More on the NetBank Failure

Last night I talked to Chris Coulthrust (not Colthrust) of Applied Cognetics, about the NetBank implosion. Understandably, for someone who's just lost access to what he thought was money safely in the bank, he's not a happy bunny. And equally understandably he was a bit concerned about my blog entry, because it was long on the throwaway snark and a bit short on facts.

So the first thing to clear up is that Coulthrust is not some kind of subprime spiv who took his morally-dubious profits and put them in NetBank. He did work at a subprime lender in the late 1990s, long before the subprime bubble, but he was not a founder of the company, which went bust, and in fact he left that job with substantial debts. After many years at various technology startups, he eventually founded Applied Cognetics, which does have one subprime-related product, but which is making most of its revenues from other sources.

Coulthrust also helped me find all manner of interesting information on the FDIC website. NetBank's total deposits came to $2.3 billion, which is less than its total assets of $2.5 billion. That should come as some reassurance to Coulthurst and other uninsured depositors, although of course the assets are long-dated and illiquid and might take some time to monetize.

The scope of the uninsured-depositor problem is not huge: NetBank had approximately $109 million in 1,500 deposit accounts that exceeded the federal deposit insurance limit. Of that $109 million, 50% is being paid out in an immediate payment by the FDIC (exactly what "immediate" means in this case is not entirely clear), leaving just under $55 million in unreachable deposits in total. The FDIC is also spending $110 million of its own money, from the Deposit Insurance Fund, to help keep most depositors whole, and of course ING is paying $14 million of its own money in order to get NetBank's deposits. So by the time all's said and done, the losses to NetBank depositors are likey to be small.

Should NetBank's depositors, like Coulthrust, have suspected that something nasty was going down? If they were paying close attention, then yes. NetBank's share price was in the pennies for most of this year, which meant that the equity cushion protecting depositors was very small indeed, and their only real hope was that NetBank would be acquired by EverBank. So when EverBank abandoned the proposed acquisition on September 17, the gig was up.

But the fact is that with $100,000 of FDIC insurance, most Americans quite reasonably don't spend much time worrying about how safe their banks are. And so it's understandable that a small and fast-growing company like Applied Cognetics, whose accounts had much less than $100,000 in them most of the time, might not consider a large windfall in terms of revenues to be cause for concern.

And while financial-market professionals are comfortable thinking of bank deposits as one type of banking-industry liability, most individuals don't consider themselves to be lending money to the bank when they make a deposit. Rather, they think of themselves to be simply placing their money in the bank for safekeeping and easy access. Applied Cognetics had $100,000 in a NetBank checking account which paid zero interest.

Interestingly, the reason that Applied Cognetics had all of its money in NetBank to begin with was basically due to the fact that Commerce Bank, in Brooklyn, made it so difficult for Coulthrust to open a business account there that he eventually gave up and decided to do everything online instead. He says he went back to Commerce Bank four times, with all the different bits of paperwork they were asking for, but that they were never satisfied, and seemed more interested in asking none-too-intelligent questions about his business model instead. My guess is that they were stealth-underwriting a loan he hadn't even asked for, although it's also entirely possible that they were simply incompetent.

Finally, it's probably just as well that the legendary Robin Kelton died in April. Kelton was a financial-industry giant, who founded not only the investment bank Fox-Pitt Kelton but also the rating agency IBCA (now part of Fitch), and the insurance rating agency ISI (now part of S&P). Kelton was on the board of NetBank from day one, and he would have been devastated to see its depositors out of pocket.