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Life support may be too late for incredibly shrinking banks

Watching the health of banks lately is a lot like watching waves at the beach during an approaching storm. The surf's getting rougher.

Consider the $26 billion Colonial Bancgroup from Montgomery, Ala., whose Colonial Bank runs 347 branches in five states — 196 are in Florida, including a bunch in the Tampa Bay area. Colonial arrived here in better days when, as a bank based in a slower-growth state, it reasoned that buying into faster-growing Florida would also make Colonial grow faster.

Or feel more economic pain when things turned south. A year ago, Colonial Bancgroup shares traded at $14. Now they trade at 59 cents, less than the cost of a can of soda. An astonishing decline for a banking company of such size.

How diminished is 4,500-plus-employee Colonial? Its market value is a paltry $119 million. That's the same value of the mothballed, nine-employee company called Zapata Corp., controlled by the Bucs-owning Glazer family.

Colonial is eligible for federal TARP rescue money. But there's a Catch-22. The feds want Colonial to raise $300 million in new capital on its own before getting $550 million in TARP funds. Worse, law firms are lining up to sue Colonial, claiming investors were never told TARP money was contingent on the bank raising new money on its own.

There's the rub. Would you sink millions into a banking company trading at 59 cents? If there was a 911 number for banks, Colonial would have it on speed dial.

Colonial's plight may be a harbinger of nasty things to come for more and more banks caught in a perfect banking storm. As the recession deepens, banks find more loans going bad, and the assets they hold losing more value.

A year ago, bank analyst Gerard Cassidy of RBC Capital Markets dourly predicted several hundred banks could fail in the coming years. Now he's updated his forecast: More than 1,000 U.S. banks, or one in eight lenders, may fail in the next three to five years as commercial loan losses rise, compounding problems from record mortgage delinquencies and soaring home equity loan defaults.

Yes, President Obama's administration, captained by Treasury Secretary Tim Geithner, this week will finally detail a bank rescue plan expected to offer incentives to lure private investors into buying toxic assets.

I am worried. We're getting late in the game for rescues based on luring private investors to put fresh stakes in still-wobbling banks.

Some folks who would never before utter the phrase "nationalize the banks" are starting to test that message. On ABC's This Week TV program on Sunday, South Carolina Republican Sen. Lindsey Graham said the idea of a government takeover of private banks — once considered a radical proposal — might be the best solution for the financial industry's problems.

"This idea of nationalizing banks is not comfortable, but I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we're going to have to do something that no one ever envisioned a year ago — something no one likes," Graham said.

There's already a phrase out there for banks that are propped up on artificial life support with government money: zombie banks. Listen for these words more in the coming months.

Robert Trigaux can be reached at trigaux@sptimes.com.

Life support may be too late for incredibly shrinking banks 02/16/09 [Last modified: Tuesday, February 17, 2009 7:35am]
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