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2002 Annual Report
|Operations of the
Corporation Ė The Year in Review
The goal of the receivership management program is to minimize losses and maximize recoveries to creditors of receiverships. In 2002, the FDIC pursued this goal by quickly and actively marketing assets from failed institutions, providing for the expeditious and orderly terminations of receiverships, and implementing a service-billing methodology to ensure fair and reasonable charges to receiverships for the services provided by the Corporation.
Institution and Asset Marketing
Two resolutions in 2002 warrant special note: Hamilton Bank and NextBank. The first involved Hamilton Bank, N.A., closed by the Office of the Comptroller of the Currency on January 11. Hamilton Bank had total assets of $1.2 billion and total deposits of $1.1 billion, and was headquartered in Miami, FL. The bank operated eight bank branches in Florida and a single bank branch in Puerto Rico. Hamilton Bank also had a small representative office in Panama and another in Peru. What made this failure so unique was that it was the first time the FDIC was receiver for such a large volume of international loans. Hamiltonís principal focus was commercial trade finance and lending to small companies operating in the United States and throughout Central America.
In resolving this failure, the FDIC took a rarely used approach to protect depositors by transferring all the insured deposits (savings and checking accounts, certificates of deposit, and Individual Retirement Accounts) from three of Hamiltonís nine branches, and only the insured transactional accounts (savings and checking) from the remaining six branches. The Israel Discount Bank, New York, NY assumed $531.6 million of the insured deposits. The FDIC paid out more than $582.6 million of insured deposits through checks mailed directly to the remaining account holders.
By the end of June, more than $1 billion of Hamiltonís assets had been collected, sold or booked as a market-determined loss. At that time, Hamiltonís Miami-based receivership office was closed, and responsibility for the remaining assets (approximate book value of $100 million) was transferred to the FDICís office in Dallas, TX. Those remaining assets principally involve bankruptcies, litigation or investigations. As of December 31, 2002, the cost of the Hamilton Bank failure to the Bank Insurance Fund was estimated to be $172 million.
The second noteworthy resolution involved an Internet-only bank, NextBank, N.A., chartered in Phoenix, AZ. NextBank was closed by the Office of the Comptroller of the Currency on February 7. NextBankís principal business was the origination and sale of credit card receivables to a special-purpose trust (Master Trust), which paid for the receivables by selling securities to the public. These securities were backed by the cash flows generated from the receivables. The bank had no brick-and-mortar banking facilities, and its main business was issuing credit cards. The FDIC received no bids for the deposits and paid out the insured deposits by mailing checks directly to depositors.
The FDIC, as receiver, assumed servicing responsibilities for NextBankís credit card portfolio. The credit card portfolio consisted of over one million cards with about 800,000 belonging to the Master Trust and the remainder being bank-owned. The management and marketing of these assets required extensive negotiations with the many parties involved in the credit card processing and securitization business. Ultimately, the bank-owned cards were sold under a loss-sharing agreement. The FDIC, as servicer, marketed the bankís interest in the trust, but no buyer was found and the Master Trust cards were shut down on July 10. The FDIC is currently administering the receivershipís remaining interests in the Master Trust.
The NextBank Instant Finance Network receivables were sold through Debt X, an asset-auction company that operates on the Internet. The sale, consisting of 900 accounts with a book value of approximately $1 million, was conducted electronically via Debt Xís secure Web site. As of December 31, 2002, the cost of the NextBank failure to the Bank Insurance Fund was estimated to be between $300 million and $350 million.
In addition to these resolution activities, the FDIC filed a lawsuit in the district court for the Northern District of Illinois on November 1 against Ernst & Young, the outside auditors for Superior Bank, Hinsdale, Illinois. Superior Bank, a $2 billion institution, failed on July 27, 2001. The complaint charges Ernst & Young with fraud and negligence in its audits of Superior and seeks actual damages of $548 million and punitive damages in an amount three times the actual damages, as well as interest and costs. The FDICís complaint asserts that Ernst & Young failed to properly audit Superiorís residual assets and then concealed its erroneous auditing for fear that its acknowledgement would damage Ernst & Youngís $11 billion sale of its consulting arm to Cap Gemini, a French company. No trial date had been set as of year-end.
Billing for Services Provided
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