Guaranty Financial Group: On the Rocks

 |  Includes: BKUNA, GFG-OLD
by: Rolfe Winkler, CFA

Guaranty Financial (GFG-OLD) should be included in OA’s “bank death watch.” With $15 billion in assets and $11.6 billion in deposits as of 12/31, Guaranty Bank would be the largest bank failure in 2009.* Reader Andrew tipped us off to their second “notification of late filing” regarding Q1 financials. Like BankUnited (BKUNA), Guaranty’s balance sheet is so messy, the company is at a loss regarding its financial condition. Also like BKUNA, the bank has orders to raise capital or face seizure.

Below is the relevant part of the filing, emphasis Andrew’s. The last section he’s highlighted demonstrates another way in which “too-big-to-fail” banks are abusing bailouts to mislead investors about the value of their assets:

The Company’s preliminary financial statements reflect a loss of approximately $256 million, or a loss of $2.38 per diluted share, for the quarter ended March 31, 2009, compared to a loss of $10 million, or $0.28 per diluted share, for the quarter ended March 31, 2008. Depending on the outcome of the Company’s continuing review of [its assets], the loss actually reported by the Company could be higher.

The financial data as of…March 31, 2009…including the valuation of our mortgage-backed securities portfolio and the evaluation of any other-than-temporary impairment of that value, is preliminary. In addition, the financial data has been prepared based on the assumption that the Company will continue as a going concern, about which there is substantial doubt because of, among other things, the Orders requiring us to increase our capital ratios by May 21, 2009. Efforts to raise capital are in progress. If we are not able to assert an intent and ability to hold our mortgage-backed securities portfolio until maturity, we would be required, at a minimum, to reduce the book value of those assets to their estimated fair value, which would result in a reduction of our capital ratios to levels where we would be considered critically under-capitalized. Even on a going concern basis, there is considerable uncertainty regarding the proper amount of other-than-temporary impairment for our mortgage-backed securities portfolio, and it is likely that the resolution of this uncertainty will result in a decrease in our capital ratios.

Did you get the significance of that last bolded section? Recent revisions to mark-to-market rules allow banks to avoid writing down assets to their fair market values provided they can demonstrate their ability to hold those assets to maturity. In other words, a bank can’t carry assets at their “hold-to-maturity” value if it’s likely they’ll be out of business before the security matures!

[Many of these assets will be impaired long before their maturity dates, of course. But that's a subject for another post...]

Anyway, this appears to be another way in which “too big to fail” banks are benefiting from taxpayer bailouts. Without that cash, certain big banks would be out of business by now. Survivors would no doubt face going-concern warnings of their own. That means they’d be unable to “assert their ability” to hold certain MBS to maturity, forcing writedowns to fair value.


*For comparison, BKUNA has $14 billion in assets and $8.6 billion in deposits. [Data from FDIC's website]