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How Wall Street CDOs sold two Florida banks down the river

If there's a mantra small Florida financial institutions should repeat, it is this:

Don't tug on Superman's cape.

Don't spit into the wind.

And above all, don't mess around with collateralized debt obligations.

If you thought "CDOs" were just part of the alphabet soup of controversial Wall Street creations that get vaguely mentioned in the news but have no practical effect here in Florida, guess again.

CDOs have suddenly cropped up as a principal cause for the recent demise of at least two Florida financial institutions: Eastern Financial Florida Credit Union in Miramar and Riverside National Bank of Florida in Fort Pierce.

In both cases, less-than-savvy managers of these struggling Florida institutions were convinced by Wall Street that heavy, leveraged investing in CDOs somehow could rescue them from their downward spiral brought on by recession and the popped real estate bubble.

As doomsday scenarios go, this sounds awfully familiar.

Eastern Financial, chartered way back in 1937 and sponsored by now-defunct Eastern Airlines, failed last May and its remains were absorbed by the Space Coast Credit Union. It had offices in Hillsborough and Pinellas counties.

Riverside, which failed last month, was taken over by Canadian-owned TD Bank.

Other Florida institutions got bushwhacked by CDOs, too. But let's eyeball Eastern Financial and Riverside National more closely and see how two such unsophisticated institutions bet so big, and so badly, on investing in CDOs.

So we are clear from the start, CDOs are securities that are backed by a pool of bonds, loans and other assets. Wall Street sells them.

A recent report from the inspector general of the National Credit Union Administration, the federal overseer of credit unions, shows how a naive Eastern Financial got stuck with a concentrated pile of CDOs purchased from Wall Street, how quickly those investments dropped in value, and how effectively they gutted the credit union's bottom line and led to its failure.

"Eastern Financial's board failed to understand and manage the level of risk undertaken by management in … its acceptance of the strategy to invest in higher risk CDO investments," the inspector general report concludes.

The sad tale of Riverside National's demise — death by CDO — is much the same.

One CDO package called "Taberna II" and purchased from Merrill Lynch lost 91 percent of its value. In all, Riverside's CDOs lost two-thirds of their value.

The Florida bank had crammed its investment portfolio with 27 CDOs. If that does not sound like a lot, consider this. The Federal Deposit Insurance Corp. owns more than 250 CDOs purchased by small institutions that later failed. When Riverside failed, its pile of CDOs by itself nearly doubled the leveraged value of those debt obligations owned by the FDIC.

Many of the 200 bank failures since the beginning of 2009 have been accelerated by losses in CDOs similar to those Riverside purchased.

Selling complex junk to the unsuspecting. It is a story repeated throughout the ages.

My advice to small banks and credit unions when Wall Street comes calling? Tug on Superman's cape instead.

Contact Robert Trigaux at

How Wall Street CDOs sold two Florida banks down the river 05/19/10 [Last modified: Wednesday, May 19, 2010 8:06pm]
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