The private bank, Park National Bank in Maywood, Chicago, previously owned by Michael Kelley was very popular with the people for its focus on community development. However it has now failed and taken over by the fifth-biggest bank in America – US Bank. The FDIC said that it has cost the insurance fund $2.5 billion.
This poses questions arising out of the debacle. One is the viability of running banks on the philanthropic model of Kelley and secondly the fairness of Washington in closing small banks and saving the megabanks.
Under the weight of risky mortgages and questionable underwriting, some of the big banks nearly fell flat. One of the big problems of Kelley’s organization was that it had invested about $900 million in some of the sure stocks – those of Fannie Mae and Freddie Mac. The regulators of the government gave all the encouragement they could to make even the banks park their investments here. But Fannie and Freddie melted down with the fire in the mortgage industry. Two years previous the feds seized them but not without leaving behind gaping holes in the banks of Kelly.
There were other problems also. For years he had been lifting up other banks when others were treating them as untouchables. He allowed his umbrella organization, FBOP, to stretch their portfolio on loans by 35% in one year from 2007 to 2008. When the property market crumbled and the credit market froze the loan portfolio too of FBOP began to deteriorate – especially as regards commercial real estate.
At the Congressional panel hearing, Kelley said last January that he thought his problems had been solved when the government launched the TARP measure in 2008 October. His regulators pressed upon him to promptly apply for TARP benefits. Verbal assurances were given to him about his getting easy approval. But in the first round, only the public banks benefited and not the private ones. Kelley received no assistance. His second application for getting help from TARP also was in vain as the regulators kept switching their requirements.
Later what happened was pure drama that gained much attention. Timothy Geithner the Treasury Secretary awarded a subsidiary of Park National $50 million as tax credits on 30th October 2008 in the morning. It was for helping in financing schools, development of retail outlets, and community center on the south side of Chicago. But later in the afternoon, the regulators of the fed closed the banks of Kelly!