Bloomberg’s Jonathan Weil raises some good questions about what we really know about the banking industry’s health this morning, looking at the newly bust Georgian bank for a wakeup call.
That bank wasn’t even on the FDIC’s June 30 watch list of 416 troubled banks, Weil reports. Less than three months later it was taken over by the feds, who found Georgian’s assets were worth a bit more than half what it valued them on its books.
How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind.
That answer will depend on whether Georgian is somewhat singular or somewhat representative—and not in its lending practices necessarily, but in its accounting ones. Why did its loans sour so quickly?
As recently as its March 31 report to regulators, Georgian said it met the FDIC’s requirements to be deemed “well capitalized.” By June 30, that had dropped to “adequately capitalized,” after a $45 million second-quarter net loss.
Georgian also reported a 12-fold jump in nonperforming loans to $306.4 million from $24.7 million three months earlier, mostly construction loans. Georgian’s numbers made it seem as if the surge arose from nowhere. On its March 31 report, the bank said just $79.1 million of its loans were 30 days or more past due.
So Georgian went from just $24.7 million in nonperforming loans on March 31 to $306.4 million three months later to an estimated $892 million loss by last week. That’s fast.
If the loans really soured that quickly, look out. If it was accountants that held back on writing down the loans, well, look out, too.
The FDIC appears to say it was the latter:
The 19-page order described various “unsafe or unsound banking practices and violations of law and/or regulations,” including failing to record loan losses in a timely manner.
If you think Georgian is all by its lonesome in that department, I’ve got a CDO I’d like to sell you.