A perfect storm of events that nearly sank a bank

RMA Journal, The, Oct, 2003 by Kathleen M. Beans, Heng You

Thomas Sung has lived through every bank president's worst nightmare. A four-day run on his bank, which had a CAMELS rating of 278 in the fourth quarter of 2002, depleted the 20-year-old, $282-million-asset thrift of about $40 million. A combination of unexpected events swept over the six-branch Abacus Federal Savings Bank, creating a perfect storm that tested the resiliency of the institution and its 68-year-old founder and president. As of this writing, business appears back to normal at his teller windows, but Sung says his thrift was "within an hour" of a takeover by the FDIC.

The first inkling that a crisis was in the making came in a telephone call to Thomas Sung from his daughter Jill Sung, an attorney and executive vice president at Abacus Federal Savings Bank. He was in Florida on an extended vacation with his wife. "We've got a situation that could be volatile," warned Jill on Monday, April 21, 2003. "You better come back right away." Sung and his wife immediately packed their bags and began the drive back to New York City, where the Chinatown headquarters of Abacus Bank is located. (Abacus branches are in Chinatown, New York; Edison, New Jersey; and Philadelphia, Pennsylvania.)

Two weeks earlier, Abacus announced in a Chinese language newspaper that it had fired Carol Lira, the manager of its Canal Street branch, for allegedly embezzling $1 million. Sought by the FBI, Lira had disappeared. Rumors began circulating in the Chinese community that Sung also had fled. Worried that their money and safe deposit boxes were at risk, a steady stream of customers began withdrawing their money and removing items from their safe deposit boxes on Monday. By Tuesday morning, hundreds of customers had formed blocks-long lines outside the bank's New York branches. The news media were reporting a run on the bank.

Sung and his wife were still travelling home on Tuesday morning when Jill reached Sung on his cell phone with the urgent request that he speak with reporters. "My wife was driving and I held a news conference by cell phone from the car," says Sung, who was on I-95 near Washington, D.C. at the time. "One reporter asked if I was sure I was coming back, and I said, 'You can be sure I'll be back'."

The first thing Sung did Wednesday morning was to meet with the captain of the local police station and ask for help in calming the crowd outside his main branch. The police had erected barricades along Canal Street to contain the long lines, which were now four or five people across an five blocks long. Customers had begun standing in line at 3 a.m.

Using the police bullhorn, Sung tried to quash the rumor of his disappearance by announcing his presence to the crowds. "I shook bands with people and tried to assure them that the bank would open as usual. Community leaders joined me in trying to reassure the customers about the bank's soundness."

On Thursday Sung went to Philadelphia, again joined by Chinatown community leaders, reassured customers there, and met with the press and local politicians. Although the customer lines had dwindled by Friday and were gone by Saturday at all of the branches, a liquidity crisis emerged that proved to be Sung's most exasperating challenge.

Solving the Liquidity Crisis

While Sung was working to calm the customers, his daughter Jill was working with the Office of Thrift Supervision, which had last examined the bank on December 31. Its assets on that date were $282.7 million, up front $245 million at the end of 2001. By adding 13 employees in 2002, Abacus' staff size stood at 158. Before the run, Abacus had earned a "superior" rating from IDC Financial Publishing Inc., which rates hanks and savings and loans. Although Abacus' rating was IDC's highest for safety and soundness, it now faced an immediate liquidity need of $75 million, or about 20% of the bank's total assets. Sting believed Abacus could meet the customers' demands for cash until his daughter informed him that the Federal Reserve Bank had revoked Abacus' overnight credit. (See sidebar.)

To avoid an FDIC takeover, Sung had to scramble. Abacus next turned to the Federal Home Loan Bank of New York, of which it is a member. However, Abacus had been securing most of its one-to-four-family mortgage loans through Freddie Mac and Fannie Mac as a way to control interest rate risk. So when Abacus asked FHLB if it could pledge the $50 million of its unencumbered readily marketable mortgage-backed securities against advances, FHLB agreed, but was willing to provide only 545 million of liquidity for these securities--approximately 10% less than their value. Sung believes that Abacus wouldn't have had to take such a "haircut" on the securities if it had established a better position with the FHLB.

Not so, says FHLB chief credit officer Paul Heroux, who says the collateral discount applied was "regular practice for all members pledging similar type securities against advances."

So Abacus was still short of funds, and the OTS informed Sting that the FDIC would take Abacus over if it couldn't come up with the cash. By Thursday afternoon, the FDIC had a representative in each of Abacus' branches and Sung had heard through contacts that the FDIC was ready to perform the takeover on Monday morning if he didn't come up with the liquidity.