Feeding the Sharks

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White Shark Cage Diving by White Shark Ecoventures.

by David Glenn Cox

Last week federal regulators shut down Montgomery, Alabama, based Colonial
Bank Group. In the end it will cost the American taxpayer an estimated
2.8 billion dollars. It will cost many people their jobs and
livelihoods because the operations of the bank have been assumed by
BB&T Corporation. The little banks get swallowed by the
medium-sized banks, and the big banks swallow the medium-sized banks;
then the government bails out the big banks because they’re too big to
fail!

Colonial Bank was a medium-sized bank, the brainchild of
one Bobby Lowder. If you have any experience with Montgomery or
Montgomery real estate you are familiar with the Lowders. They are an
old Southern family with their fingers in every pie. In Montgomery they
built shopping centers and apartment complexes. They knew all the
politicians and where all the bodies were buried.


There was a
residential neighborhood development that was quite successful in
Montgomery. It was comprised of fifteen hundred to two
thousand-square-foot houses with nice yards and landscaping. Problem is
that in a town like Montgomery with little real growth, how do you sell
more houses? This neighborhood was around ten to fifteen years old and
well established, and at the end of the two main roads were dead end
streets. It had been assumed that perhaps a phase two might be built at
some later date.

But the developers had a different plan; they
went to the zoning board and got a variance. For the Lowders it was no
more than a formality, like borrowing a cup of sugar. At the end of the
dead end streets they built apartments, and not luxury apartments but
low-income apartments. The effect on the neighborhood was devastating;
overnight the yards filled with for sale signs. The value of the homes
plummeted and most homeowners lost their equity.

Just across
town a new residential development was opening, offering fifteen
hundred to two thousand-square-foot-homes with smaller yards and two
dead end streets at the back of the neighborhood. The sign out front
said, “A Lowder Planned Community,” and as I drove by I said to myself,
“Yep, and I know the plan!”

This is how you use political
power in a small town. People who don’t want to move must be frightened
into moving, and you, as a realtor and developer, profit on both ends.
So when Bobby Lowder formed Colonial Bank in 1981, I knew it would get
interesting sooner or later. With the construction company, the
residential real estate division and the commercial real estate
division, now they had their own bank to finance their projects. They
owned the country music radio station in town as well as a string of
other radio stations.

The corporate officers list reads like a
who’s who of Alabama politics along with Milton McGregor, the father of
Alabama’s dog track industry, was ex-head Auburn football coach, Pat
Dye. Then, this being Alabama after all, there is Big John Ed Matheson,
the preacher at the biggest mega church in town. What could go wrong? A
preacher, a gambler, a football coach, and Bobby Lowder.

In May
of this year Bobby Lowder stepped down as head of Colonial Bank. He
could see the train tracks running out and it was time to get off the
train. As a going away present the bank awarded favored directors an
average of five thousand shares of stock to cushion the blow. From a
high of over $25.00 per share it would have been a bonus of $125,000,
but by April the stock price had fallen to just 91 cents a share and
closed yesterday at 41 cents.

Bank of America has sought an
emergency injunction, freezing one billion dollars in Colonial assets
over the mishandling of funds in mortgage lending. Colonial is also
under investigation by the Justice Department for accounting
irregularities and a criminal investigation in connection for alleged
accounting irregularities at its division in Orlando, Fla., which
provides financing for mortgage lenders, and a civil probe by the
Securities and Exchange Commission concerning accounting issues and the
bid for federal bailout funds.

But they had a plan; new
management took control under a plan for a $300 million investment led
by Taylor, Bean & Whitaker Mortgage Co. of Ocala, Fla. The infusion
of cash would make Colonial eligible for as much as $550 million in
government bailout funds. Ah, but the best-laid plans of mice and men
sometimes go awry.

The deal fell through when federal agents
raided the Ocala headquarters of Taylor, Bean & Whitaker and shut
down the operation. From failing to file financial reports to "certain
irregular transactions that raised concerns of fraud," HUD, Fannie May
and Freddie Mac had all suspended T.B.& W. It was the final straw
for Colonial, the two mice trying to work together to build a rat. It’s
always a bad sign when your merger partner gets raided by the feds!

The
seizure of Colonial is the seventy-seventh bank failure this year; it
is also one of the largest failures since Washington Mutual. The
Federal Reserve always holds their executions on Friday so that maybe
you little folks won’t notice what’s going on. Regulators also closed
two other institutions in Arizona, one in Las Vegas and one in
Pittsburgh.

A report in Bloomberg news says:

"Aug. 14
(Bloomberg) -- More than 150 publicly traded U.S. lenders own
nonperforming loans that equal 5 percent or more of their holdings, a
level that former regulators say can wipe out a bank’s equity and
threaten its survival. The number of banks exceeding the threshold more
than doubled in the year through June, according to data compiled by
Bloomberg, as real estate and credit card defaults surged. Almost 300
reported 3 percent or more of their loans were nonperforming, a term
for commercial and consumer debt that has stopped collecting interest
or will no longer be paid in full."

Makes you wonder if maybe
a program to assist the borrowers, as was done in the last Great
Depression, might not have been a wiser course of rescue than to just
keep feeding the sharks and allowing them to eat each other. The board
members will keep their six figure incomes, but the employees will
suffer. Like an autoworker when the plant shuts down, what do you do
when the bank you work at is bought out? Everyone loses and the folks
who ran the train off the tracks, they just walk away.

Yet no
matter how much money the government gives to the banks, the banks
customers still can’t make their payments. I guess we need more shark
food!