Monday, May 10, 2010

Onward Christian financiers

By Distributorcap

When the clock flipped into the year 2000, America was enjoying true prosperity. The economy was humming, the budget was balanced, the internet was hot as dot-com stocks were flying, and real estate was beginning its rise into the stratosphere. In fact, the biggest fear was that the entire computing structure of the US would go haywire as internal clocks in the CPUs and software would not be able to handle the change in the century digit. By the time 2001 rolled around, the dot-com stocks had collapsed and George Bush had been installed as Chief Defender of the Faith of Idiocy.

But the real estate market kept flying. During that year, Integrity Bank, opened their doors in the Atlanta suburb of Alpharetta. The bank's philosophy (which in hindsight would blend nicely with the coming decade of Bush dogma) would be to transact business based on Christian principles and make a lot of money at the same time. The bank's charter and philosophy took the motto on American money “In God We Trust” literally. The bank gave customers free Bibles, and employees prayed together at meetings. Investors included Georgia politicians and the former CNN host Lou Dobbs.

The bank’s founder, Steven M. Skow, a Lutheran, said he would give away 10 percent of annual profits to churches and faith-based charities. In 2007, Mr. Skow donated $1.7 million. Mr. Skow said he would not discriminate against non-Christians. “We weren’t selling religion,” he said. “We just managed the bank on godly principles, like the golden rule.”

The gold sure ruled until their Golden Calf god turned out to be made of iron pyrite.

In August 2008, government regulators in Georgia shut down Integrity Bank just as the economy began to collapse in a sea of red ink and bad mortgages. Integrity bank was initially seen as just another failed lender that had fallen victim to the hard times of easy lending and overvalued the real estate. After all, these were good Christians who made some bad decisions.

When it was put into receivership on August 29th, 2008, Integrity had assets of $1.1 billion and deposits of $974. What was left on the balance sheet was sold to Regions Bank of Alabama. The failed Christian bank's five offices re-opened on Sept. 2 as branches of Regions. The FDIC estimated the bank lost up to $350 million on those $1.1 billion in assets, putting the red ink at a stunning 32%, one of the highest loss percentages in the last 40 years.

Onward Christian financiers.

On Friday, May 8, a federal indictment was unsealed. It accused two former vice presidents at the bank of hastening its downfall by selling fraudulent loans to a hotel developer in exchange for bribes.

From the The New York Times:

The two executives, Douglas Ballard and Joseph Todd Foster, were charged with conspiracy, insider trading and bank fraud, according to the indictment. Mr. Ballard was also charged with bribery. The developer, Guy Mitchell, who received $80 million in loans, was charged with conspiracy and bribery.

But in announcing the indictment, the United States attorney Sally Quillian Yates said Mr. Ballard and Mr. Foster had not lived up to the bank’s name or mission. “A number of banks have suffered from the plummeting real estate market, but this bank was robbed from the inside,” she said. 

To say the least.

Good Christian Mitchell pled not guilty at a federal courthouse in Atlanta. Good Christians - Ballard and Foster - have yet to turn themselves in and will probably be arraigned within a few days.

The soldiers for the good Christians were deployed quickly to defend these pious and moral citizens. Edward Garland, Mitchell's attorney said his client had been a law-abiding, profitable customer for the bank. “The collapse of the economy caused the bank failure, not his activity,” Mr. Garland said.

The indictment states Mitchell received the $80 million in loans from Integrity from 2004 to 2006. The holdings in the Mitchell portfolio include the upscale Casa Madrona Hotel and Spa in Sausalito, Calif., and the Royal Palm Hotel near Miami. The indictment goes on the state that he obtained the money under false pretenses and deposited nearly $20 million in a personal checking account. From this account his bought some very religious inspired items, like a private island in the Bahamas for $1.5 million.

The indictment also charges that Mitchell made few, if any, payments on the loans. Instead, it says, he took additional loans, and his debt ballooned. In return for lenient terms on the loan, Mitchell paid Ballard more than $230,000 in bribes. It also accuses the two good Christian bank executives of engaging in insider trading when they sold off their Integrity stock as the bank began to wallow in a sea of debt.

“After passing out $80 million to the developer like it was Monopoly money, both officers dumped their Integrity stock before the failed loans came to light,” Ms. Yates said. 

"We expect to show that he is completely innocent." stated defense lawyer Garland of Mitchell. He said "Mr. Mitchell was in compliance with banking regulations and merely used a central bank account for both personal and business expenses.” These words are right out of the most holy biblical text - the book of Hypocrisy.

Before the collapse of the bank, Integrity had launched its own internal investigation of the loans to Mitchell, since they were such a large part of the portfolio. The probe found that some of Integrity's good Christian, Bible-thumping executives lent more and more money to Mitchell, in order to boost their own collection plate. "By continuing to loan Mr. Mitchell money, large loan fees were generated for commissions to the loan officers, as well as loan dollar volume goals to justify larger year-end bonuses for executive management," the directors concluded in January 2008, according to minutes from a board meeting that were filed in the bankruptcy.

By the time the bank collapsed in 2008, Mitchell had several different loans from Integrity that added up to $83 million, or 127% of the bank's total capital of $65.3 million, according to court and regulatory filings. The loans were secured by the hotel, shopping centers, his home in Florida and co-signed by Jesus himself.

However, good Christian Mitchell had a sweetheart clause in his loans. Unlike almost any other borrower, Mitchell wasn't required to make payments on the loans out of his own pocket. Instead, each loan had interest reserves, or money set aside to cover payments until the projects started generating their own cash. In other words the loan was being paid back with money from the loan. Regulators have criticized the use of interest reserves as a payment mechanism, claiming its makes it difficult to detect troubled loans.

Founder Steven Skow, who left the bank in 2007, was not implicated in the indictment. He claimed he was a good Christian (and good Sergeant Schultz) and knew nothing about the activities in the indictment. He said he had lost $22 million in stock when the bank failed.

I guess this is a true test of faith for Mr. Skow, 22 million faiths in all.

By the way, the faith-based state of Georgia leads the nation in bank failures, with 38 banks having closed since 2007, according to the FDIC. Georgia has one of the nation's most underregulated banking system.

(Cross-posted from Distributorcap NY.)

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