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BB&T slashes value of Colonial Bank loans with nasty implications for industry, economy



BB&THQWake up and good morning. One banker's quality loan is another banker's fish wrap.

So it is a few days after the failure of Alabama's Colonial Bank and the FDIC-inspired sale of most of its assets to North Carolina's BB&T. The move catapults BB&T from a bit player in Florida to No. 5 in deposit market share in the state. (AP Photo: BB&T headquarters in Winston-Salem, N.C.)

But here's the startling news -- with oh so many nasty implicationsWith Colonial assets now in hand, BB&T is marking down Colonial loans and real-estate collateral by an astonishing 37 percent. That figure reflects a large amount of estimated losses. The biggest hit was taken on construction loans where BB&T is cutting their value by 67 percent. Read the Wall Street Journal's story about this here.

Why? Was Colonial delusional not to do the same earlier in the game? Maybe, but the key reason is this: Colonial faced loan losses that were too big to absorb. So it stalled in the thin hope the economy would improve (and improve the value of its loans) before Colonial's day of reckoning.

Didn't happen. Here's a chilling remark from Daryl Bible, BB&T's chief financial officer: "When we looked at Colonial's portfolio versus ours, we saw a lot of borrowers we turned away."

Why was Colonial awash in such crappy loans? Let us count the ways. Greed. Impatience to grow. Arrogance. Naivete. Incompetence, perhaps. A devastating decline in real estate prices, for sure.

So here's the Question of the Day. What do we do with dozens of banks operating in Florida and hundreds of banks operating across the United States are stuck with loan portfolios that are starting to reek of a similar lack of quality as Colonial's? The FDIC and bank regulators know this better than anyone but are not equipped with the dollars, manpower or public impact to handle them all at once. Indeed, the FDIC is preparing to hit banks with new fees just to raise more money to handle failures. So regulators "manage" bank failures -- banking triage is what's happening -- by dealing with the truly walking dead first.

BB&T writing down Colonial loans 37 percent, and construction loans by 67 percent? I get queasy just writing this. Some good insight on the impact of these writedowns appears in this Reuters blog analysis:

"The fall in real estate prices implies huge losses for bank loan portfolios, losses that could wipe out what’s left of their meager capital.  We got another reminder on Monday of just how bad the losses might be. BB&T said it marked down loans acquired from failed Colonial Bank by 37 percent.

"A loss rate half again as large, if applied to Citigroup, Bank of America and Wells Fargo, would wash away what’s left of their equity capital. In other words, despite recent capital raises, their leverage remains way too high."

-- Robert Trigaux, Times Business Columnist

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