Guaranty Financial's Impairment Portends Economic "Death by a Thousand Cuts"

Jul.26.09 | About: Guaranty Financial (GFG-OLD)

A new and distinct phase of the financial crisis is beginning to materialize, characterized in part by the fragile (please excuse the euphemism) state of Guaranty Financial Group Inc. (GFG-OLD) - a financial institution that declares itself to be the second largest publicly traded bank in the state of Texas. The speculation over Guaranty Financial's ability to avoid FDIC seizure has intensified in recent days, due in no small part to the startlingly grim language contained in the bank's most recent 8-K concerning "material impairments" to the business. From the SEC filing:

As previously disclosed in a Current Report on Form 8-K filed on June 29, 2009, Guaranty Financial Group Inc. (the “Company”) has been working on a plan to raise substantial capital for it and its wholly-owned subsidiary, Guaranty Bank (the “Bank”) through an open bank assistance transaction with the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Thrift Supervision (“OTS”) and with private investors, including the Company’s current principal stockholders. On July 17, 2009, at the direction of OTS, the Bank filed an amended Thrift Financial Report (“TFR”) as of and for the three months ended March 31, 2009. This filing reflected substantial asset write downs as described below, which resulted in the Bank having negative capital reflected in the TFR as of that date.

The Company believes that these write downs foreclosed the possibility of applying for open bank assistance. Our primary stockholders have not affirmed their willingness to commit to a capital infusion in support of such an application. As a result, the Company no longer believes that it will be possible for the Company or the Bank to raise sufficient capital to comply with the Orders to Cease and Desist described in the Company’s Current Report on Form 8-K filed on April 8, 2009. In light of these developments, the Company believes that it is probable that it will not be able to continue as a going concern.

With nearly a billion dollars in annual sales, and over two thousand employees, the collapse of Guaranty Financial would be no small event; it wouldn't however, pose an immediate threat to the stability of the financial system as a whole. In the latter months of 2008, the size, reach, and breadth of the most at-risk financial institutions was such that the after-shocks of failure could have brought our financial system to it's knees.

Round #2 - a round that is gaining clarity on a daily basis - is most accurately described by the old saying "death by a thousand cuts". Bank failures of a magnitude similar to Guaranty Financial will not produce the immediately recognizable reverberations seen post-Lehman. What these "small" failures will do though is slowly exacerbate the crippling forces that presently plague the economy, drain further the FDIC's already depleted "rescue fund", and via the continued destruction of wealth, contribute to the decidedly deflationary trajectory of the United State's economy.

Disclosure: no position in GFG