Downey Bank Finally Goes Down For The Count: Who’s Next?

Written by:
Jagajeet Chiba
Published on:
Nov/23/2008
Downey Savings Bank

So far the online prediction markets have been fairly accurate in their offering related to the next bank closure. 

Betting activity at www.intrade.com long suggested that National City and Downey would close before the end of 2008.

This weekend, the US federal government swooped in on California-based Downey, saying hundreds of millions of dollars in bad loans from the housing bubble had rendered the Southern California banking fixtures unsound. 

The banks' branches will continue operating as usual under the ownership of Minneapolis-based U.S. Bank, one of the country's largest banks, and no depositors will lose any money because of the failures, regulators said

Downey Savings lost an estimated $547.7 million during the first nine months of 2008, mostly a result of its dealings in "option ARM" loans.

After seizing the banks, the agency handed them over to the Federal Deposit Insurance Corp., which immediately agreed to have U.S. Bank, a unit of US Bancorp, acquire virtually all their assets and assume all of their deposits.

It's not immediately clear how intrade grades these wagers since Downey Savings is effectively still in business, unlike IndyCal, another California-based bank that completely shut down over the summer.

One of the more popular bets, Cleveland-based National City, was purchased by PNC Financial Services late last month for a price believed to be well below National City's market value. 

Harleysville National had a nearly 100 percent chance of going under according to the betting activity at intrade. 

Harleysville National Corp. said late Wednesday that it will seek the maximum $120 million it can apply for, based on the U.S. Treasury Department Capital Purchase Program's rules that cap funding at 3 percent of total risk-based assets. It assumes the combination of assets resulting from the Harleysville's pending acquisition of Willow Financial Bancorp Inc. Combined, the two banks would have $5.5 billion in assets.

Harleysville National CEO Paul D. Geraghty said, "While we are a well-capitalized bank today, this influx of low-cost capital will further strengthen our balance sheet and fuel our ability to grow our business with customers and prospects in our market territory."

Oriental Financial and Fifth Third Bankcorp are also perceived as banks about to tank in the mind of gamblers. 

Despite all the hoopla surrounding Citi Bank over this weekend, intrade was yet to offer odds on that mega bank's failure. 

Jagajeet Chiba, Gambling911.com

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