Checking accounts draw more interest
The humble checking account, long overshadowed by sexier and higher-risk investment vehicles, may have a key role to play in the revival of the nation’s gasping financial system.
Banks and other financial companies got into trouble by betting their futures on exotic investment vehicles like “collateralized debt obligations” and securities tied to high-risk mortgages.
Now, old-fashioned banks and savings and loans that offer plain-vanilla services like checking accounts are coming back into favor with big-fish buyers. In a financial market battered by failures and volatility, they offer a reliable stream of cash in the form of customer deposits, account fees and other revenue that can help companies rebuild weakened reserves.
“I am having conversations with a lot of companies that are looking to buy thrifts,” said Alberto De Almeida, an investment banker with Keefe, Bruyette & Woods in San Francisco. “The credit markets are broken. And these deposits are the cheapest funding source available.”
The appeal of deposits was demonstrated Sunday, when Goldman Sachs Group Inc. and Morgan Stanley -- the last two of Wall Street’s big investment banks -- persuaded the Federal Reserve to turn them into bank holding companies, allowing them to take deposits that can help them stay afloat.
The thirst for deposits is also behind credit card giant Capital One Financial Corp.’s acquisition of banks in Louisiana and New York, while Mutual of Omaha bought a bank with branches in Arizona, Nevada and California. And General Motors Corp., with its GMAC Financial insurance arm, successfully lobbied federal regulators to allow it to continue taking deposits.
“Bank deposits are an important part of GMAC’s funding strategy,” said Frederick “Fritz” Henderson, president of General Motors. “If we didn’t get that extension, we would have had to wind the bank down.”
The perceived safety and security of traditional banking institutions is apparently appealing to customers as well.
Mac Movagar, who owns three Denny’s restaurant franchises, said he moved his account to a Farmers & Merchants Bank branch in Santa Ana after reading about its local focus and its century in business.
Movagar, of Laguna Beach, said he wanted a bank that valued traditional customers seeking basic services.
“People need to understand that we are the ones oiling the machinery of the economy with our checking accounts and our savings,” Movagar said.
In its promotional material, Long Beach-based Farmers & Merchants hammers home the safe-and-secure message, billing itself as “California’s Strongest Bank.”
That image may have held special appeal to customers of Pasadena-based IndyMac Bancorp Inc., which federal regulators took over in July as it faced a run on deposits and a collapse. That month, more than 600 new customers opened accounts, giving the bank $170 million in new deposits.
Now, with Washingon Mutual Inc. putting itself on the block amid a loss of investor confidence in the company, Farmers & Merchants says it is seeing a fresh run of customers.
Bank Chief Executive Henry Walker said he was visiting a Newport Beach branch on Thursday when a customer holding a Washington Mutual checkbook asked him whether his money would be safe at Farmers & Merchants.
“I told him before you lose dollar one, I am going to have to lose everything, and I’m not going to lose everything,” Walker said.
It’s not just small banks that are in vogue again. Wells Fargo & Co. and Bank of America Corp. have survived and, in some ways, thrived during the mortgage meltdown because they did not rely too heavily on the subprime mortgages that landed other banks in trouble and instead focused on core banking products, such as checking, savings and certificates of deposit.
Banks and thrifts used to live on checking accounts, certificates of deposit and long-term loans. But with the Federal Reserve keeping interest rates low for most of the decade, they found that they could market loans as never before. The availability of low-cost loans helped drive up home prices, and that made borrowers willing to take more risks, getting themselves into short-term loans and option loans that had interest rates or payments that would shoot up after a few years, or even months.
The banks would then resell these loans to investors who would bundle them up and sell them again, this time like shares in a company. Those bundled loans and other so-called derivatives, like interest rate swaps, turned companies like IndyMac from small-time savings and loans into national names nearly overnight. They also helped regional banks like Washington Mutual expand into nearly every corner of the country.
But as home prices slumped and borrowers defaulted on their loans, the banks that bet the biggest on investments tied to risky loans, such as Lehman Bros. and Bear Stearns, were forced into sales or collapse.
The difficulty sorting the good banks from the bad -- because the value of the unpaid loans is nearly impossible to measure -- also has hurt bank stocks overall, driving some regional banks’ shares to record lows in recent weeks.
That has made it harder for financiers like John Delaney to find the money they need to lend to businesses.
“Three or four years ago, I didn’t need a bank to finance a business. I could just go to the capital markets. That was the best source of financing,” said Delaney, CEO of Maryland-based CapitalSource. “Now those markets are so profoundly troubled that anyone wanting to get funding there is going to have to pay more, and they’re probably going to find that there are more restrictions too.”
When Fremont Investment & Loan in Brea nearly collapsed after seeing more than $3 billion in subprime mortgages go into default, CapitalSource worked with regulators to obtain an industrial banking charter, enabling it in July to buy Fremont’s 22 branches and, most crucially, about $5 billion in deposits.
So far the deal has paid off. In seven weeks, the new CapitalSource Bank has brought in more than $70 million in new deposits and more than 1,000 new customers. Its stock price has been relatively stable while other banks have seen their values fall off a cliff. It is working with state and federal regulators to switch from an industrial charter to a general bank charter.
One of the main reasons?
“Checking accounts. That’s the biggie,” said Tad Lowrey, the bank’s president. “If you build a checking base you can cross-sell other products to customers, and it’s tougher for them to leave.”
--
--
Times staff writer Ken Bensinger contributed to this report.
--
RELATED STORIES
Bailout: The Bush administration seeks swift action on plan. Page A1
Congress: Lobbyists work to alter the bailout bill’s language. Page A1
