Four years after the start of the banking crisis, federal investigators are proving what many Americans have long suspected – the root cause of many banking failures was due to fraud.
The Office of the Special Inspector General for The Troubled Asset Relief Program (SIGTARP) announced last week that a massive $41 million bank fraud contributed to the 2011 collapse of Bank of the Commonwealth, Norfolk, Virginia. The failure of Bank of the Commonwealth, which had almost one billion dollars in assets at the time of closing, resulted in widespread losses. Shareholders in Bank of the Commonwealth lost over $172 million as the share price went to zero and the FDIC Deposit Insurance Fund was hit with a loss of $268.3 million.
According to SIGTARP, Eric H. Menden of Chesapeake, Va., pleaded guilty to a $41 million bank fraud which involved tax fraud and collusion with bank management to fraudulently conceal non-performing assets. U.S. Attorney Neil MacBride of Virginia said “Today, Eric Menden admitted to carrying out a massive fraud that played a part in the collapse of the Bank of the Commonwealth. Mr. Menden used his relationship with Bank insiders to use the Bank as his own personal ATM. He raked in millions telling big fat lies to get loans, secure funding from investors, and defraud state and federal tax authorities. Over the last few years, many people in this country have begun to understandably question our financial institutions. Unfortunately, this case indicates that those concerns are sometimes well founded.”
Menden pleaded guilty to making false statements, wire fraud and conspiracy to commit bank fraud. Menden was able to get easy bank financing from Bank of the Commonwealth in return for favors extended to bank executives. In addition, Menden assisted bank management in concealing the extent of non-performing loans by purchasing properties owned by the Bank. Financing for purchasing the non-performing loans was provided by Bank of the Commonwealth which later took large losses when the Bank wrote off the loans extended to Menden.
Bank of the Commonwealth is a prime example of a bank that regulators allowed to stay in business long after it effectively became insolvent. In order to cover up its fraudulent activities, Bank of the Commonwealth applied for $28 million from the TARP in November 2008. The banking industry was in full scale collapse in late 2008 and the Feds were literally forcing banks to take TARP money to prevent a full scale banking panic.
Bank of the Commonwealth, however, was in such a financial mess, that the Federal Reserve forced the Bank to withdraw its TARP application. In addition, in July 2010, the Feds issued a regulatory directive to Bank of the Commonwealth which prohibited the extension of new credit to Eric Menden. After signing the agreement with the Feds, the Bank promptly resumed lending to Eric Menden through the use of a straw borrower. Despite the red flags raised the Fed’s refusal to allow Bank of the Commonwealth to borrow TARP funds, regulators did not close the Bank until almost three years later.
By the time regulators finally closed Bank of the Commonwealth on September 23, 2011, over 20% of the Bank’s portfolio was non-performing and the Bank was critically undercapitalized. The quarter billion dollar loss taken by the FDIC for the failure of Bank of the Commonwealth indicated that almost one third of the Bank’s assets were worthless. In order to sell the Bank, the FDIC had to enter into a loss-share transaction covering $798.2 million of the asset pool acquired by the purchasing bank. Under the loss-share transaction, a share of future losses on the failed bank’s loan portfolio would be absorbed by the FDIC.
The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was established to investigate fraud, waste and abuse in connection with the TARP.