Our suspicion is either CLOs or, more likely CDOs of TruPS, which was a giant ratings agency blessed orgiastic daisy chain of banks funding other banks that were funding other banks compounded by structured finance technology (i.e., leverage). Apparently a few banks caught the hiv and, well, you can imagine how well these have done...As a friend of TILB recently put it after consultation with us:
These CDOs of TruPS are poison to a great number of small and mid-sized banks and they all shared the slow acting lethal koolaid cup a few years ago. Ironically, without checking, I'd bet that each of Campbell's banks is/was itself a big issuer of TruPS, so the collapse of these six banks will weaken the rest of the banking system daisy chain of TruPS and TruPS CDOsNo doubt. Our understanding is that this truly was a daisy chain: virtually all of the banks that are TruPS CDO ABS owners were issuers of TruPS to CDOs playing a ratings/funding arbitrage (or at least a perceived arbitrage!).
The WSJ described the situation with the six failed Illinois banks as follows:
In 2005, the failed banks and two others owned by the Campbell family of Illinois started snapping up trust preferred securities, which are a hybrid between debt and equity, in an attempt to fuel earnings growth [actually, TILB strongly suspects it was CDOs backed by TruPS that the banks actually acquired]. Demand was sluggish for loans in the small Midwestern towns where the family's banks were based."The appetite is not large"? Shocker! You've only managed to drive six banks into the ground, basically drove a seventh into a distressed sale and have two remaining on the brink. I cannot believe capital providers are not just lining up to send you their money. Perhaps you can call up Jeffries and have them pool another CDO to fund your capital needs!
When the credit crisis hit, the values of the securities and pools into which they were packaged [read: "CDOs"] rapidly lost value, partly because some banks stopped paying dividends on the securities. Under accounting rules, the banks were required to write down the securities to market value. That forced the banks to absorb big losses, winnowing their capital cushions.
The Campbell family still controls three banks that remain in business. Two are based in Illinois and also have been battered by investments in trust preferred securities. A third bank, in Scottsdale, Ariz., steered clear of the securities because it had plenty of growth opportunities through lending. It is now suffering from a wave of souring loans to finance commercial real-estate projects.
Lyle Campbell, the 73-year-old patriarch of the family's banking business, said in an interview on Monday that he is scrambling to raise as much as $25 million from private investors to bolster capital at his three surviving banks. "The appetite is not large," he said.