Fremont General Corp. filed for Chapter 11 bankruptcy protection, and is simultaneously selling most of the assets of its troubled thrift, Fremont Investment & Loan, to CapitalSource Inc.
The filing could portend a wider trend. Earlier this month, Greg Peters, head of global credit strategy at Morgan Stanley, recently told attendees at a Reuters Investment Outlook Summit that regional banks exposed to deteriorating home equity loans are facing a greater risk of bankruptcy, possibly extending the U.S. credit crisis to 2010. “The subprime error will go down as one of the biggest mistakes ever,” Peters said, according to a press report. “What we haven’t even seen yet is the regional bank problem coming home to roost.”
Last month, the U.S. Office of Thrift Supervision said that the number of problem thrifts had doubled to 12 at the end of the first quarter, compared to a year ago.
Fremont said in a press release that both CapitalSource and Fremont Investment & Loan have received the necessary approvals from the Federal Deposit Insurance Rop. and the California Department of Financial Institutions to complete the transactions. The Associated Press pointed out that last year regulators forced Fremont to stop originating mortgages, asserting that it did not have proper risk management oversight. The state added that Fremont subsequently sold its mortgage assets, but retained its retail banking assets.
In March, Fremont said the FDIC and the California regulator issued a directive requiring the company to raise more capital or sell its bank. That directive characterized Fremont’s bank as undercapitalized, according to a Fremont press release at the time.