Banking Crisis No End

For a chart showing how bad the trouble is for banks click here.
A major bank in Houston has failed. Houston's Franklin Bank closed, the 18th failure this year
"Houston, Texas-based Franklin Bank S.S.B. was closed by regulators Friday, the 18th bank failure this year amid the ongoing credit crisis. The Federal Deposit Insurance Corporation said in a statement that Franklin Bank 0.26, -0.13, -33.3%) had total assets of $5.1 billion as of
Sep. 30, and $3.7 billion in total deposits. El Campo, Texas-based Prosperity Bank will assume Franklin Bank's deposits, and Franklin's 46 offices will reopen as Prosperity branches, the FDIC said." (MarketWatch)

According to Bank Investment Daily it is expected that 500 banks nationwide will fail in 2009 and 2010. The implications are significant with law firms, because we are responsible for our clients money and cannot charge for the risk involved. (See the prior article on this blog about how IOLTA accounts compound this risk and how to avoid it.) Although the limit on FDIC insurance has been raised to $250,000, there is still substantial risk for sums over that amount. Since IOLTA accounts were created in the late 80's there has not been this sort of banking failures. Some lawyers will continue to deposit large amounts of cash in their IOLTA account until someone they know is burned. Why take that risk when it can be avoided?

Case Costs Financing

CASE COSTS FINANCING

The IRS requires attorneys who handle contingent fee cases of hold the expenses advanced to their clients as accounts receivable (assets). This results in the attorney being in the banking business for something that the attorneys considers the cost of doing business, filing fees, deposition costs, investigation expenses, models, etc. To make matters worse attorneys cannot charge a client interest on these costs advanced because this would be profiting from the attorney client relationship. Being the clever folks that they are the finance industry has moved in to solve the problem. It is called “case costs financing”. These plans involve the client borrowing the costs of maintaining a legal action from a financial institution and paying the financial institution the interest charges. Since the clients seldom are credit worthy, the attorney guarantees the loan, but makes no profit from it. The interest rates are usually in the area of credit card rates. A bank in the Dallas area, Access lst Capital Bank has started making this service available at about 4 points over prime. (I must confess that I am a stockholder in this bank and my son is one of the principals in the bank.) A phone call to them will save your clients interest expense. The client gets a precise statement of the costs advanced on the case. The attorney frees up his cash and may be able to handle a case he would have difficulty financing. His accounting to the IRS is simplified.