The Feds Take Action Against Broadway Bank

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The good news for leading Democratic Senate candidate Alexi Giannoulias is that regulators have not moved to close down Broadway Bank—which his family owns—though many observers have predicted they would since the bank's books started to sink in 2008 under the weight of bad loans.

But the bank's liberal lending policies and troubled health have been dogging Giannoulias's political career, and today he received news almost as bad as a shutdown: Crain's is reporting that the FDIC and Illinois banking officials have stepped in to place restrictions on Broadway. The bank must come up with more capital, stop paying out dividends—the Giannoulias family reaped millions of dollars from the institution even as its performance plummeted—and agree to additional oversight of its management.

Also, the FDIC has yet to post a Report of Condition and Income from Broadway for the fourth quarter of 2009. Those public documents, also known as Call Reports, offer details of a bank's income and loan portfolio. Usually they're posted promptly at the end of every three-month period.

Giannoulias worked as a senior loan officer and vice president for Broadway from 2002 to 2006, and he touted this experience during his successful campaign for treasurer. But as the bank came under fire for issuing loans to alleged mobsters, convicted political fund-raiser Tony Rezko, and hundreds of other borrowers who couldn't make payments, Giannoulias attempted to distance himself from it. During the Senate campaign he's emphasized that he hasn't worked at Broadway for almost four years.

That's true, but as I detailed in a December profile of Giannoulias and the bank, many of Broadway's loans that have gone bad over the last couple of years were issued on his watch.

Since 2005, Giannoulias has received about $8 million in dividends from his share of ownership in the bank, according to records and statements he's released since last fall. He's said that he would be willing to put some of this money back into Broadway if necessary to keep it open.

Expect Giannoulias to respond to the latest news by noting that hundreds of other community banks across the country have struggled during the economic meltdown. That too is true, but Broadway put itself in a dangerous position by engaging in risky, fast-growth lending practices. As I noted in my piece in December:

Broadway's growth and profits were fueled largely by its rapidly expanding business in issuing loans for new real estate development. Traditionally lending for construction and development (known in the industry as C & D) has been seen as a bigger gamble than lending for, say, existing homes or small businesses, since a relatively high number of plans for new hotels, condos, housing developments, office complexes, and the like end up flopping. In the early to mid-2000s, though, as the soaring real estate markets drove the national economy, many lenders downplayed the risk and dived in.

At the end of 2002, Alexi's first year as a full-time employee, the bank had nearly $80 million in outstanding C & D loans—about 25 percent of its total loan portfolio, according to records filed with the FDIC. By the end of 2006, not long after he'd left the bank, it had $356 million in C & D loans accounting for nearly 46 percent of its loan total. During those years, it was consistently among the 20 banks, out of hundreds its size, with the biggest share of their portfolios tied up in such loans.

Moreover, rather than relying primarily on depositors from the community for its lending money, the bank relied heavily on brokered deposits, or "hot money"—pots of money collected by brokers from investors around the country. Over the last decade scores of banks have used brokered deposits to quickly bolster their cash supplies—but at a cost. These deposits command higher interest rates; furthermore, the depositors are less likely to stick with the bank if they see they can do better somewhere else. "When properly managed, BDs offer institutions a number of important benefits such as ready access to funding," the FDIC notes on its Web site. "However, BDs can be a higher-cost and more volatile funding source and, as such, present potential liquidity, earnings, and other risks that must be properly managed."

In 2002 the ratio of brokered deposits to total assets at Broadway was 53 percent, according to FDIC records; four years later, it had risen to 68 percent. The average for all federally insured banks nationwide was 4.5 percent. According to an explanation of hot money on AOL's Daily Finance in July, "the 79 U.S. bank failures in the last two years had four times the brokered deposits of the average bank, and 33 percent of the failed banks had high brokered deposits and extremely fast growth."

In the early and middle part of the decade, when the economy was thriving, this just meant that Broadway had money to lend. Giannoulias says that it was able to aid countless small businesses and enable important development projects to get off the ground. "We've taken enormous pride in helping people," he says, naming a neighborhood health store and a nail salon. "We have people who've had checking accounts for 25 or 30 years."

But experts and community leaders say Broadway developed a reputation for giving out loans to just about anyone who walked in the door. Among the recipients of loans while Alexi worked full-time at the bank were: Michael Giorango, a Florida developer who's been convicted of running bookmaking and prostitution rings; Boris and Lev Stratievsky, a father-son team later convicted of laundering money for Ukrainian drug dealers; and Tony Rezko, the developer-businessman-political fixer who was eventually convicted of fraud and money laundering for his role in pay-to-play schemes during the administration of Governor Blagojevich. Giannoulias and current bank officials have said all of them were creditworthy when the loans were issued . . . .

At the time these loans generated little attention, and the bank continued to make headlines for its success. In 2006 it was the fifth-most profitable community bank in the country, and on the surface its management decisions appeared to be sound. Loans that had "gone bad," meaning those with payments at least 90 days past due, didn't make up even half a percent of the total value of its portfolio—and the bank had reserves on hand to cover them. Like hundreds of other profitable banks, it saw no reason to change its loan or deposit strategy.

Yet [Michael] Iannaccone, the banking consultant, thinks it should have proceeded with caution. "Even in 2006 and 2005 everyone knew that real estate wasn't going to keep going up 10 percent a year," he says. "And they were in high-risk loans."

At the very least, Giannoulias is going to have to talk about Broadway Bank again, and that's not a good thing for him. Even if he triumphs next Tuesday, the Republicans will be eager to keep bringing this up as often as possible before November.

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