Implications of Colonial Bank’s Failure

There’s big news out today, folks.  Colonial bank is very likely to fail today, August, 14th, 2009, and there are a lot of reasons you should care.

First, Colonial received a major investment from a now bankrupt business, Taylor, Bean, and Whitaker.  This company funded and facilitated a huge number of mortgages, particularly in the southeast region.  But that’s old news.

Second, Colonial’s failure was leaked prior to its actually being shut down and placed into receivorship.  This is a huge issue.  There are two schools of thought on this.  The first is the most simple: somebody leaked the information at BB&T, Colonial, or the FDIC out of pure stupidity.  There’s a good reason that the public isn’t notified when a bank is going to close.  It saves that bank, usually, from having a run and costing the FDIC even more money.  The second reason is a little more complex and underhanded.  Somebody might have purposely leaked the news that the extremely strong BB&T was going to buy the deposits of the very weak Colonial, because Colonial was already seeing a run on deposits.  The first instance is extremely problematic; the second, extremely smart.  We’ll have to wait and see what really happened.

Third, Colonial bank received TARP money after getting a similarly large amount of private investment.  It received $550 million tax payer dollars, to be exact.  Recently, the TARP inspector general (aka TARP czar) raided offices of the bank alleging fraud that probably would have kept the bank from receiving funds.  As an FYI, a number of bankers and investment professionals that I have spoken with agreed with me when I was astounded and angered that Colonial received funds in the first place.  They’ve been failing for quite some time.  There goes $550 million down the tubes that was only supposed to be invested in the strongest and/or most systemically important financial institutions.  There’s a scandal brewing here, just wait.

Finally, and this is the biggest future news of all, the FDIC is going to run out of its self-funded reserve for losses.  This means that it’s likely that it will tap its line of credit at the Treasury.  This isn’t the first time this has happened, and you shouldn’t panic, but it’s one more bit of shocking fall out from the financial disaster that we’re desperately trying to get behind us.  Let me repeat, the FDIC is about to run out of its own money and start relying on taxpayers.  Can the government handle it? Absolutely.  Does this highlight how bad our situation was and continues to be? Absolutely.  Most importantly- Are your deposits still safe? Absolutely.