As The Wall Street Journal’s weekend edition reported (paid subscription required), political influence might buy a bad bank time, but it can’t cure what ails it.

Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance.

[...]

…AmTrust benefited from the advocacy of politicians, including Rep. Steven LaTourette (R., Ohio), who pleaded with Treasury and White House officials not to kill a second Cleveland bank. Cleveland’s Democratic mayor, Frank Jackson — a critic of National City’s forced sale — also sought to protect AmTrust.

At the same time, regulators were hoping that federal rescue programs being rolled out would stem the number of seized banks.

The OTS and FDIC eventually agreed to plans by AmTrust to aggressively shrink its balance sheet, sell branches, and thicken its capital cushions, according to people familiar with the matter.

The “shrinkage” plan didn’t work. On the other hand, unnamed sources “close to AmTrust” told a tale that sounds like it’s straight out of Texas circa 1985.

People close to AmTrust blame federal regulators for some of the troubles. In recent months, OTS examiners demanded that AmTrust write down the value of loans far more aggressively than bank officials thought necessary, these people say.

The OTS also required AmTrust to beef up its reserves to levels that executives regarded as excessive, these people said.

The requirements triggered more losses. Deteriorating finances prompted regulators’ complaints about AmTrust’s health to amplify from “a gradual drumbeat … to a crescendo,” said a person close to the company.

AmTrust officials say they were perplexed, especially after regulators earlier blessed the company’s turnaround plans. “There’s no way loans could have been worth X nine months ago and are worth a tiny fraction of that today,” said the person close to the company.

Once the regulators decide that a bank is doomed, the “mark-to-depressed-market” scythe starts swinging, the death spiral starts, and you can’t pull back on the joystick. You’re headed straight into the ground. Those of us who’ve been through this recently (and many more times in the past) know that as a bank lawyer in such a situation, you’re nothing more than an oncologist whose patient is going to die and there’s nothing you can do other than comfort it on the way out.

The OTS didn’t cause AmTrust to fail. Bad loans and the worst recession since the 1930s caused the failure. Monday morning quarterbacks can argue until the end of time whether the OTS hastened the failure or delayed the failure (or, ironically, both), what the right call in this case should have been, and when it should have been made. One thing is certain, and it’s a point that Paul Jackson at Housing Wire has been making since this bank failure blitz first started: the current crop of failures are costing the FDIC more losses-per-failed-bank than the last time we went through this process. This one will cost the FDIC an estimated $2 billion.

AmTrust’s deterioration over the past year likely resulted in the bank
selling for a lower price than it would have fetched if the thrift had
been seized earlier, said people familiar with the government-led
auction.

Given that result, one more thing is certain: the next politician that shows up at the doorstep of a federal bank regulator requesting that the regulator give a bank more time to work out of its troubled condition will likely be given the AmTrust example and politely shown the door.