Regulatory Flexibility

Rooting around, searching for something totally unrelated, I recently unearthed a recent Office of Thrift Supervision Approval of Rebuttal of Control granted to Legg Mason Inc. and certain related entities in January.

The rebuttal was filed in connection with the proposed acquisition by Legg Mason and various of its subsidiaries to acquire more than ten percent of Countrywide Financial Corporation's voting stock. Obviously, Legg Mason doesn't want the group of related companies or any of its members to be classified as a savings and loan holding company, for a number of very sound reasons. Legg Mason had been granted approval by the OTS in 2003 to acquire more than ten percent but less than twenty-five percent of the stock of Countrywide's voting stock, but was required by the OTS to obtain prior OTS approval for any "subgroup" to acquire more than ten percent of any class of voting stock of a savings association in the future. The Legg Mason companies now proposing to acquire the additional voting stock of Countrywide are such a "subgroup."

In support of the subgroup's Rebuttal of Control, it filed a Rebuttal of Control Agreement. The form of those agreements is set forth in 12 CFR 574.100. To rebut a presumption of control, the acquirors are supposed to submit an agreement that "materially complies" with the form set forth in 12 CFR 574.100, although the OTS has the authority to "otherwise agree in writing." The Legg Mason "subgroup" requested a number of changes from the standard form, and the OTS agreed to them.

A number of the changes were made to conform to the OTS' 2003 ruling, and others made to ensure that the acquirors did not control Countrywide. However, the  OTS also  approved some additional changes to engage in certain advisory services with Countrywide and its affiliates, something that the standard agreement prohibits. In fact, the standard agreement prohibits the acquirors from engaging in any intercompany transactions with the thrift or holding company. The OTS doesn't believe that in this case, the ban on intercompany transactions is warranted because the nature of the services to be provided by the subgroup to Countrywide, and by Countrywide to the subgroup, would not "enable the Acquirors  to influence or control " Countrywide or its affiliates. Those services are (1) banking and financial services to be provided by Countrywide and (2) investment advisory services to be provided by the Legg Mason "subgroup."  The services are to be provided on market rates and terms.

The OTS merely states that with respect to Countrywide providing banking and financial services services to Legg Mason, the OTS "does not believe" that such services would permit Legg Mason to control or influence Countrywide. That's the end of the discussion. The advisory services to be provided by the Legg Mason entities to Countrywide merits a paragraph, the crux of which is that since there's plenty of market competition for such advisory services, the danger of influence or control is not present.

The OTS may or may not be correct in the conclusions it reached. Unfortunately, without more discussion of its analysis, it's impossible to challenge its reasoning. In other words, the OTS just breezed through the issues and reached a conclusion favorable to Legg Mason's subgroup being able to acquire more voting stock of Countrywide.

Not that a bank regulator would have done whatever it took to let Legg Mason pump badly needed capital into troubled Countrywide. The fact that Legg Mason upped its stake in Countrywide to 15% a couple of weeks after the OTS gave its approval and that Countrywide desperately needed the "scratch" was likely coincidental. Not that the OTS might have looked the other way when, in September 2007, the "subgroup" publicly announced that they had increased their voting stock from 8.76% to 10.04%, which should have required a prior approval of the Rebuttal of Control at that time, not four months later. I'm also sure that the OTS' decision being released one week to the day following the announcement by Bank of America that it was acquiring Countrywide is pure serendipity.

A CEO of a federal thrift recounted to me how he once listened to an OTS minion, looking especially arrogant with half-closed eyelids and a barely-concealed Elvis-like sneer, blather about the OTS' "unwritten rule" concerning savings and loan holding company capital requirements (find those "unwritten" rules in the regulations, I dare you), and about how the savings and loan executive should have known about these "unwritten rules" that the executive unwittingly "violated." With 30+ years of such experiences under my belt, I tend to take a jaundiced view of these matters. When a regulator wants to serve his agency's self-interest, the "What, Me Worry?" style of analysis can quickly replace the "tortures-of-the-damned-drowning-in-a-river-of-red-tape-and-nitpickers" style in which many financial thrift employees find themselves floundering when they want an interpretation on an issue on which the regulators have no skin in the game.

Perhaps Legg Mason hasn't been directly trying to influence Countrywide. On the other hand, the public statements that Legg Mason fund manager Bill Miller has made criticizing Bank of America's offer price and demanding that Countrywide drop its poisoned pills, might lead a skeptic to think otherwise. It won't make any difference to the OTS. The need to keep Countrywide afloat pending the consummation its acquisition by Bank of America  will keep its views of regulatory compliance "elastic."