Bank Lawyer's Blog

A Chink In The Armor Of Federal Preemption

After getting a chance to actually read the majority and dissenting opinions in Cumo v. Clearing House Association, rather than merely press reports of the same,  I find the opinions themselves only mildly surprising, for reasons that don't have to do with the reasoning employed by Scalia and Thomas in their opposing opinions, but because Thomas confounded his condescending left-leaning critics by refusing to fulfill his assigned role as Nino's "sock puppet." Who knew he had a mind of his own?

To the pinheads who post here, it appears simply that Scalia and the majority refused to accord Chevron deference to the OCC's interpretation of the admitedly ambiguous term "visitorial powers" as including enforcement of state laws against national banks because (1) "Nino Knows Best" what's a reasonable interpretation of "vistorial powers" and (2) extending that definition to enforcement actions is not reasonable. To the contrary, The Sock Puppet thought that inclusion of enforcement actions within the scope of "vistorial powers" was a reasonable interpretation of that ambiguous term in the National Bank Act and that the Court should have deferred to the OCC's interpretation. It was a close call, reasonable (and unreasonable) people can disagree, and among this august body five thought one way and four the other. Game over, unless you "say you want a revolution, well you know, we all want to change the world." National banks will just have to learn to live with it. Until the composition of the Court changes or Nino gets hit by a bus.

The trade press and popular press were full of dire predictions, such as that by Cheyenne Hopkins in the American Banker, warning that the decision "could open the floodgates for lawsuits from state attorneys general..."

"Most attorney generals were waiting until this case was decided," said Arthur Wilmarth, a professor at George Washington Law School. "Given the amount of private litigation we've seen, it certainly wouldn't surprise me to see some state enforcement actions."

Yes, that may be correct. There may be an increased number of enforcement actions by state attorneys general against national banks. However, the rub is that both the majority and dissenters agreed that Eliot Spitzer, Cumo's predecessor who commenced the tussle by issuing correspondence to national banks in lieu of administrative supoenas, had no power to compel national banks to deliver documents or to allow inspection of their records pursuant to anything other than a judicial subpoena, issued by a judge and based upon a finding that there is probable cause to believe that state laws (that have not otherwise been preempted by federal law) have been violated by the national bank. As Scalia put it in the majority opinion:

If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant. An attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive. Judges are trusted to prevent “fishing expeditions” or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing. In New York, civil discovery is far more limited than the full range of “visitorial powers” that may be exercised by a sovereign. Courts may enter protective orders to prevent “unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice,” N. Y. Civ. Prac. Law Ann. §3103(a) (West 2005), and may supervise discovery sua sponte, §3104(a).

An attorney for a state regulatory agency (not in Texas) who prefers anonymity professed a glass-half-empty view of Cuomo's "victory" in an e-mail to me last week.

In a fine example of Scalia's sick, twisted sense of humor, he tells the states you can bring lawsuits against national banks to enforce your nonpre-empted consumer protection laws, but you can't issue subpoenas to get the information you need to file those lawsuits. (Oh, and Rule 11 sanctions apply to state attorneys so don't try filing that lawsuit and getting the information supporting the lawsuit thru discovery. No sovereign immunity from Rule 11.) I can just hear Scalia saying nanner nanner. This case does nothing for the states as far as I can see.  I seriously think he must have meant this decision as a joke directed at all of the states' attorneys sitting down with their cup of joe in the morning to read a new SCOTUS case that is supposedly good for states.  And the punchline is the last paragraph.

Actually, I think the last two paragraphs of Scalia's opinion are a telling "punchline." From those paragraphs:

Here the threatened action was not the bringing of a civil suit, or the obtaining of a judicial search warrant based on probable cause, but rather the Attorney General’s issuance of subpoena on his own authority under New York Executive Law, which permits such subpoenas in connection with his investigation of “repeated fraudulent or illegal acts . . . in the carrying on, conducting or §63(12) (West 2002). That is not the exercise of the power of law enforcement “vested in the courts of justice” which12 U. S. C. §484(a) exempts from the ban on exercise of supervisory power.

Accordingly, the injunction below is affirmed as applied to the threatened issuance of executive subpoenas by the Attorney General for the State of New York, but vacated insofar as it prohibits the Attorney General from bringing judicial enforcement actions.

In a long discussion with a reporter from the National Law Journal prior to oral argument in this case, I told her that Spitzer's letter clearly sought to exercise a visitorial power. Unfortunately for the State of New York, without the exercise of such powers, the states will be hamstrung in determining whether or not violations of state laws of the kind in question in this case (fair lending laws) have occurred. That's why, although it's reasonable to assume that some states will be more active in this area, I'm as skeptical as my state regulator correspondent at this juncture that this will "open the floodgates" of litigation. If it does, expect the push-back by targeted banks to be furious, including nasty battles to impose sanctions on state attorneys general who do attempt to "game" the system in order to go fishing.

This issue will be affected by the proposed federal consumer protection agency, if that monster is ever created by Congress. Bank trade associations appear to be on their heels at this point in opposing it, but if the proposal gains traction (which appears likely), bankers and their lobbyists will wage a long, protracted battle to make the federal agency the exclusive agency over such matters, and to gut the present proposal to make the federal standard a "floor" and to allow the states to impose and enforce higher consumer protection standards. No matter how wounded the banking business appears to be politically at the moment, I don't see it rolling over. Instead, I expect blood on the floor and mounds of cash burned before the commercial banking business lets that type of system come to pass. Expect the banks to be supported by their primary regulators (other than Sheila Bair, of course). Neither the OCC nor the Fed has any interest in losing turf to a new "consumer products" regulator. Neither does the OTS, although they don't, at this point, appear to be a long-term player.

Of course, all of this is premature gas-baggery. If any of the pundits who've been blabbing about the future could actually predict the future, they'd be taxing the limits of their livers' ability to process Mai-Tai's on the verandas of their multi-million dollar homes on Hapuna Beach on the Big Island of Hawaii, instead of billing by the hour or the piece, being quoted in newspapers, or writing blogs. The only thing that can be predicted with certainty is that this will be a most interesting federal legislative session for those of us nerds who follow this stuff.

It Takes A Village...Of Idiots

Most bankers and bank regulators appear to be on hiatus until next week. The double whammy of Friday "flex day" and the day before a Saturday holiday has apparently driven the "bank biz" to seek a pool, an umbrella, and a cool beverage. Come to think of it, that sounds like a great idea.

Instead of a "serious" (always a relative term on this blog) post, I'll leave you with some recent snark from a "Snark Meister," Libertarian, co-host of ABC television magazine program 20/20, and blogger John Stossel. He quotes Alan Abelson who, in turn, paraphrases the late Texas writer and liberal pundit Molly Ivins: “ …She could always tell when the Texas legislature was in session because every village in the state reported its idiot missing.”

Damn, you have to love a woman like that, no matter what your political bent.

Stossel claims that legislatures exist primarily to steal the public's money to fund liberal projects. Sorry, John, but they exist to steal the public's money to fund any project that will keep them in power, and often to fund their own lifestyle and the lifestyles of their family members. While it's true as a general statement that liberals favor big government and conservatives small government, members of both parties appear to be equally adept at pilfering from the public's pocket. If there's one thing I've seen in the decades I've been voting, it's that nobody I've voted for has actually managed, over any length of time, to spend less of the public's money that his or her predecessor.

Whether Republicans or Democrats, they're all village iditots, and we're even bigger village idiots for letting them continue to get away with it by playing us off against one another. So it has been, so it will always be.

That said, I'd rather live with the village idiots we've got here than, say, those idiots running Iran, North Korea, or...shudder...France.

Have a Happy 4th.

Boneheads Bash Bogus Tweeters

A report in today's Wall Street Journal about consumer advocates organizing a hash-tag "tea party" to assault what the advocates thought was a Goldman Sachs Twitter account, but that turned out to be a fake Tweeter Bird, wasn't quite as amusing as the "Goldman Sex" fiasco, but it was close.

ACORN, a grassroots housing advocacy organization, and MomsRising, an online community of mothers, told their members and the Twitter public at large to tweet “petition @GS_NEWS Prevent home foreclosures with the MHA program now! http://act.ly/5l retweet to sign #Homewrecker.” Their goal is to get Goldman, and three other institutions, to sign on with President Obama’s new Making Home Affordable (MHA) Program.

Except  @GS_NEWS is not Goldman. GS_NEWS’ Twitter page is decorated with a Goldman Sachs logo and tweets about Goldman Sachs news. But, Goldman doesn’t have a presence on Twitter at all, says Andrea Rachman, a spokesperson for the bank. The owner of the @GS_NEWS account could not be reached via Twitter for comment.

According to the story, Acorn and the risen Moms are in a tizzy because Goldman Sachs-owned loan servicer Litton hasn't signed on to "The One's" Making Homes Affordable Program, in which borrowers who had no business taking out loans on their original terms get more generous loan terms so that they can remain in homes they can't afford for awhile longer, hopefully at least until after the next round of Congressional elections. "The One's" mantra is that popularly attributed to another ruler anointed by God, Louis XV: "Après moi, le déluge." As Luke Mullins pointed out today, recently released figures by federal bank regulators show that a majority of modified loans go back into default. Then again, those figures don't include modifications performed in accordance with "The Change We Have Been Waiting For"'s more generous terms, so perhaps the red(ink) sea will part and all those underwater borrowers will scramble to safety onshore before the waves of reality come crashing down upon them again.

Apparently unimpressed with the off-target misfiring of the consumer advocacy twits, Goldman Sachs has decided to continue to hang tough with its own loan modification policies.

“Litton loan modification activities are consistent with the Home Affordable Modification Program,” Ms. Rachman says. “And we very much hope to formalize our participation in the program, but we need clarification from Treasury on whether it will affect our ability to hire the people we need to run our business effectively.”

Goldman's lack of faith in our "A Deal Is Not A Deal" federal government is well warranted. And as long as faux Goldman social media sites continue to make fools out of its opponents, Goldman ought to be able to weather the PR wars in fine shape.

Blindsided

I returned to the office today, haven't had time to read the SCOTUS opinions in Cuomo v. Clearing House Association, and won't get a chance to read them until this weekend. Therefore, I'll save my bloviating about it until next week. By that time, I should have some decent commentary written by others to pilfer and/or mock. One preliminary reaction, though: I didn't see this one coming, any more than I saw Ginsburg and the other court liberals joining forces with The Court Jester, then letting him write the majority opinion. I guess I should have taken the questions asked during oral argument by Roberts and Ginsburg at face value, since they indicated that those two weren't playing devil's advocates after all. Instead, they were telegraphing their ultimate positions. Then again, according to today's American Banker, both sides were caught flat-footed by the Supreme Court's siding with Andy Cuomo. As far as the practice of trying to predict human behavior is concerned, it's always useful for a bellowing bovine to realize that he's just as much of a dull-normal cud-chewer as the rest of the herd.

By the by: I heard that Andy was still so excited by this unexpected decision that he spit up a little while being burped by Eliot Spitzer this morning after his bottle.

On a completely unrelated topic, TJX continues to pay various aggrieved entities and natural persons over the massive data security breach we've been following for the last several years. Last week, it was reported that TJX Cos. will pay $9.75 million to settlle actions brought by 41 state Attorneys General over the breach.

[I]t will pay $2.5 million to create a data security fund for states as well as a settlement amount of $5.5 million and $1.75 million to cover expenses related to the states' investigations. But TJX stressed that it "firmly believes" that it did not violate any consumer protection or data security laws.

[...]

TJX must also certify that its computer system meets detailed data security requirements specified by the states and must encourage the development of new technologies to address weaknesses in the U.S. payment card system.

In April 2008, TJX Cos. offered to set aside $24 million to reimburse customers who through their MasterCard credit cards were defrauded because of a data breach last year. A similar agreement was made with Visa-card issuing banks the prior November for up to $40.9 million to help banks cover costs including replacing customers payment cards and covering fraudulent charges.

In January, TJX Cos. offered a 15 percent discount to its customers during a "Customer Appreciation" day to reward customers' loyalty as the company dealt with the breach.

TJX also denied that it had anything to do with the death of Michael Jackson, the downing of another Airbus, or that recent nasty outbreak of E. Coli bacteria in ground beef, although that doesn't mean it won't eventually be forced to pay something to settle claims related to those events made at some point in the future.

Data security breaches: gifts that keep on giving.

On The Road Again

My misanthropic nature periodically takes a whipping, usually at the instigation of my spousal unit. The next week is one of those times, when we must hit the road and visit family members. Inasmuch as my wife's family never heard of "family planning" (not even "natural" family planning) and bred like rabbits, this will entail a thousand miles of hard road, survivable only by the consumption of many (and I mean "many") Shiner Bocks (thank God Catholics drink!). Therefore, this blog will be on vacation  until the middle of next week, at least.

On the other hand, while I'll have laptop, cell, and other tools of modern mobile communication with me, much travel will be over portions of the country so barren that roadkill improves the scenery and reception is "spotty." Thus, I expect the trip, for the most part, to be relatively stress free (an attitude aided by beverage consumption). In fact, I may come back as refreshed and enthused as Terry Tate, Office Linebacker. I certainly hope so.

ILCs: Plenty Of Fight In The Dog

It's not the size of the dog in the fight, it's the size of the fight in the dog.
---Mark Twain

While the OTS has been getting much of the attention of the trade press for being singled out by "The One" and his minions for liquidation, the industrial loan corporation charter and similar forms of "non-bank banks" are also on the administration's chopping block. The Democrats in the House have been pushing for the end of the ILC for the last few years, especially during the eighteen month period that ended in early 2008 when the FDIC put a moratorium on insurance applications for new ILC charters and for non-financial firms acquiring existing ILCs. "Rampaging Robert" Bennett, the Republican Senator from Utah who sits on the Senate Banking Committee, effectively killed attempts to pass such legislation in the Senate (although it passed in the House in 2007). He shows no signs of relenting.

During testimony last week before the Senate Banking Committee (paid subscription required), Treasury's "Tim Terrific" Geithner was pummeled by Bennett over the issue.

"There is not a single ILC that contributed to the crisis, not a single ILC that went down," Bennett said. "Destruction of an industry is not a modest change. … You are taking an area that worked and going to abolish it. You are engaged in overkill, in my view."

He left unspoken a threat to take Geithner snipe hunting with Dick Cheney if the Obama administration pursues the ILC charter's immolation. Since Utah is home to most of the remaining 45 to 50 remaining industrial banks, thrift and loans, industrial loan companies, and similar "loophole" financial institutions, Bennett definitely has "skin in the game." Plus, he's got a track record of winning when nit comes to protecting his home state's turf.

Also with skin in the game is Senate Majority Leader "Dirty Harry" Reid of Nevada, which is home to some of those institutions, as well, and which is a state whose economy doesn't need to lose anymore economic firepower of any sort. As he did with previous fights over this issue, Harry's not wild about face time and has left the public fighting to Bennett. As I speculated before, however, I don't think Senator Reid will stay out of the game if the Democrats push the issue.

It should be noted that while the Obama proposal is not to outlaw the charter itself (as it has proposed to do with federal savings banks and savings associations). Instead, the administration wants to require ILCs to be defined as "banks" under the Bank Holding Company Act, which would eliminate the ability of "non-financial" holding companies like Target, Harley-Davidson, Pitney Bowes, BMW and others to continue to own them and to also carry on their "commercial" activities. They would also have to meet the FRB's capital levels and would be examined and more closely regulated just like other "bank holding companies." As noted by David Enrich and Robin Sidel in a recent Wall Street Journal piece (paid subscription required), the practical effect of this change would be to cause the holding companies to close the ILCs down.That, in turn, may very well have the effect of choking off credit to businesses and consumers at a time when the economy needs these financing sources.

Though relatively small players in the financial system, ILCs provide a wide variety of products and services to businesses and consumers. The offerings range from financing purchases of Harley motorcycles to loans that cover corporate medical payments to insurers. Eliminating or sharply curtailing those operations could make it harder or costlier for customers to get credit.

While most ILCs and their holding companies are publicly taking a wait-and-see attitude, and Utah bankers profess optimism, the proposal has got to be severely annoying to the industry. A well-placed source told me that a couple of months ago, a delegation of executives of Utah ILCs and other interested parties from Utah made a trek back to D.C. to visit with FDIC Chairman Bair as to when the FDIC might, in actuality, remove the moratorium on ILC acquisitions and new charters in light of the fact that the moratorium had expired over a year ago and yet the FDIC had not approved any pending applications since that time. "Chair Bair" told them that these were tough times for new charters but that if some holding company came up with big bucks to help take a load off the FDIC's back in the form of a rescue of an FDIC-insured ILC that needed the assistance, that might play favorably with the FDIC. No mention was made of the idea that the federal government was getting ready to unload a world of hurt on the business model itself, so that the whole discussion was likely moot. That may mean that Ms. Bair (reportedly not a favorite of Tim Geithner's) was out of the loop on this issue, or it may mean that she was simply not forthcoming. Regardless, they could have saved themselves the trip had they known what was coming down the pike.

 It's very early in this game, but if I were forced to bet now on the eventual winner, I wouldn't back the anti-ILC crowd. ILCs and their supporters have large investments to protect, businesses that make good sense for them and their customers, and, perhaps most important, plenty of fight in them if the going gets nasty.

Ice Skating Through Hell

I'm lounging around the Colorado Diablo Bar & Grill on the Eighth Level of Hell last Friday, knocking back my second boilermaker of the afternoon with my old pal, The Prince of Darkness himself. He tells me that I've got five or six years left, at a minimum, before he accelerates the maturity date on my contract with him and calls due my soul for all eternity. I nod and tell him that might work for me (although I'm constantly looking for loopholes), and he gives me that sly grin of his and says "Just screwing with your head, Hoss. You've got five or six weeks, max." Then he erupts with that "BWAAAAAHAAAAAAAHAAAAAAHAAAAA" cackle that just irks the living heck out of me every time I hear it, which is one too many times in my sordid life, let me tell you. Soon, he's doubled over with belly laughter and just about choking himself to death, all red in the face and spitting flames out his nose. I mean, this guy could piss off the pope. Which I believe he does regularly, come to think of it.

Anyway, Old Scratch suddenly turns off the laughter as if a switch had been thrown, sits bolt upright in his chair like he'd just been touched by an (unfallen) angel, and whips his head around like Linda Blair in "The Exorcist" before Father Karras threw himself out the window. Simultaneously, an arctic blast of wind comes barreling through the saloon, knocking us both over. In no more than a blink of an eye, the place is covered with ice--all four walls and windows are a sheet of the stuff a good foot thick. To top it off, the iceberg that sunk The Titanic crashes through the front door and comes to rest between me and all of the Jack Daniel's Black in back of the bar, which REALLY frosts me.

"What the hell just happened, Nick?" I ask as The Deceiver picks himself up and starts slipping and sliding around, trying not fall and break his tail. You can tell this guy doesn't know his way around a frozen pond. Me, I grew up in upstate New York, smack in the middle of the snow belt. I could slide on ice before I could walk, which was a good thing, seeing as how many times my parents frequently threw me in snowdrifts late at night until I reached the age of five.

He turns to me and with a look on his face composed of equal parts rage and incredulity, explains: "That quarter-wit Spitzer just wrote something you agree with. Even I never saw that one coming."

As I glided past him to head home, grab a computer, cruise the Internet, and Google "Spitzer+Hell+Freezing+Over," I heard The Beast screaming for his demons, some gal named Nancy, and some guy named Barney to grab the "Space Heaters of Gehenna" and start melting "this Satan-forsaken ice."

Bair-ly Everywhere

No sooner had Treasury Secretary Tim ("Pinocchio") Geithner issued the Obama administration's regulatory reform white paper last week, then FDIC Chairman Sheila Bair was praising it out one side of her mouth and  bashing it out of the other side. Simultaneously, her critics were hard at it, baiting the Bair.

The FDIC press release on the proposal is a not-so-subtle reminder to President Obama that the FDIC ought to be front and center in the management of "too big to fail" systemic risk. Reading only that statement, you might believe that Ms. Bair had decided to become a team player. In an interview aired on Friday on CNCB, "Chair Bair" ("just call me 'Chairman'") revealed that she intends to "study the white paper," which she labeled a "good opening process" by Obama, and then "work with the administration and Congress constructively on this.”

She then tipped her hand as to who she thinks should be running the show on "too big to fail, and it's not the Fed. She said the FDIC has played a substantial role in stabilizing the financial system and would like a seat at the table in any oversight council that's created.

“[The FDIC] is guaranteeing over $6 trillion right now,” she said. “The FDIC has tremendous exposure to the system so we would like a real say on systemic risk issues. [Reform overhaul] is an institutional issue, not a turf issue or a personality issue.”

Additionally, Bair suggested creating a separate fund going forth for existing firms that are already “too big,” as a way to create economic disincentives for companies that put others at risk.

“We suggest that for very large financial organizations including bank holding companies, Congress should consider creating a fund—just as we do with a deposit insurance fund–that could be set up [for firms] that have risk-based assessments," she said. "So if an institution is extremely large, interconnected or imposes a risk to the system—they would pay a higher assessment.”

In the interview, she made it clear that she wants the FDIC to have a "seat at the table" and "a real say" on rule making and enforcement of "too big to fail" policy. She also makes it clear (after being served up soft balls by Camden Fine, of all people) that the Oversight Council has to have "real teeth," not merely serve an advisory role. In other words, she doesn't think the Fed is where the power should lie.

She specifically denies that any of the disputes between the Fed and the FDIC (and, obviously, between the FDIC and the administration's point man on these issues, Tiny Tim Geithner) involve a "turf war" between the various regulatory agencies. Sure, I believe that. I also believe that The Great Pumpkin exists.

On the good news front, she supports the dual banking system (state and federal). That support will last as long as the FDIC remains the primary federal regulator for state-chartered, non-Fed member banks. Consolidating all supervisors in one federal banking regulator is not a model preferred by Ms. Bair, who favors a larger, not smaller, role for the FDIC, based entirely on what's in the best interests of the country as a whole, of course, and not (Lord forbid!) a matter of bureaucratic turf wrestling.

Review the interview and decide for yourself for yourself the sincerity of her positions. She's good on camera, you have to hand it to her. In comparison, she makes Timmy look like Elmer Fudd after ingesting a bit too much caffeine.

I don't think that she's any worse than any of the other federal regulatory arm-wrestlers, other than that her fetish for consumer advocacy is often hard to stomach. Given her role as "Chair Bair" of the FDIC, she should make the best interests of insured institutions her primary concern. "What's good for the consumer is always what's best for insured institutions" sounds nice as a populist slogan, but it often rubs up against the facts, as it has in the "system-wide loan modification" train she's been driving the past two years. As Ocwen has demonstrated convincingly, looking at each loan individually makes more sense for lenders than across-the-board, one-size-fits-all, approaches. Also, her double-dealing between Citigroup and Wells Fargo over Wachovia and her pathetic political butt-kissing in the industrial bank charter moratorium affair didn't win her any points with me, even if many commercial banks were happy to see Wal-mart and Home Depot shut out of starting or acquiring a non-bank bank. Moreover, as an attorney for community and regional banks, I can't help but notice how the FDIC under her watch has been especially tough behind the scenes on the little guys while it caters to the giants. Well, those giants who don't curse her for her two-faced ways. Those giants earn her undying wrath and calls that they be replaced immediately, even if she's the only federal regulator who thinks so.

Wait a minute...I DO think she's worse than any of the other regulatory arm-wrestlers. That said, I hope that the FDIC does not become "the biggest loser" (as the New York Post speculated in the story linked in the first paragraph of this post). As I've stated previously, the rank-and-file of that agency, including many of the old salts who've been called out of retirement to deal with this crisis, and also including many of the independent contractors the agency has engaged to help manage failed institutions and their assets, "know their stuff." It would be bad news for the country if that expertise is wasted because political appointees are engaged in a game of throwing elbows at an "elevated" level.

"Dead Man Walking!"

The weeping and wailing has already begun for the Office of Thrift Supervision. Fingered for liquidation (along with the federal thrift charter) by the Obama administration's "reform" plan that was announced yesterday, Reuters called it "The Saddest, Unloved Bank Regulator." Bank trade associations, on the other hand, rushed to its defense.

The bankers say eliminating OTS would wipe out a culture that understands the needs of small thrifts, which are obliged to channel most of their lending to housing-related activities.

"The vast majority of OTS-regulated thrifts have done a great job supporting housing," said Chris Cole, senior regulatory counsel at the ICBA. "We think the merger could have some impact on housing lending."

Needless to say, anything that helps to make more money available for mortgages at a time when home prices in many markets are in free fall is likely to have some appeal in Congress. Bankers have taken note.

"If we want to make housing a national priority, we need to keep issues like this in mind," said American Bankers Association spokesman Wayne Abernathy.

There are also questions about whether the OCC is the right agency to take over supervising small thrifts, given its current brief of overseeing larger national banks.

"Losing the OTS would be a mistake," said Jim Wheeler, a financial institutions partner at law firm Bryan Cave in Atlanta. "What Bank of America has in common with the S&L on the corner is nothing. They don't even speak the same language."

Apparently, Mr. Wheeler's PR representative found a full-fledged "biter" at Fortune when he threw that pithy line in the ocean of e-mail spam. Good for him.

Today's The Washington Post ran an article that indicated that OTS employees are taking the bad news in stride.

"These people have been through this before," the employee said. "Not only that. They've lived through the calls for the elimination of OTS" for "pretty much all 20 years of OTS's existence."

It's always preferable for the doomed to take their execution with good humor, refusing the blindfold, accepting the last cigarette, and sparing us any last words other than, perhaps, a heart-felt bit of classical Latin: "Morde Me."

While it has its defenders, the opponents of the OTS finally seem to have it cornered. The agency hasn't helped itself with its dismal list of large thrift failures, the backdating of capital contributions scandal, and its director's confession at a congressional hearing that AIG was its responsibility to oversee. I think that the best current federal thrifts might expect is that they can successfully wage a fight to save the federal thrift charter, which Obama also wants drive a stake through. While Barney Frank was quoted in the aforementioned WAPO story as calling for the abolition of the OTS, he's also on record over the past few days as rejecting the call to abolish the federal thrift charter. Today's American Banker (paid subscription required) quoted Frank as saying the charter will stay put, even if it has a new overseer.

Frank shut the door on scrapping the thrift charter, a move that he said did not make sense.

"We support putting the OTS and the OCC together into one agency, and you want to make sure the thrift charter isn't used to play games with, but I think it would be a mistake to abolish the thrift charter," Frank said.

Frank didn't elucidate the reasons that such abolition would be a mistake. I'll guess that they have something to do with housing, political action committees, and a boy named Sue.

Former OTS employees may find themselves stuck in a basement room next to the boiler in the offices of the new national bank regulator. I assume that they'll keep their retirement vesting dates.

The end of the road has not yet arrived and as acting OTS Director correctly advised his staff, the earliest the end could come would be later this year or early the next. At this point, however, it looks almost certain that, after twenty years of hanging on by a thread, the OTS' string is about to play out.

P.S. This is Bank Lawyer Blog's 1,000th post, which is further evidence that, indeed, "stuff" can be stacked this high.

Ignorance Is Not Bliss

Paul Jackson, editor-in-chief of Housingwire.com and HousingWire Magazine, expressed his frustration yesterday with federal policy makers' apparent lack of comprehension of how the country's mortgage financing markets work. To me, their ignorance is par for the course. I long ago lost my sense of incredulity at the abysmal lack of understanding of many policy makers in Washington, D.C., which is why I'm the bitter, cynical crank who spews acid all over the pages of this blog today. Paul, being somewhat younger than I (a classification that applies to the vast majority of the world's population), is still able to be amazed at the fact that when it comes to D.C, what you need to know is how to acquire and retain political power, and any other knowledge gained is purely by osmosis and mostly superfluous (at least it is as far as the policy makers are concerned).

What especially irks Paul is the notion that issuers of mortgage-backed securities didn't have enough "skin in the game," and that, according to this line of thought, policy makers are proposing to require issuers to retain at least 5% of the risk on any asset-backed security and to forbid the issuer from hedging any portion of that risk. Paul alleges that this approach is 189 degrees "bass ackwards."

The first thing that should be coming to any market participant’s head when they hear about this so-called ’skin-in-the-game’ rule is this: isn’t skin in the game what has literally crippled once-proud institutions like Citigroup Inc. (C: 3.122 -3.94%)? Isn’t skin in the game what put Lehman and Bear Stearns into history books as former Wall Street firms, too?

[...]

[T]he problems at Citibank and elsewhere aren’t because the banks had too little skin in the game. It’s because they had too much.

Paul's also exasperated by the allegation that asset securitization itself is to blame for the mortgage market meltdown. He's worried that many folks who should know better are getting ready to "throw the baby out with the bath water."

Remarks such as this, from a June 15 Washington Post op-ed penned by Timothy Geithner and Lawrence Summers, should scare anyone involved in the securitization industry:

In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The fact that this dreck is coming from the head of Treasury (and from Lawrence Summers, too) scares the living snot out of me, because it demonstrates a fundamental misunderstanding of securitization. A lack of some much-needed oversight into structured finance by federal officials is now being used as an excuse by those same officials to toss cold water on the entire concept?

While Paul concedes the necessity to have a "healthy debate" about asset securitization and related issues, it's extremely difficult to have a debate of any kind, much less a "meaningful" debate, when one side's the equivalent of William F. Buckley, Jr. and the other the equivalent of a potted plant. When it comes to knowledge and intelligence, the debaters ought to at least have the intelligence level of a dull-normal member of the same genus, and preferably the same species.

I'm not optimistic, but, then again, I seldom am.