With $14.4 billion in assets, Guaranty will be the biggest bank to fail this year when regulators seize it. Even the board of its parent company, Guaranty Financial Group (GFG), recognizes that it's probably just a matter of time. It has warned investors that a government takeover is likely and has already voted to allow the bank's overseers in Washington to step in and shut it down.
|U.S. Bank Failures Since 2007|
Of course, there's no need for most people with Guaranty Bank savings or checking accounts to worry about losing their money. The Federal Deposit Insurance Corp. covers up up to $250,000 against losses. And the FDIC isn't going to run out of money anytime soon.
But there's no such protection for Guaranty's investors, who've watched as its shares fell 99.3 percent, from $18 to 13 cents, since it went public in December 2007.
As Fortune pointed out last week, there are some big names among them: Financier Carl Icahn and hotel builder Robert Rowling spent $600 million to shore up Guaranty a year ago. And well-known hedge fund managers David Einhorn, of Greenlight Capital, and Daniel Loeb, of Third Point, are also among Guaranty's shareholders.
When a bank fails, the FDIC looks for another financial institution to take on its deposits. That process starts well before the bank's doors close. But Guaranty Bank is in dire shape -- it recently wrote down $1.5 billion in mortgage-backed securities at the behest of its regulators. So it may take a while to find a willing buyer.
That's especially true because the FDIC says it may revise its rules that govern sales of busted banks, making them more burdensome for private equity and hedge funds. Private investor groups stepped in to buy IndyMac and BankUnited, two of the biggest banks to fail since the recession began in late 2007. Such deals have to wait until the FDIC's new rules are in place.
The BankUnited sale cost the federal government $4.9 billion. If shuttering Guaranty Bank bears a similar price tag, the FDIC's nearly empty deposit insurance fund will be depleted by another $5.5 billion, or some 40 percent of its current balance. Even with a half a trillion dollar credit line from the Treasury Department already queued up, that's still a lot of money.