It was reported in the FT on Friday night that ING Direct, a subsidiary of the Dutch financial group, is taking over the customers and insured deposits of NetBank, an online lender with $2.5bn (£1.2bn) in assets. Apparently the bank was shut down on Friday by the US government following losses on sub prime mortgages and other loans.
It is a significant situation and marks the largest US bank failure the savings and loans crisis of the early 90's. It is a stark reminder that the sub prime mortgage market is not a story that is dead and buried yet.
ING will be taking on $1.5bn in deposits insured by the Federal Deposit Insurance Corporation and said it had paid about $15m to acquire the deposits. ING will also acquire $724m in assets from NetBank, which filed for bankruptcy protection.
Arkadi Kuhlmann, ING Direct chief executive, said in an interview that ING stepped in partly to insure continued consumer confidence in companies such as his and NetBank that conduct all their banking business online and do not operate branches.
“This is all about confidence in the market,” he said. “Since we are the largest direct bank we were very pleased to assist and help out and hopefully take on these customers who will continue to do business on the Internet.”
ING Direct’s announcement came just an hour after the Office of Thrift Supervision, which oversees US lenders, said it would close NetBank following loan losses.
In addition to the losses, OTS said Georgia-based NetBank failed to improve what the regulator said were weak underwriting standards, poor documentation, a lack of proper controls and failed business strategies.
NetBank’s losses came largely due to early default on loans that it had sold, OTS said.
“While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful and it became clear that high operating expenses combined with continuing losses were jeopardizing the institution’s viability,” the OTS said. It added that the closure came after NetBank’s previous attempts to sell itself failed.
Many small mortgage lenders have been forced out of business in the wake of the mortgage crisis and Countrywide Financial, the largest US home lender, appeared close to failure over the summer. Countrywide was aided by a $2bn equity investment from Bank of America and a fresh $12bn in financing from its lenders.
The FDIC said NetBank had approximately $109m in1,500 deposit accounts that exceeded the federal deposit insurance limit. These customers will have access to their insured deposits but will become creditors for the their uninsured funds.
NetBank’s website was shut down on Friday but was to reopen Sunday evening.