A $500M Tab on Hamilton - Offshore accounts hinder effort to seize assets

WASHINGTON — The January failure of Hamilton Bank could cost as much as $500 million, making it the most expensive failure in nearly three years and putting it on par with the fall of Superior Bank, the Federal Deposit Insurance Corp. said Tuesday.

The announcement came as recently unsealed court documents offered the first detailed look at the suspect transactions that led to the Miami-based Hamilton’s collapse. The allegedly corrupt practices detailed in the filings by regulators help explain why the cost of Hamilton’s failure to the Bank Insurance Fund, estimated at between $350 million and $500 million, is so high compared with its asset size of $1.3 billion.

In contrast, Superior, of Hinsdale, Ill., had $1 billion more assets, but its failure is expected to cost the Savings Association Insurance Fund $350 million. However, that cost was mitigated by a historic deal with the thrift’s owners, who agreed to pay $460 million over 15 years.

With the release of the court documents, officials at the Office of the Comptroller of the Currency were trying to demonstrate that it was aware of Hamilton’s questionable practices, but were repeatedly frustrated in their attempts to curb them by the bank’s officers and management.

The allegedly corrupt practices included $80 million of unsound loans, charges of money laundering, and the creation of an elaborate web of companies set up to hide bad loans. “As a result of this continuous, apparently deliberate activity to ‘hide the ball,’ the comptroller’s examiners were wholly unable to determine with any degree of certainty the true financial condition of the bank,” the OCC wrote a year ago in response to a lawsuit that Hamilton filed against the agency.

“It is the assets of the federal deposits insurance fund that are at risk if the pattern and practice of undocumented funding activities involving huge sums are money are allowed to continue,” the OCC wrote.

Critics have argued that the OCC should have moved quicker to shut down Hamilton. But Robert Garsson, a spokesman for the OCC, said that the bank would have been saved if it had complied with two agency cease-and-desist orders. The agency moved quickly to shut down the bank once it was determined that Hamilton was not complying with the orders, he said.

“It is unreasonable to suggest we should have closed the bank sooner,” he said. “Once we were able to conclude that it was no longer viable, we moved very quickly to close the institution. Up until that point closing the bank would not have been justified.”

Instead of conceding to the agency’s wishes, the bank sued the OCC last April in an attempt to stop it from imposing strict capital requirements. Though the bank’s request was denied, Hamilton successfully petitioned the courts to seal the documents. That ban was lifted in late February after the institution collapsed.

Since mid-1999, when Hamilton ignited its feud with the OCC, the bank has contended, even after its failure, that it had done nothing illegal and that all its dealings were legitimate. In December, Hamilton again sued the OCC, this time claiming that the agency was overly harsh in its criticism of the bank and its accusations of money laundering because of a racial bias against Hamilton’s primarily Hispanic management.

However, the OCC sought to show in court documents that it had much more to go on than just stereotypes.

One report outlines a series of transactions where about $1.9 billion of travelers checks and cashier checks from various Latin American countries were delivered to the bank in pouches and then credited to the accounts of correspondent bank customers. These unusual transactions were “conducted in blatant disregard to anti-money laundering laws and regulations,” the OCC said in the court papers.

Additionally, in July 2000 Hamilton loaned $5.5 million to Metro Bank International in Vanuatu, a place known for money laundering. The money was then wired to Perpetual International Holdings, an offshore company that Hamilton claimed to know little about.

Several other companies to which Hamilton loaned money transferred part of their loans to Perpetual.

The court records also outline a series of loans to one company that were used to pay off the loans of another company, in an attempt to cover up bad loans and avoid charging them off.

Several of these lending triangles involved Alexander H. Finance Co., a company that shared the same logo and several of the same stockholders as the bank’s holding company, Hamilton Bancorp. Manuel Cohen, the head of Alexander H. Finance, was also the authorized signatory of 26 Hamilton bank accounts.

Hamilton allowed Alexander H. Finance to overdraw its account by $1.7 million, which was then paid off by a Latin American trade financing company that had borrowed from Hamilton.

Unsealed documents filed by the OCC also supported its insistence on increased risk reserves to cover loans in Ecuador, the initial point of contention with Hamilton that spurred the first cease-and-desist order.

Banco Cofiec, an Ecuadorian bank, was delinquent on a $4.5 billion loan in the beginning of 2000, and Hamilton should have charged the loan off against its first-quarter earnings, according to an OCC filing that explained its reasoning for the order. Hamilton also understated its risk reserve by $9 million the same quarter, contending all along that all of its exposure to Ecuador was safe.

In the majority of these transactions, Hamilton did not perform “the most rudimentary credit underwriting” or even document the purposes for most of the loans, according to the documents. In some instances, the relevant documents for the loan were still in Spanish when the OCC examined the bank, the court documents say.

Though the FDIC would not say how much it had reserved in advance for Hamilton’s failure, officials said that if their estimate holds, the majority of the bank’s impact on the bank fund has already been accounted for.

During the fourth quarter the fund’s ratio of reserves to insured deposits declined to 1.27% — 2 basis points above the statutory minimum — in part because the FDIC increased its reserves for future losses, which are not counted in the ratio’s calculation. FDIC officials said they did not expect Hamilton to have a “significant” impact on the ratio in the future.

They added that the cost of Hamilton’s resolution is expected to be high because of its large portfolio of foreign loans and trading credits. Traditional loan portfolios have a wide market of buyers, but the potential purchasers are limited in Hamilton’s case, the FDIC officials said.

The agency is also hampered by difficulties in seizing and selling any collateral on Hamilton’s loans, because they are located in other countries.

The industry is still awaiting word on how much this year’s other large failure, that of the $700 million-asset NextBank, will cost the bank fund. An FDIC spokesman said that there will be no estimate for NextBank’s failure until the agency sells the bank’s credit card receivables, which make up most of its assets. Bids on that portfolio are due at the end of the month.

FDIC officials also said they had revised the estimated cost of resolving the $72 million-asset Oakwood Deposit Bank Co., which failed in February. The estimated cost had jumped to $73.5 million, from a $47 million original estimate, the officials said.

Since its collapse, regulators and law enforcement have discovered that the bank actually possessed $124 million of deposits, more than double what it originally claimed. The newly discovered deposits were the reason the cost estimate was increased, FDIC officials said.

This is believed to be the first time in over a decade that the cost to resolve an institution will exceed its total assets.