FOUR more California banks bite the dust. The FDIC seizes California National Bank as it fails last month. California National is based in Los Angeles with 68 branches. This is considered the fourth largest bank failure in the country. Fortunately for depositors, US Bank immediately bought the failed bank with no losses to be incurred by depositors. The Feds also seized San Diego National Bank, with 28 offices, and San Francisco’s Pacific National Bank with 17 offices. Less than 30 days ago, United Commercial Bank with 63 branches was shut down and sold to East West Bank. Bank failures across the country have reached 120 so far as a direct result of the mortgage meltdown.
Banks normally lend out a multiple of their paid in capital. For instance, if their paid in capital is $100, they can borrow funds to lend out ten times that amount or $1,000 but $900 of that is debt. There is no problem with liquidity if borrowers pay back the $900 on a timely basis. But when borrowers have actually no capacity to pay back the loan, the bank’s cash flow stops and it is unable to turn around and pay back its own borrowed funds and the bank itself starts to default on its own debt. When a bank can no longer pay its debt, the Feds swoop in and seize the bank to protect depositors. Normally, the Feds look for a potential buyer of the failed bank who takes over. But the takeover is not without cost to the Feds. The buyer buys the bankrupt bank at a fire sale price because the Feds take over the non-performing debts. In the case of United Commercial Bank’s failure, the Feds agreed to absorb $7.7 billion of bad debts. East West agreed to acquire $10.2 billion of the failed bank’s assets without the accompanying bad assets of $7.7 billion. They were able to shave off the nonperforming loans, which caused the failure of the bank in exchange for taking over the bank. That’s a pretty good deal for the buyer. What made the purchase more attractive to East West was that the failed bank had a license to bank in Shanghai because it acquired a Shanghai bank in 2007. Considering that East West’s primary focus is the American Chinese market in California, having the ability to do business in China appears to be a natural expansion for East West.
It’s a different story altogether for individual debtors. When too much debt accumulates, practically no one has a rich uncle who will swoop in and arrange for the sale of the individual’s debts to another person. Indeed, nobody in his right mind will buy the debts of someone else if doing so serves to promote no interest of the buyer. GM and Chrysler had to resort to begging Uncle Obama for bail out funds. Even then, Uncle Obama gave them bail out funds but required them to go through a pre-packaged Chapter 11 bankruptcy.
Fortunately, individual debtors may resort to bankruptcy law for relief. When push comes to shove, Federal law gives debtors a chance to get rid of debt with a Chapter 7 bankruptcy. While discharging unwanted debt, the law allows debtors to keep most if not all of their assets, including their house, cars, furniture, retirement accounts, and other assets through a system of exemptions. Qualified debtors become productive again because they are able to keep their assets and income while getting rid of burdensome debt.
On the other hand, Chapter 13 bankruptcy allows debtors to restructure their financial obligations, particularly mortgages on their houses, under a plan that they can afford. Chapter 13 even allows a debtor to strip or convert a junior lien or second mortgage if there is no equity supporting the lien. Indeed, bankruptcy law is a very powerful tool at the disposal of qualified debtors for getting rid of unwanted debt. Debtors should seriously consider bankruptcy to become productive again. Large businesses do so.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published Dcemb er 12, 2009 in Asian Journal Los Angeles p. C4 )
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