Friday, August 14, 2009

Colonial Bank On Brink Of Collapse

. Friday, August 14, 2009

By stockOzone team

Southern regional bank Colonial Bank is on the verge of failure, a federal judge said in granting a request made by Bank of America to freeze Colonial's assets.

U.S. District Judge Adalberto Jordan ruled Thursday in favor of Bank of America (BAC, Fortune 500), which had requested a temporary restraining order to keep Colonial from liquidating or transferring assets worth $1 billion.

Depositors are protected through the Federal Deposit Insurance Corp.

"Viewing Colonial's contractual breach in conjunction with the fact that Colonial is on the brink of collapse and is suspected of criminal accounting irregularities, the potential for immediate substantial injury to Bank of America is clear," the judge said in his order.

The lawsuit filed by Bank of America involved more than 6,000 mortgages issued by its subsidiary and held in trust by Colonial. According to the motion, Bank of America is owed more than $1 billion in assets but Colonial has failed to pay the amount owed.

Trouble has been brewing recently for Colonial, which is owned by Montgomery, Ala.-based parent Colonial BancGroup (CNB). Last month, the bank said in a statement that it had "substantial doubt about Colonial's ability to continue" due to uncertainties about its ability to increase its capital levels.

As of the end of June, Colonial had assets of $25.5 billion and liabilities of at least $24.2 billion, which includes deposits of $20 billion.

Colonial was among two banks raided earlier this month by federal agents in Florida acting on search warrants issued by the office of Neil Barofsky, the special inspector general for the Troubled Asset Relief Program.

Last week Colonial said it was informed by the Department of Justice that it was the target of a federal criminal investigation relating to its mortgage warehouse lending division and alleged accounting irregularities.

So far this year, 72 banks have failed, according to the Federal Deposit Insurance Corporation. The closures have cost the FDIC $16.58 billion in 2009.

Colonial BancGroup says it has 340 branches in five states: Alabama, Florida, Georgia, Nevada and Texas.

In the event that regulators shut down Colonial, customers' deposits are protected: The FDIC's insurance fund guarantees up to $250,000 per person per account. And, the agency said on its Website, it historically "pays insurance within a few days after a bank closing either by establishing an account at another insured bank or by producing a check."

Disclosure: Author does not own any of the stocks discussed here.

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