Colonial Bancgroup Nears the End

Another big U.S. banking company is close to collapse. Colonial Bancgroup, already the subject of a federal criminal investigation and mired in regulatory and financial problems, is one step closer to being taken over by the FDIC now that Bank of America is suing it for $1 billion.

The $25 billion-asset company’s seizure would be the fifth-largest bank failure in U.S. history and the biggest since Washington Mutual went under in September. The end come come as soon as next week, since the FDIC typically decides on Wednesdays which banks to close.

Among other charges, Bank of America alleges that Colonial breached a contract in receiving more than $1 billion from Freddie Mac from loans funded with the aid of B of A, which was a collateral agent for Colonial. Bank of America asked a federal court in Florida to block Colonial from disposing of any of those proceeds.

Colonial has been scrambling to stay alive, stalling for time with regulators in its home state of Alabama, divesting assets and exploring a sale of the company. The bank on Wednesday said it will delay filing its second-quarter financial results because of a federal investigation into accounting irregularities in its warehouse lending unit. Meanwhile, a deal to raise $300 million from mortgage lender Taylor, Bean & Whitaker collapsed earlier this month. (Taylor Bean, a large provider of home loans, itself faces bankruptcy after the Federal Housing Administration barred it from making loans over fraud allegations.)

Colonial is out of time and options. The government probe of Colonial and B of A’s suit is certain to frighten away potential buyers or investors. Not that any were likely to be circling. The company, many of whose assets are tied up in economically depressed Florida, in July announced a second-quarter loss of $605.7 million.