Backstage at a Bank Funeral: Feds Swoop In on an Unsuspecting Town

In a time of credit crisis, small to medium bank branches are failing, forcing the Federal Deposit Insurance Corporation (FDIC) to go in and clean up the mess. Coming in stealthily to avoid public panic and sudden withdrawal of all a bank’s funds, which would result in a sinking of the bank and possibly others in the area, the FDIC makes a quick job of taking over the bank. However, while hotel reservations under fictitious company names may be an effective way to cover up the FDIC’s affairs in a town of 3,200, one wonders what will happen when larger banks in more populated areas have to be reckoned with. How will the FDIC’s tricks fair on a larger scale as credit problems become more of a cycle?

June 5, 2008; Page A1 Wall Street Journal

STAPLES, Minn. -- At 7 p.m. on Friday, May 30, Mayor Chris Etzler walked throughthe back door of First Integrity Bank. The lobby should have been closedfor the weekend, but dozens of strangers in dark suits were bustlingabout with laptops and file boxes. Someone had just delivered 32 pizzas.

On Friday morning, the officials and local contractors hired to helpwith security held a meeting to plot out their strategy for theafternoon bank failure.

Dan Walker, a top official with the Federal Deposit Insurance Corp., aWashington, D.C., bank regulator, had summoned Mr. Etzler to explainwhat was going on: The FDIC had just taken over First Integrity.

"All the deposits are safe," Mr. Walker tried to reassure the mayor."Nobody is going to have any problems."

It isn't easy for 75 federal officials and contractors to slip into asmall town undetected and liquidate an 89-year-old bank without anyoneknowing. But that's what just happened in this old railroad town,population 3,200. It's a scene that's likely to repeat itself across thecountry as banks struggle through a painful credit cycle, overwhelmed bytroubled mortgages and soured construction loans.

First Integrity, which had two branches and $55 million in assets, wasthe fourth FDIC-insured bank to fail this year. That's one more thanduring the entire three-year stretch leading up to 2008. Some analystspredict that as many as 150 banks, mostly small and medium-size, couldfail over the next three years.

In its role as receiver for failed banks, the FDIC acts as a SWAT team,playing equal parts secret agent, medical examiner, salesman and griefcounselor. The first 48 hours are typically the most frantic, as theagency must turn a failed bank inside out and oversee its sale -- or itsorderly burial.

Secrecy is paramount to prevent a panic among the locals and a run onthe bank. That could sink a bank and lead to runs on neighboringinstitutions. Banks only retain a percentage of their deposits in cash,and use the rest for things like loans, which means they don't haveenough money on hand if everyone demands their deposits back at once.Created during the Great Depression to prevent such scares, the FDICinsures deposits at more than 8,000 banks, covering up to $100,000 perdepositor in most cases.

To keep a low profile, FDIC officials often use personal credit cardswhile in town. Many will tell curious strangers they work in insurance.In the case of First Integrity, Mr. Walker rented a conference room in atown 30 minutes away for a meeting of "Robinson & Associates," and asign near his hotel's front door welcomed the fictitious company.

The FDIC allowed a Wall Street Journal reporter to go along with itsteam in Staples this past weekend, offering a rare window into alittle-known government task force.

Spectators in Lawn Chairs

Despite the military-style planning that goes into taking over a bank,things can go wrong. Once, a local motel guessed the feds were comingand put up a welcome banner on the marquee. Another time, FDIC officialshired a hypnotist to get a confused bank employee to remember the vaultcode. Sometimes, locals pull up lawn chairs and watch from across thestreet.

Mr. Walker, 61 years old, has been a part of 10 bank closings, but FirstIntegrity was his first time in charge. Before becoming a regulator, hespent four years in the Army and 12 in the Texas National Guard.

In late April, Mr. Walker flew to Minneapolis to plot a strategy in casethe bank failed. The FDIC knew First Integrity was in trouble becauseits capital reserves had evaporated, and the delinquent loans on itsbooks more than doubled in 12 months. Many of the bad loans were tied toFlorida real estate. The FDIC is still sorting through the bank'srecords and wouldn't elaborate. David Duhn, the former president ofFirst Integrity, didn't return calls for comment.

On that first trip, Mr. Walker visited the bank's headquarters inStaples. He then drove seven miles east to First Integrity's otherbranch in the tiny town of Motley, to get a feel for its layout andsize. He strolled in and asked to exchange a couple of dollar bills forcommemorative state quarters. The teller obliged. He took a look around.And then he left.

As First Integrity's health worsened, the bank was unable to find abuyer. Regulators picked a date to swoop in. Ken Jarzombek is an FDICofficial in charge of all the groundwork for a takeover team, fromacquiring printers to ordering pizzas. He called the Todd Countysheriff's office and notified them that a "government agency" could becoming to town and would pay deputies overtime to assist it. Mr.Jarzombek has worked on about 60 bank failures and says law-enforcementofficials often try to push him for specifics. "I try to beat around thebush," he says.

A Painful Chapter

On Wednesday, Mr. Walker and other top FDIC officials flew in. They setup a base in a hotel in Baxter, not far from Staples. They recorded theestimated drive time to Staples and scouted for a place to park 50rental cars.

A onetime railroad and lumber town in central Minnesota, Staples is nowa shadow of its vibrant days. The old opera house closed decades ago,and the town is working to refurbish its main landmark, a train depotacross the street from the bank. Todd County is one of Minnesota'spoorest areas, and some residents say First Integrity's failure will beanother tough chapter in their history.

On Thursday, a local newspaper, the Staples World, printed an articleabout the troubled bank and raised the possibility it could beliquidated. Mr. Walker was alarmed; this could cause a panic. An FDICofficial stationed inside the bank monitored the lobby. Only when it wasclear customers weren't swarming the place did regulators relax.

Friday morning, minutes after First Integrity opened for the last time,Mr. Walker sat in his hotel's conference room and watched the other FDICofficials file in. He waited for someone to close the door before hespoke. "Is anybody in here not supposed to be at a meeting of Robinson &Associates?" he asked. No one said a word.

There was little room for error. A Watford City, N.D., bank, FirstInternational Bank & Trust, had tentatively agreed to acquire roughly75% of First Integrity's assets, worth about $36 million, and all of itsdeposits, for a premium of $2 million. The FDIC would retain the loansand assets First International didn't want, and try to collect as muchof the loans outstanding as possible. First International planned toopen the lobby Saturday morning to assuage the community.

Late in the afternoon on Friday, Mr. Walker and a few others began the30-minute drive to Staples. They walked into the bank and began theformal proceedings. Officials from the Office of the Comptroller of theCurrency, a division of the Treasury Department, revoked FirstIntegrity's charter and appointed the FDIC as receiver.

Rumors Spread

Mr. Walker went into the lobby and introduced himself to the shakenstaff. "We understand what you are going through," he recalls tellingthem. No one asked questions, and Mr. Walker offered one warning: "It'sgoing to be crowded," he said.

The rest of the FDIC officials then swarmed in. Armed sheriff's deputiesmoved to the doors to stand guard. FDIC officials put tape on someinterior doors to prevent them from automatically locking.

By the time the mayor arrived, the agency had already restored access tothe automated-teller machine for depositors and changed the bank's Website. The vaults were secure.

A crowd of people stood on the sidewalk across the street at a barcalled Gary's Place -- a rumor was spreading about a bank robbery. Oncethey learned deposits were safe, most went back inside.

"We're going to be out of here as fast as we can," Mr. Walker told themayor, Mr. Etzler, who had rushed over from his daughter's high-schoolgraduation. "It will just be a brief blip in history -- that's it."

Mr. Etzler looked relieved. "Just the uncertainty and the questions thathave been floating around, to get some finalization to it," he said.

Some FDIC officials stayed at the bank until 1 a.m. Saturday morning,and many returned seven hours later. By Sunday, almost all of the bank'sfiles were in boxes and the vaults were being cataloged.

Local residents said the FDIC officials seemed to come out of nowhere."I didn't know they were coming, but we knew when they were here," saidBecky Hasselberg, 58, who has lived in Staples her whole life. "Peoplein suits and ties walked into the coffee shop. They weren't too casual."

Monday morning the bank reopened. A temporary sign out front read "FirstInternational Bank & Trust -- Member FDIC."

Write to Damian Paletta at damian.paletta@wsj.com

Corrections & Amplifications

The Federal Deposit Insurance Corp. was created in 1933, during theGreat Depression. The initial version of this article incorrectly saidthe FDIC was created after the Great Depression.