Guaranty Financial Group: On the Rocks

Guaranty Financial (GFG) 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.

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

Comments

[mupals:]

Do you have list of other banks on the "bank death watch" list?

May 17 09:30 AM

[thetruth09:]

The guaranty bank that "exited from warehouse lending" is a different Guaranty bank. There is Guaranty Bank of Austin, TX and Guaranty bank of Wisconsin

May 17 12:43 PM

[Rolfe Winkler:]

thetruth09.....thank you for the correction....it was my impression that the warehouse lender was just the WI ops of the TX bank. I was wrong.

May 18 09:08 AM

[Rolfe Winkler:]

thetruth09.....looks like I just got the link wrong. Guaranty bank in TX did exit warehouse:

ml-implode.com/viewnew...

May 18 11:09 AM

[Big Al45:]

Well, Guaranty is in bad shape but there are a lot of other worthy closure candidates out there. Georgia alone has 10 functioning banks with a Texas Ratio over 200% In normal times, a Texas ratio over 100% would result in a cease and desist order and put the bank on the fast track to closure

Think that Sheila selects the banks for closure based on the FDIC's ability to dispose of the assets and not the degree of insolvency. There's no hurry to close a bank provided the depositors don't withdraw their deposits and the bank doesn't make more questionable loans

Personally, I'm betting that Corus or Security Bank of Georgia will be the next mult billion dollar bank closure. However, that won't happen for a couple of weeks. The FDIC can't handle more than one large failure a month.

May 22 04:03 PM

[Heracles28:]

Guaranty Financial Group left its parent company, Temple Inland Paper Company (Texas), on 01 January 2008. Guaranty Bank, which was included in the GFG spinoff, has corporate offices in Austin and Dallas, along with branch offices all over Texas and California. I remember reading that their CEO, who had been with Guaranty Bank/Temple Inland for a long time, resigned in November of 2008.

May 26 04:36 PM

[SeraphimHan...:]

Everyone tries to use the old "well there is Guaranty in Texas and there is a different one on wisconsin..etc". Lets get it straight. The Guaranty Bank, based in Austin Texas, under Guaranty Financial Group IS the place that filed the two late filings, IS taking a huge loss and does NOT have the capital to sustain itself. The only question now (to avoid closure, sale or merger) is "Is there someone out there that will invest in the company"? I would say NO. They dont have their act together, their technology sucks, they cant balance their books and their marketing BLOWS!!

Jun 03 06:32 PM

[gloryfet:]

i am a working class person from corpus christi,tx. I had $1000 to invest. I used my own brain power and chose the shaw grp to invest $500 in and the value has gone up 25%. I decided for the other $500 i would trust someone else's opinion to invest. Well, Robert Rawling is from corpus christi and he is a billionare. I thought who better to follow. i saw he had purchased several million dollars of guaranty stock. I decided to trust a local and follow his lead. The other $500 went into guaranty stock. I know it is only $500, but it probably means the same to me as Robert Rawling's $ he invested. What will happen to my $?? i don't know anything about stocks, banks, etc. Is there still hope to recoup any of my money?? right now it is worth about $25 Any info. would be helpful.

Jul 08 02:28 PM

[mbmalone:]

Follow what happens to BankUnited to see what is going to happen to your shares Gloryfet. I am hoping to recover my loss, but so far I have only continued to lose more the longer the bankruptcy goes on.

Jul 10 09:08 PM

[gloryfet:]

thank you for the response -gloryfet


On Jul 10 09:08 PM mbmalone wrote:

> Follow what happens to BankUnited to see what is going to happen
> to your shares Gloryfet. I am hoping to recover my loss, but so far
> I have only continued to lose more the longer the bankruptcy goes
> on.

Jul 11 02:05 AM