retirement Income Security Act of 1974 (“ERISA”). And Californian shareholder rights firm Robbins Umeda LLP has begun an investigation into possible mismanagement at Sterling Financial Corporation. Lastly, Kendall Law Group, founded by a former federal judge, began an investigation on behalf of shareholders of Sterling Financial Corporation. Are the vultures circling?

Jan. 5 update: In an agreement announced the day before New Years, but signed a week earlier, the Federal Reserve bank toughens oversight and gave Stirling Financial 60 days to draw up plans to strengthen risk management, maintain sufficient capital and identify contingent sources of liquidity. Stirling Financial also cannot pay dividends or increase the bank’s debt without approval. Stock value barely moves around 0.62 range.

Feb. 5 update: Stirling limps along. Barely. Stirling Financial announced on Monday a fourth-quarter loss attributable to common shareholders of $333.1 million, or a loss of $6.41 per share. That translates into a net loss in 2009 of $855.5 million, or $16.48 per share. On Tuesday, shares fell 18 cents to close at 57 cents.

Sterling’s nonperforming assets ballooned more than 16 percent in its fourth quarter to finish 2009 at $952 million. That’s more than 8.5 percent of Sterling’s total assets.

This week, Sterling offered 20 cents on the dollar for 10 separate sets of trust preferred securities initially valued at $238 million. As that WSJ article explains, trust preferred securities are at the front of the line in bankruptcy proceedings. It is very hard to raise new capital when new investors would likely recover little if the bank collapsed. Thus, the efforts to buy back the trust preferred securities.

March 17 update. It would appear that Sterling needs another break from the Feds in order to stay in business. The Treasury would accept a steep markdown on the $303 million invested in Sterling only 15 months ago if the company can raise an additional $650 million in capital from new investors. The deal essentially wipes out all current shareholder equity.

It looks like the bank will be sold to private equity firms. Whether the Sterling franchise brand will survive is unclear, nor is it known what assets (including branches) will need to be sold.

April 2 update. Remember that update from February? The one where Sterling was offering a steep discount on the repurchase of $238 million in securities. Apparently, it is critical to Sterling’s efforts to raise $650 million in capital that would bring the bank back into compliance with regulatory capital requirements.

Well, they had to extend the deadline for two more weeks.

May 4 update. Thomas H. Lee Partners, a Boston private equity firm, will invest $134.7 million in struggling Sterling Financial Corp.

Sounds good, doesn’t it? Except that, as part of the ‘deal’, Sterling also announced it will execute a separate stock exchange deal with the U.S. Treasury to convert about $303 million in preferred shares to common stock worth about $76 million. Why did taxpayers have to lose $237 million of equity, when the private investment is only for $135 million?

Oh, and Sterling still has to raise an additional $585 million to meet the required capitalization to keep the company independent. Because they’ve lost a cumulative $1.28 billion since the fourth quarter of 2008 ($85 million in the first 3 months of 2010), you’ve really got to wonder.

On Monday, May 3rd, Sterling announced their plan for recapitalization – sell 221.9 million shares of common stock at 20 cents a share. Add in 5.5 million shares of convertible preferred stock being offered at $92 a share and the deal with Thomas H. Lee Partners mentioned above, and they get the $725 million they need.

Not bad, except that common stock was priced at 87 cents before the announcement. The question is whether shareholders will approve taking such a big hit and the further dilution of their holdings.

May 24 update. Warburg Pincus Private Equity X, L.P. has agreed to bail out part of Sterling. Upon the completion of the deal, Warburg Pincus would own approximately 20.5% of Sterling Financial. As part of the deal, Thomas H. Lee Partners, L.P. will adjust the size of its proposed investment to be equal to Warburg Pincus. Terms of the deal require Sterling to raise an additional $442 million from other investors.

The Warburg deal requires U.S. Treasury and other regulatory approvals. (Treasury granted approval May 26, which is not surprising given that it was at regulators behest that Warburg help the otherwise struggling deal with THL Partners.)

July 16 update. Sterling is described as one of today’s worst performing penny stocks. Describing a 30-day average volume of 1.7 million shares, Smartrend suggests that, high volume often signals a change in trends. Shares of Sterling Financial are currently trading below their 50-day moving average (MA) of $0.73 and below their 200-day MA of $0.79.

August 21 update. Fitch Ratings has downgraded the Individual Rating of Sterling Savings Bank to ‘F’ from ‘E’ indicating Fitch’s opinion that STSA would have defaulted if it had not received some form of external support.

Thursday, it was announced Thomas H. Lee Partners, L.P. (“THL”) and Warburg Pincus Private Equity X, L.P. (“WP”) have amended their agreements to increase their investments in Sterling. Upon closing, THL and WP would each own an aggregate of 22.6 percent of Sterling’s pro forma common stock.

Sterling also reached agreement with about 30 investors for a private placement of about 155.3 million shares of common stock and 3.9 million shares of preferred stock for gross proceeds of about $388 million.

Shares closed Friday at 64 cents. The stock has lost nearly three quarters of its value in the past year.

Big Banks. Fail.

Starting today four on the nation’s biggest banks stopped accepting IOUs from the cash-strapped state of California.

Check the list:

  • Bank of America,
  • JPMorgan Chase & Co.,
  • Wells Fargo & Co., and
  • Union Bank of California.

Recognize some of the names? Yep, they’re many of the same ones that you and I bailed out with federal loans, guarantees, and forgiveness.

Now I don’t much like seeing states issuing IOUs while they sort out their political goings on. And Professor Natelson ponders whether they might even be unconstitutional.

But watching big banks penalize small business and consumer recipients of IOUs not only seems like playing politics with the helpless citizens caught in the crosshairs, but it strikes me as exceedingly bad business. Watch all those customers head over to the local credit union or community bank. And never come back.

Tell us which bits you don’t like

Please, Mr. Rehberg, could you be more specific about what part of the Obama stimulus program you don’t like. Simply being critical of the federal spending, in general and on principle, isn’t good enough.

As Pogie (over at Intelligent Discontent) capably points out, Rehberg boasts all about the federal pork money he brings to Montana.

Perhaps Rehberg could tell us which of the following federally funded projects he doesn’t like. After all, he voted against the American Recovery and Reinvestment Act of 2009.

Here’s some of things he didn’t want to fund:

* Fixing Rye Creek Road, on the Bitterroot National Forest, was one of four water enhancement projects funded by the first allocation of federal stimulus moneys in Montana.

* Statewide, the American Recovery and Reinvestment Act will deliver $31.4 million in roadwork on national forests.

* $3.4 million has been allocated for energy efficient upgrades for Montana schools, including projects as lighting, boilers and heating-and-ventilation system upgrades.

* $77 million in federal stimulus funds will go to reconstruction or renovation of five of Montana’s border stations.

More examples and details of how the federal stimulus dollars are being spent in Montana can be found here. The State of Montana estimates that 11,000 jobs will be created or saved here, although they’ll never be able to prove those numbers.

Surely, Mr Rehberg isn’t against fixing up the old roads, school facilities, and border crossings? If so, perhaps he could clearly explain why government live up to its responsibility to be good stewards of these necessary facilities. Does he want rural residents to continue to drive on sub-standard roads? Does he want school kids freezing from poorly maintained classrooms, or does he want school districts to be frittering away their limited budgets on huge energy bills? Or does he want those of us who must cross the border on a regular basis (and that is mainly Montanans and Albertans) to have to wait while the border patrol works around an antiquated, cramped, and inefficient border crossing?

Perhaps Mr Rehberg would also like to explain why he doesn’t want us to spend money on hunting and fishing supplies. You see, in a similar vein, the Fed and the Treasury Department provided nearly $400 million to the Cabela’s credit-card operations through the Term Asset-Backed Securities Loan Facility, or TALF. That’s right – without the federal bailout moneys, Cabela’s, that well known outdoor retailer, would have canceled much of its credit card program. Surely Mr. Rehberg wants to explain what’s wrong with helping us buy all those guns, bullets, cases, rods, jackets and fishing flies?

Nationalize this! Part II

All around the world discussion now includes the distinct possibility of the U.S. nationalizing its top banks. Alan Greenspan no less suggests, “it may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.” And it was probably Senate Banking Committee Chair, Christopher Dodd, who made us all stand up and take notice when he said, “I’m concerned that we may end up having to do that, at least for a short time.” The Wall Street Journal even gave their coveted prime position on their Opinion page to an interview with Nouriel Roubini, the famed Dr. Doom of NYU’s Stern Business School, explaining the inevitability of a Swedish style takeover within six months.

Gosh knows we need new management of our big banks. The vast majority of the American public seems to have lost confidence in the imperial bank executives, what with toxic assets, choked-up capital, inadequate reserves, plummeting share prices, remodeled bathrooms, and private jets. Government management, however temporary, will seem mild by comparison.

And now we hear that the Obama administration fears the bankers might reject the bailout money because of the $1/2 million cap on executive compensation! Will they not stand up for what this nation needs rather than their own personal gain? If the financial system collapses, then how could it possibly be in the best interests of their company, their stockholders, or their customers? Let’s stop this game of moral hazard with the bankers, throwing good money after bad.

So, ask yourself, would you bank with the government? Do you have confidence in this country’s ability to pull itself together and climb out of this mess? I do. I own treasury bonds. I do so, not because I feel I will get hugely wealthy but rather because they pay a comfortable return with a sense of security and national benefit. I like the sense of collective rescue instead of a culture of fawning obsequiousness and dependence upon unaccountable, unresponsive mega-bank CEO’s.

We’re all in the together, so let’s band together to fix it. As I’ve said before, it’s not like we’re going to stop saving and lending. Go get your money and put it where you think it will do the most good. That’s right – go down to Bank of America, Citibank, Wells Fargo, and First Interstate Bank and ask for your money. Tell them you don’t think they are managing this country’s financial system appropriately. You might then put your money in a local credit union or a community bank or in treasury bonds. (All of which are paying quite reasonable returns, I might add.) Because if we don’t take charge, then the government will be left with no choice.

Sorting through the mess

Like most folks, I don’t completely understand the financial crisis our nation is in. But, my lack of full comprehension doesn’t make the questions less compelling. No matter what you call it – a fiscal disaster, a banking crisis, a liquidity issue, or a banking bailout, the questions remain.

These days it seems like the solution is to “purge bad assets that are paralyzing the financial system“. Why is that? What is it about those assets that make them so toxic? Can the banks sell them, much as they bought them in the first place? Sure they are risky, but there’s always an investor willing to take that gamble providing the payoff is sufficient. Instead, the banks want our government to overpay for the loans, right?

As I see it, the plan is to establish a government fund (call it a bank if you like, though it is nothing like anything you’d recognize as a bank) to buy up all the bad investments and loans. It’s those bad calls that are causing banks to be losing money. But, isn’t that what banks are supposed to be best at (and far better than the government’s ability to pick winners and losers) – to judge the loanworthiness of a particular project and to calculate the reserves needed to cover the likely outcome of those loans? Why, then, when they got it wrong do they expect us, the taxpayers, to take responsibility for their bad calls?

Why are banks any different from any other entrepreneurial enterprise that takes a risk, backs their judgment, and goes into business the most efficient way they know how in order to provide the goods and services we demand. Because let us not forget that customers are still wanting to give banks money and that someone else is out there wanting to borrow that same money back. We are saving more than ever before (creating liquidity, right?) and we’re still taking out car loads, credit-card debt and refinancing our homes. We may not be doing that at quite the same rate as we once did, but today’s levels aren’t that far different from what they were five years ago. So, if banks were profitable five years ago, they should be able to profitable today. Lots of smaller banks and credit unions prove that as they are facing a good year of profits they can plow back into reserves, net worth, and available capital.

The smart folks at the Treasury, the Fed, and the Federal Deposit Insurance Corporation are worried that the only people left to invest in bailing out the banks is the government. Lender of last resort, right? But, don’t the big investment companies see the same systemic hazard that the regulators see? That is, don’t they see that a frozen market for capital is going to be their worst nightmare? If investors don’t bailout the banks, then those same investors are going to be a whole world of hurt. Maybe it is time for them to step up and take responsibility for the health of the financial system? After all they probably did as much, if not more, to create the mess in the first place.

Is the government going to pick winners and losers? Will the administration be deciding which companies survive (Bank of America, the new owner of Merrill Lynch) and which fail (the late Lehman Brothers)? Me, I don’t think they’re doing a very good job of it. Instead of rewarding the conservative, well capitalized regional banks and credit unions, it seems they are rewarding the aggressive, merger-hungry, behemoth banks.

Even if that is a strategy, which of course it isn’t, then it’s not being consistently applied. On the one hand we are giving Bank of America $20 billion to complete the purchase of Merrill Lynch investment company at the same time we are giving Citibank $10 billion to sell of its Smith Barney brokerage. Given that the government is now part owner of both B. of A. and of Citi, then we either want to own a bunch of investment gurus or we don’t. Or is there something about Merrill Lynch (which has lost $39.1 billion in the last year and a half) that makes it such a better deal than Smith Barney?

I’m beginning to see why the government makes such a terrible investor on our behalf. The Congressional Budget Office estimated that taxpayers could lose $64 billion on investments made just last year under the first third of the $700 billion financial rescue package we know as TARP. Maybe we should just leave government to do what government does best … spend money, not invest it!

No, none of this makes sense to me. And I think that that may be part of the problem – no-one completely knows what is going on. The banks won’t own up to how much they stand to lose on their bad investments. The economists keep changing their predictions, as they are want to do. And the politicians are afraid to admit that they don’t really know what they are doing, just making ad-hoc decisions as they bumble along.

It is the last group, our politicians, that we can hold accountable. The public needs to have faith in their elected officials, and so we deserve answers to our questions. We need to demand that the decision makers fully understand the consequences of their actions. Otherwise, we’ll be letting them off the hook. And when things get worse, we would only have ourselves to blame. Hmm, somehow I think it’s going to get messier!

To Save or Not To Save the Auto Industry

What should we do with the auto industry? On the one hand, they employ millions of people directly and support businesses that employ millions more. Can ourcountry handle the collapse of this industry in these already disastrous economic times?

On the other hand, I can’t really deny that they cars they make aren’t as good as their foreign competitors. They are less attractive, less functional, and have lower gas mileage than their foreign counterparts. They clearly haven’t done a good job of innovating and staying abreast of changes and trends in the market. Other auto companies aren’t suffering the way they are. So why should we help them? What precedent are we setting? What will be the next industry that we’ll have to help? Where does it end?

I also go back to the union issue. I am strong proponent of workers’ rights. However, even I have to admit that the unions have gone too far. Requiring lifetime benefits for someone who has only worked for the company for five years? I’ve never heard of that…ever. It seems unreasonable to me. Yet at the same time, I don’t buy that the only way that American auto manufacturers can compete with their foreign competitors is to cut employee pay and benefits.

What to do, what to do…

Anyone wanna own a bank?

Looks like pieces of Citibank might be up for purchase. Perhaps now would be a good time for the government to own a bank?

Nationalizing Citibank would be big. Really big. Citi was once the largest U.S. bank, with a market value of $274 billion as at the end of 2006. On Friday, it was down to $20.5 billion.

Now without getting too much into the virtues and sins of mark-to-market, it is still worth pointing out that Citi has $50 billion in capital above and beyond what the regulators require to be ‘well capitalized” and has around $2 trillion in assets. (Mind boggling numbers, eh?) Of course, the U.S. Government is responsible for $25 billion of that capital, a function of the $700 billion Troubled Assets Relief Program that isn’t for troubled assets any more.

Citibank is almost certainly in the TOO BIG TO FAIL category. So, we can expect to see the U.S. Government pony up more bucks, in a move that says the company has adequate capital and liquidity to ride out the crisis and thus calms panicked investors.

But, wait a moment. The company is now valued at $20.5 billion. And we’ve already injected $25 billion. Don’t we already own it?

OK, OK, I know. Market valuation isn’t that simple. Citi was worth way more than what we paid when we paid it. And there’s lots of other schmucks sitting on preferred stocks like us. And selling a company isn’t anywhere near as easy as accepting a no-strings-attached check for $25 billion.

But, still. At what point do we get control of the assets and management and decision-making for all the money we’re putting in? I don’t mean more loans or more debt guarantees. When do we get to own the whole shebang?