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November 3, 2009

Are healthy banks at risk of being seized by regulators?


''Citizens National Bank, of Teague, Texas, eked out a small profit in the third quarter and was well-capitalized by industry standards.

It failed anyway. Regulators seized the one-branch bank on Friday along with eight other financial institutions owned by FBOP Corp., a bank-holding company in Oak Park, Ill., that was on the ropes for months.

Most of FBOP's banks were woefully short of capital, hit hard by souring real-estate loans that came from the parent company, according to people familiar with the situation. The banks also were pummeled by their holdings of preferred stock in Fannie Mae and Freddie Mac.

In a twist with roots in the savings-and-loan crisis, Citizens and another relatively healthy bank were seized by regulators, too, because they couldn't pay for the sins of FBOP's terminally ill banks.

The Federal Deposit Insurance Corp. is allowed under a 1989 law to assess the costs of disposing of a failed bank that is part of a holding company to other banks with the same owner. The agency has used the mechanism just six times.

The so-called cross-guarantee authority 'prevents a bank-holding company from loading all the problem assets into one bank and letting that one go down at taxpayer expense in order to preserve the healthy bank,' said Gregory Lyons, co-chairman of the financial-institutions group at law firm Debevoise & Plimpton LLP in New York.

'We're left in the lurch,' said Rep. Danny Rush after Chicago's Park National Bank was shut.

When regulators shuttered the flailing banks after closing hours on Friday, the FDIC leaned on Citizens National Bank and Park National Bank, based in Chicago, to foot the bill.

'The two banks were unable to pay the amounts assessed and were closed by their chartering authorities,' the agency said in a statement.

Citizens National Bank had just $102 million in assets, compared with $19.4 billion in assets for the nine FBOP-owned banks combined.

The closure of the two profitable banks came hours after Treasury Secretary Timothy Geithner attended a ceremony in Chicago that awarded Park National $50 million in tax credits to help spur community-development projects in low-income communities. A Treasury spokesman said Mr. Geithner was unaware of Park National's fate, noting that the FDIC doesn't disclose bank failures until they occur.''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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