The bank job

The hit squad checked into the Hilton Garden Inn in Gainesville on Thursday under the name A-Z Technology. It was a perfect choice – an anonymous hotel in a suburban strip mall in north-east Georgia, 20 miles from the target; the local Rotary Club was meeting there at the same time and the receptionist was unlikely to pry.

On Friday, six hours before they swarmed the bank, the squad gathered at the Gainesville Civic Center. The blinds were drawn and large bouncers stood at the conference room entrance. About 80 people crammed inside as Ann Hill, a kindly looking middle-aged woman, stood to call the group to attention. “Welcome everybody to the first meeting and probably the last meeting of A-Z Technology,” she said.

Hill then went through the painstaking preparations for the day, which included, rather unusually for a bank job, a level of concern for the tellers and other employees. “Keep in mind what they’re going through,” she stressed. “We’re going to outnumber them, and it’s almost going to be like a herd of locusts descending on the place where they work.”

By Friday evening, those congregated in the meeting room were scattered around northern Georgia, keeping watch on the doors of all eight branches of Habersham Bank. In a town called Cornelia, Arthur Cook, a burly veteran member of the squad, watched from the car park for the last customers to leave. Then he gave a signal.

The staff were quickly rounded up in the lobby. Chandeliers hung from a high ceiling, illuminating stunned faces. One woman sobbed quietly and several covered their faces with their hands. Members of the squad moved among the shaken employees, each sporting a prominent badge emblazoned “FDIC”. This was no ordinary bank heist. The intruders were from the government and they were here to close down the failing bank and replace it with a profitable one in the course of a single night.

The set-up

The decision, Dallas, Texas, February 8. A map of the US looms over a meeting of members of the FDIC’s regional branch in Dallas as they hold a meeting to discuss the failure of Habersham Bank

It was another, more acute banking crisis that led to the creation of the Federal Deposit Insurance Corporation or FDIC. In 1933, President Franklin D. Roosevelt implored his fellow citizens to stop runs on the banks that threatened a complete collapse of the financial system. “I can assure you that it is safer to keep your money in a reopened bank than under the mattress,” he said.

Further to ensure there was never a repeat of the crisis that saw 9,000 banks fail, FDR signed a new insurance system into law. From that day on, every bank in America has paid a premium to the FDIC to insure each depositor’s account, now up to a limit of $250,000. This new financial crisis has depleted the fund, with 157 bank failures last year alone. But the FDIC guards the balance closely. Where possible the failed bank’s loans and deposits are transferred to an acquiring bank, at a discount to sweeten the deal.

Preparing to act, Gainesville, Georgia, February 18. Members of the FDIC task force gather to prepare for the afternoon’s planned closure of Habersham Bank – some 90 individuals are involved in the closure

This is what happened on that Friday night in Georgia. Habersham Bank was founded in 1904, surviving two world wars and countless economic crises. But all of this history vanished with the arrival of the squad. Over the course of that evening, the branch became part of South Carolina Bank and Trust. The new owners, whose bank now has $4bn in assets and close to 100 branches, were there to watch, led by Robert Hill, SCBT’s young chief executive, and his team of slim, neatly dressed men and women. Their demeanour was serious but Hill’s face flushed as he strode in behind the FDIC, obviously pumped up.

Waiting outside, Cornelia, Georgia, February 18. Habersham Bank seen through a car windshield as members of the FDIC’s task force await orders to close the bank and notify its employees of its failure

As is usual for the FDIC, the Habersham transfer happened unbelievably fast – between 5pm on Friday and 9am Saturday when unsuspecting customers arrived to find their bank has changed owners. There was a lot of fiddly work to be done, reconciling accounts and balancing books. But the most important role for the FDIC’s accountants, lawyers, computer technicians and regulators was their subsidiary job as counsellors.

The entrance, Cornelia, Georgia, February 18. Arthur Cook (left) and Robert Hill enter Habersham Bank to notify the employees of the bank’s failure

Back at their base in Dallas, the FDIC managers had stressed the importance of handling bank employees with care. Bill Zvara, who led the closing with Ann Hill, said: “Our experience in the past with old Georgia institutions with family ties is there’s lots of loyalty from the employees. Keep that in mind.”

“This is good news for y’all,” said Hill, the new SCBT chief executive to the stunned employees. He pointed out he had a family connection to Georgia, and the acquisition meant better job security for them. Hill, his unrelated FDIC namesake, announced that if “y’all” have a ball game, a wedding or have to go to church, then she would understand but she hoped most would stay to help get the books in order ready for the opening. Most did.

Breaking the news, Cornelia, Georgia, February 18. The FDIC’s resolution and receivership specialist, Bill Zvara addresses Habersham Bank employees (the photograph is pixillated to protect their identities) as his team prepares to begin the closing and takeover process

The “y’alls” helped. The FDIC team are not your stereotypical feds, all grey suits and foreboding faces. They were at least southerners, most of them, and full of southern manners.

Eyes were dried, hands moved away from faces and before long the Habersham employees were scurrying around showing the nooks and crannies of the huge building to the FDIC team. Apart from the southern charm, pay at time and a half and some sandwiches helped. On closing night, getting the staff onside keeps them as allies for the main job – keeping the customers calm: if they get spooked and start to withdraw their funds, then all the careful planning will be for nothing: the bank run will be disastrous.

Bank statements, Cornelia, Georgia. February 18. An FDIC facilities operations manager (on the floor) takes inventory of Habersham Bank’s vault with the aid of one of the bank’s employees

We left at about 10pm, with some staff still going through the books, and an armed state trooper guarding the door. Cook, who has done dozens of closings, says the FDIC tries not to use the local police as they can be too close to the bankers. He remembers one instance where he was slightly unnerved to learn that the outgoing bank chief executive had a gun in her office. He mentioned it to the local policeman on duty. “She took it out of there last night,” the officer said. “How do you know?” said a surprised Cook. “She’s my wife,” came the reply.

The job

Early the next morning, the squad arrived back in Cornelia to see the cash count before the customers came in. A few cars were already in the large parking lot and, despite the FDIC’s best efforts, some of the occupants were nervous. By a stroke of bad luck, the cash machines outside the bank were out of order due to a technical fault that the bank couldn’t control. Failing to get out your money and being told that the bank is closing is exactly what the FDIC’s process is supposed to avoid. “It makes you want to take your money out of every bank account you’ve got,” said Sadie Kelly, a retiree who moved up from Atlanta to be closer to her family, and who needed another fireside chat from FDR.

Final count, Cornelia, Georgia, February 19. Bank employees do a cash count at Habersham Bank prior to its reopening the morning after its holdings were transferred to new ownership

Kelly, who said that, like many moderately well-off Americans, the “1990s were big money years” for her before she lost a lot on the stockmarket, was reassured by an FDIC team member that her money is safe. She expressed concern for the bank employees, but not the management or owners, who will lose their jobs and shares in the company. “It seems like the big guys with the big bucks are the ones holding the reins. To be honest I’m quite happy to see them crumble.”

David Stovall, Habersham Bank chief executive, who was last seen on Friday night, wearing a neat moustache and black suit with pocket square, and complaining that the FDIC was keeping him waiting, was nowhere to be found. Attempts to find Gus Arrendale, the bank’s chairman, poultry baron and largest shareholder also failed.

Reopening, Cornelia, Georgia, February 19. Bank tellers conduct business as usual as customers line up on the Saturday morning as the bank reopens under new ownership

There was a lot of muttering from customers who didn’t seem entirely reassured when an FDIC employee tried to explain that the bank had been taken over by SCBT overnight, that their money was safe and the bank would open in a few minutes. A woman noted that in 2009 “they had big fireworks out the back” for July 4, but not last year. So she knew Habersham were in trouble. And she “really doesn’t think it’s very nice not to let their customers know”. She works at a local factory and like Kelly was inherently suspicious of the local bigwigs.

But before long the customers were in and doing banking business as usual. A plate of cookies offered further reassurance and the FDIC employees – warned off the snacks – tried to keep a low profile as they continued the paperwork.

Going through the files, Cornelia, Georgia, February 19. The FDIC investigation team sort through boxes and files left by the former owners of the bank

Eric Raines, whose job on the closing is to calm any worried customers and fend off any (other) nosy reporters, says it can be more tense. Customers arrive with suitcases to try to take out all their money and the FDIC is left – like Jimmy Stewart in It’s a Wonderful Life – trying to explain that the money’s safe but not sitting there in cash.

Just over a year ago in the same town, SCBT took over an even older bank, Cornelia Bank & Trust, in another FDIC process. The executives think that this experience has made things smoother this time – like much of America, Cornelia is getting used to having its banks closed on a Friday night.

The plan

Kevin Hagler, a big, ruddy-cheeked man in his forties, is someone who can explain why banks are dying in Georgia, the state with the most failures in the country. As deputy commissioner from Georgia’s state bank authority (its now ironic motto: “safeguarding Georgia’s financial services”) he was also at the closing.

The closing manager, Dallas, Texas, February 11. Arthur Cook stands outside the FDIC’s regional office

The state regulators are supposed to be in charge of supervision, but Hagler is embarrassed to admit he is ever more reliant on the FDIC nowadays to oversee his remaining banks. Hagler’s department charges banks chartered in Georgia a total of $20m in fees but the cash-strapped state keeps half of that and leaves him about $10m to watch over 250 lenders. This is not nearly enough and instead of increasing the number of bank examiners to cope with the crisis, Hagler has had to cut them.

He was promoted to his job just before the crisis hit Georgia. “In August 2008, just before we had the first failure we had a retirement party on the Thursday and the next day I was taking away a charter.” Two-and-a-half years later he still looks shell-shocked but wants to emphasise that Georgia looks worse than it is. Perverse local rules that restricted banks’ ability to open branches across counties mean it has had a larger number of failures than most other states but its banks are smaller.

The new boss, Cornelia, Georgia, February 18. Robert R. Hill, Jr., CEO of SCBT Financial Corp. sits for a portrait inside the newly acquired Habersham Bank

However, the regulator is candid enough to admit what few of his fellow supervisors across the country will acknowledge so openly – banks made bad decisions and the regulators let them. “Our community banks did not make the ‘innovative’ mortgage loans … the subprimes … but what they did do was lend to developers and builders. That’s what killed us – the value of the land.”

Until he was promoted, Hagler was a bank examiner, patrolling the Georgia countryside trying in vain to exert some regulatory control. It was tough to put the brakes on, he says, when a banker wanted to lend to a property developer who, in turn, had five builders fighting to work on his project. “I say, ‘that’s a bit risky’ and they say ‘get the hell out of here – you’re taking food out of my baby’s mouth!’”

The specialist, Cornelia, Georgia, February 19. Bill Zvara the FDIC’s resolution and receivership specialist, inside Habersham Bank as his team conducts a closing and takeover process

Habersham Bank was hit by the bust in land prices the same way – its website still has plots of land and houses for sale that have been taken back from borrowers who couldn’t keep up with payments. A maintenance man who used to just look after the bank, now spends much of his time driving around the properties, checking they are in working order and trying to slow their inevitable decline.

Cornelia is not close enough or pretty enough to be a commuter town from Atlanta and not near enough to the tourist attractions of the Appalachian mountains. It is hard to see where a sustainable property boom here was ever supposed to come from. Nearby there is the Tallulah Gorge, where the Habersham County website threatens that visitors can “enjoy three more weekends of aesthetic water releases”. Even the small local Elvis Presley museum was closed for the winter so I didn’t get to see its trophy asset: a wart removed in 1958 from Elvis’s wrist or buy a T-shirt proclaiming “The King is gone but the wart lives on”.

The commissioner, Cornelia, Georgia, February 18. Kevin Hagler, deputy commissioner for supervision, Georgia Department of Banking and Finance, pictured inside the newly acquired bank

Apples are the local produce and can be seen everywhere, including an apple sculpture in the town centre that was part financed by the extinct Cornelia Bank & Trust. Now, of course, CBT and Habersham, which has lent to local businesses for over a century, are just divisions of the SCBT, the local links stretched if not extinguished.

Unlike most of the country, which fetishises community banking to a fault, SCBT’s Robert Hill has little time for this sentimental nonsense. “They made it through the Great Depression and they haven’t made it through the Great Recession,” he says of Habersham. Then he adds: “Georgia is over-banked.” He’ll merge more into his expanding empire if he finds the right opportunities.

His energetic team was already going through the Habersham books on Saturday morning, poring through lists of old customers. Things have been so bad that there hasn’t been any proper lending for three years. “One that we called on said he’d always banked at Habersham but hadn’t been able to do business there,” says Hill. He extended the businessman a $1m equipment loan there on the spot.

The aftermath

Over the next couple of days the FDIC peeled away back to their home bases in Florida and Texas, ready for the next mission. Back in Washington, Sheila Bair, the agency’s combative chairman explained how she recently won new powers to use a variation of the closure process seen in Cornelia on the largest financial groups. Why should Citigroup receive billions of dollars of government bail-out money and keep its shareholders and management in place while Habersham is forcibly sold?

Sheila Bair, chair FDIC: ‘For us just to throw up our hands and say they’re too big to fail, we’ve got to keep bailing them out – I’m not buying that’

Bair’s term expires next week and she is using her final days to evangelise on this subject. But translating the skills used in Georgia to the trading rooms of New York and London is no easy task and there is still doubt to overcome. When I asked Eric Raines of the FDIC whether he could see a big bank closed in the same way, he smiled: “You mean like a Chase or Bank of America? ... It gets political.”

Bair, though, is determined to keep the politicians out of the picture and ensure that her legacy will be ending the dreaded “too big to fail” phenomenon. She says that complexity is not an excuse. “For us just to throw up our hands and say they’re too big to fail, we’ve got to keep bailing them out – I’m not buying that. I don’t think anyone should buy that,” she says. “I think for the very largest ones we will need to see some structural changes occur.”

If she is right, then a quirky US system that has worked for 75 years could prove critical in the next crisis – from the orchards of Georgia to the Big Apple up the east coast and across the world. But if she is wrong or her departure means there is no one left in government with the zeal to end the bail-outs then too big to fail will be too hard to fix.

Tom Braithwaite is the FT’s US banking editor

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This article is subject to a correction and has been amended

Too big to fail?

What to do with the big banks

Three years after the financial crisis the world is still dealing with its inability to kill big banks.

In the past month, the rump of Northern Rock, whose queues of panicked depositors signalled the start of the crisis for many in Britain, has been put up for sale by the UK government which expects to realise a loss on taxpayer bail-out money in the process.

Ireland, whose citizens are saddled with the losses of its zombie institutions, is trying to enlist international support to make bondholders pay part of the bail-out costs.

Switzerland, terrified of a repeat of the turmoil at UBS and Credit Suisse – giant banks that vastly exceed the size of the country’s economy – has opted to impose draconian capital levels so they should be able to see out an even bigger crisis in the future.

In the US, where once collapsing banks like Citigroup have recovered, there remains concern that banking has become even more concentrated and the “too big to fail” institutions have consolidated their power.

But small banks in the US fail all the time, with some local heartache but limited impact on depositors, borrowers and local economies. The Federal Deposit Insurance Corporation is now busy replicating its successful procedures for small banks to be used on large financial groups – whether they are Wall Street companies such as Goldman Sachs, insurers such as AIG or hedge funds such as Long Term Capital Management, which blew up in 1998.

It’s an elegant idea. Instead of the huge turmoil on the financial system wrought by the Lehman Brothers collapse in 2008 or the vast cost to taxpayers of bailing out Royal Bank of Scotland, the banks’ executives would be fired, shareholders likely wiped out and bondholders also pick up the tab. The government would have the power to seize, stabilise and sell off the good parts of the business while leaving the bad loans to rot.

There are plenty of sceptics, though, who worry that messy realities and realpolitik will prevail in the next crisis. Will countries work together to wind down an institution or, as last time, look after their own taxpayers first? Will they want to make bondholders and shareholders take the pain of losses if that means panic spreads across the system? Do governments and regulators have the mettle to be executioners of banks or will they reach into the public purse for expensive life support? 

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