Banking Despair in Puerto Rico

Paradise? Maybe, just not for an ailing bank.                           Photographer: Christopher Gregory/Getty Images

It can't be a good sign when a lender finishes a news release by saying "customer deposits are FDIC-insured to the fullest extent of the law for up to $250,000 per depositor."

On the assumption that you're curious about the bank that issued that statement, it was Doral Financial Corp., based in San Juan, Puerto Rico.

On April 25, Doral disclosed that it had been told by the Federal Deposit Insurance Corp. that it no longer can include about $289 million of tax receivables in its regulatory capital. Doral says the Puerto Rican government owes it that money as a refund for overpaid taxes. And if it doesn't get paid, that's a big problem, because the IOUs accounted for 42 percent of the bank's regulatory capital as of Dec. 31.

In its news release today, Doral called upon Puerto Rico's government and Department of Treasury, known as Hacienda, "to honor its obligations, as it repeatedly committed to do in communications with the financial community since January of 2013." Doral said it received a letter yesterday from Hacienda that said Doral has no right to a refund of its overpaid taxes.

Even if Doral has been wronged, it may be too late. Puerto Rico's government is in financial straits itself and might not be good for the money.

The stock market already has pretty much written off Doral. The company's latest balance sheet showed $8.5 billion of assets and $735 million of shareholder equity. However, the company's stock-market value is only about $18 million, down from about $1.8 billion as recently as 2007. Shares of Doral, Puerto Rico's third-biggest bank by assets, fell 18 percent today to $2.70.

It has been about four years since the FDIC shut down a bank as large as Doral. The last time was in April 2010 when the agency seized another Puerto Rican bank, Westernbank, which had about $12 billion of assets. If Doral goes, it will be yet another reminder about the first rule of banking: Get the money.

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