Bank Lawyer's Blog

Thanks, But No Thanks

In what might very well turn out to be an extremely smart move, Texas-based Frost bank tells the US Treasury Department that it will pass on the handouts.

The parent company of Frost Bank won’t attempt to get a piece of the $70 billion government bailout of the financial sector.

Cullen/Frost Bankers Inc. (NYSE:CFR), based in San Antonio, was the only top 10 Texas financial institution to survive the 1980s savings and loan crisis. It has weathered the current financial storm comparatively well, said Cullen/Frost Chairman and CEO Dick Evans in a written statement.

“Cullen/Frost is well capitalized now and for the foreseeable future, with sufficient capital to grow our business and take advantage of acquisition opportunities,” he stated.

Why any sane banker would forgo the opportunity to have Barney Frank and Chris Dodd micromanaging and second-guessing how you deploy your government-provided capital is beyond me, but Frost Bank must have its reasons. Perhaps they decided that they'd prefer having a hot poker shoved in their eye sockets. It would likely be a lot less painful process, and you'd die much more quickly and mercifully.

Caveat Emptor

For those who are hot to get in line to buy from the US government bad assets that the government will buy from banks and sell back to private investors, former Arnold & Porter partner Edward Sisson has some advice: get ready to invest in the US government's "breach-of-contract court system."

Mr. Sisson ought to know. He was in the thick of the litigation that resulted from the mass breaches of contracts by the U.S. government following the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). We've discussed those lawsuits many times, most recently here.

Mr. Sisson, in an opinion piece in a recent issue of the American Banker (paid subscription required), describes himself as "the lawyer who coordinated litigation strategy and communications between the 65 law firms that represented more than 120 plaintiffs from across the country who ultimately all were sent to the United States Court of Federal Claims in Washington, D.C." Although the plaintiffs won the basic issue of the government's liability for breach of contract in 1996 in the landmark Winstar decision, and more favorable rulings on common issues a year later, that didn't stop the government. I didn't even slow them down.

And yet, despite victories in 1996 in the Supreme Court and in 1997 in the "Sisson issues," stubborn Department of Justice litigation tactics, combined with a pro-government Court of Appeals for the Federal Circuit, so dragged out the litigations that many plaintiffs gave up, or were finally undone by late rulings in the appellate court. Even today, some of the largest cases are dragging on, 19 years after the government breached the contracts.

A wise and experienced small-city lawyer from Oregon, representing plaintiffs in one of the cases, said after years of frustration that litigating against the United States "is like dancing with a bear. You don't stop dancing until the bear gets tired."

As you contemplate buying bank-related assets from the government, never forget: you are beginning a dance with a bear — a marathon reminiscent of dance marathons in black-and-white newsreels of the 1930s, in which sleep-deprived partners shuffle around the floor, hoping to last long enough to win the prize. After you buy the government assets and do the deal, and after the Congress and the president pass the laws that breach your deal, the government bear will dance with you until you drop. And unless you have crafted a comprehensive agreement that anticipates all the bear's steps, you will win no prize at the end.

Space does not permit listing the bear's litigation dance steps here. Believe me, as one who danced with the bear for 14 years, its steps are numerous, tricky, and full of trips and twists.

Sadly, investing in the U.S. government's breach-of-contract court system (by paying lawyers to pursue claims in that system) is an economically irrational choice for any competently run business that could deploy the same cash in its own productive activities. Taking into account the 10 years or more of delay before buyers receive payment of damages, the interest that does not accrue on the damages during all those years, the amount of the litigation fees (in the millions), and the lost interest and income buyers would have earned on those litigation fees had they invested those sums in their businesses rather than in their litigators, even a large judgment will leave buyers less well off than if they just let the government get away with the breach scot-free.

I can hear the prospective buyers now: "That was then. Now, it's a whole new ball game."

Yeah, the new game is called "Murderball" and you're the last nerd standing on the wrong side of the gym, with the Duke Lacrosse Team on the other side. And they're all drunk, pissed off, and kinda horny.

Don't say you weren't warned.

Red Flags In Place?

Occasionally, I like to point those readers who are in-house counsel or private practitioners and who represent financial institutions to a useful publication that's available on-line from another law firm. Ordinarily, I'd make a snarky, self-deprecating comment at this point; however, my e-mail lately indicates that there are some readers who not only don't "get" the snark, but take it on face value and begin to froth at the mouth with politically correct apoplexy. So, just for today, I'll play it straight. Tasteless, low-brow sarcasm will resume tomorrow.

Today's resource is the Proskauer Rose LLP Privacy Law Blog, which has good material on, of all things, privacy law. Of particular interest to many businesses is a recent post on the suspension of enforcement by the FTC of the of the "Identity Theft Red Flag and Address Discrepancies Rules" until May 1, 2009. Unfortunately, the suspension applies only to those business subject to FTC enforcement of the rules, not to financial institutions governed by the Red Flag rules that are enforced by the federal bank regulatory agencies. As to the latter, you banks better be in compliance by the end of this week!

The reasons for the FTC action are interesting.

The rules apply to financial institutions and creditors.  But, according to the FTC, many companies “indicated that they were not aware that they were engaged in activities that would cause them to fall under the FACT Act’s definition of creditor or financial institution.”Moreover, the FTC said that companies not traditionally subject to the jurisdiction of the FTC did not follow the FTC’s rulemaking, and consequently did not become aware of their obligations under the Red Flag Rules until very recently.  The FTC also expressed concern that covered entities, to meet the fast approaching November 1 deadline, were not taking the appropriate care necessary to do a proper risk assessment and craft a meaningful red flags program.

As the FTC stated, “[g]iven the confusion and uncertainty within major industries under the FTC’s jurisdiction about the applicability of the rule, and the fact that there is no longer sufficient time for members of those industries to develop their programs and meet the November 1 compliance date, the Commission believes that immediate enforcement of the rule on November 1 would be neither equitable for the covered entities nor beneficial for the public.”  Therefore, the FTC will delay enforcement of the new rules for six months.  Considering this generous extension, covered entities should be on notice that they will need to have a written identity theft prevention program in place by the May 1, 2009 deadline.

So, this time around, being a clueless ignoramus turned out to be a good thing, unless you were a financial institution regulated by one of the federal bank regulatory agencies.

Many banks were well on their way to compliance with the Red Flag rules as part of their information security and customer identification programs, long prior to November 1. Red Flag and address discrepancies compliance has been more a matter of documenting the program and having it approved by the board of directors.

Incidentally, the OTS released last Friday revised examination procedures, which were developed jointly with the other agencies, for examinations after November 1, 2008. The revised procedures incorporate procedures to test compliance with the Red Flag rules. The OCC released its revised examination procedures on October 15, 2008, which also addressed affiliate marketing and opt-out notices.

The Wacky World of Bank Law Blogging

Every once in awhile, I have to step back and wonder whether the creative (and often, emotional) release of spending an hour a day pounding out semi-snarky blog posts instead of ogling scantily-clad female hoofers on "Dancing With The Stars" or proving to myself that, once again, I'm not smarter than a fifth grader, is worth the aggravation of putting up with Millennial lawyer newbies who criticize me for a position on a point of law about which they know absolutely nothing (which hubris is, I'm told by parents of Millennial children, a characteristic of the entire generation, not merely those members who've made the bad career choice of lapping up the leavings of soon-to-be-exiting Baby Boom Shysters), or with the tin foil hat wearing nutroots who want me to render advice (pro bono, naturally) about their scheme to solve the subprime mortgage crisis "if only Secretary Paulson would listen to my great idea." At those points, a reader will often e-mail me a link to something that convinces me that the brain damage is worth it, after all.

The takeovers of federal savings banks IndyMac and Washington Mutual generated an unusual amount of vitriolic, borderline unhinged e-mail that vilifies the FDIC, particularly FDIC Chairman Sheila Bair, and proposes conspiracy theories at which even Oliver Stone and Michael Moore would laugh out loud. Because Ms. Bair's pro-consumer agenda is often a target of this blog, some of the conspiracy theorists have approached me to determine whether I'd be interested in rendering advice to groups of potential plaintiffs who propose to sue the FDIC, the insolvent institutions, the U.S. Government, individual agency officers, and, if I recall correctly, Al Gore, Pope Benedict XVI, the Dali Lama, and The-Artist-Formerly-Known-As-And-Now-Once-Again-Known-As-Prince for violations of both the United States Constitution (with particular emphasis on the Second Amendment) and the Kyoto Protocol. Inasmuch as none of these inquiries has thus far been accompanied by a non-refundable retainer of $100,000 or more, I always end up deciding that their arrival in my in-box is exactly what the "delete" button was invented to address.

It was pointed out to me, however, that a post I did when Ms. Bair's appointment to the FDIC post was first announced, two and one-half years ago, has been turned into what every blogger dreams of: a totally twisted, inaccurate Internet meme. In that post, I made the following (what I thought to be obviously) zany comments:

For instance, is Ms. Bair the same Sheila Bair who won the Natural Bodybuilders National Championship in 1990? Can you see a resemblance? No? Well just wait until I get through "photoshopping" it.

If this is the same Ms. Bair, she appears to have dropped a lot of weight in the last 16 years. Can't blame that on steroids, though, since she's "a natural."

Unless you're off your lithium, you should be able to understand that the picture posted and the questions asked are part of a joke. Apparently, some of the recently-released inmates from our nation's finest psychiatric wards are refusing to stay on their meds, because they've taken the photo above to be an actual photograph of the FDIC's Sheila Bair, and they've made fun of her "cut" muscular body. One amusing message board discussion was cut short by a voice of sanity suddenly breaking in with the question as to what the "fact" of her being a bodybuilder has to do with the takeover of Washington Mutual.

So, you muscle fetishists out there: Here me now and believe me later! There exists a Ms. Sheila Bair and she was a bodybuilding champion. There also exists a Ms. Sheila Bair and she is the Chairman of the FDIC. Are they the same person? If Stevie Wonder gazed at both their pictures, he might be confused.

Here is a link to a video of Ms. Bair's fantasy dinner date with Hans and Franz. Which Ms. Bair, you ask? You be the judge.

Just remember to stay on your lithium.

To Every Day, Spin, Spin, Spin

I recently asked a friend of mine, a D.C. "insider" at one of the national law firms who's one of the "go to" guys when the American Banker or another trade rag needs a quick quote for the latest breathless twist on the same old themes, what this person thought of Sheila Bair. She or he (the name, and even the the sex, of this individual will be disguised to protect the guilty) has been in a number of meetings with Ms. Bair, and is an astute evaluator of all things regulatory. He/she was quite complimentary of Sheila, and told me that Ms. Bair is both a smart cookie and an effective inside-the-beltway "playah," who has obviously, and effectively, been trying to stay on the right side of Barney Frank.

"Of course," she/he observed, "as a female, she really doesn't have a side that's attractive to Barney Frank."

That is the kind of comment that rewards my faith that before each day ends, someone, somewhere, will bring a smile to my face.

As part of Ms. Bair's campaign to support Mr. Frank's agenda (and her own consumer advocacy bias), she's been touting for months her "systematic loan modification" approach to easing the credit crisis, and has made a big bet on the FDIC's ability to implement it with IndyMac's owned and serviced loan portfolios. Last week, she testified before Congress about the IndyMac efforts, and alleged that these efforts were paying off.

Bair also noted that 3,500 borrowers have preliminarily accepted the FDIC’s offer for a loan modification, although it’s unclear how many will ultimately end up with a modified loan.

“Through this week, IndyMac Federal has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures,” she said. “While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed.”

Accepting the FDIC’s offer involves signing a modification agreement and mailing in a check for the new payment amount, along with information needed to verify income. It’s unclear how many of the 3,500 that have accepted the offer will ultimately see their loans modified based on verification of their income. Bair did not comment further on the specifics of the modification program in her remarks to the Senate on Thursday.

“Our hope is that the program we announced at IndyMac Federal will serve as a catalyst to promote more loan modifications for troubled borrowers across the country,” she said.

It’s a hope clearly shared by some key lawmakers as well, including Housing Financial Services Committee chairman Barney Frank (D-MA), who recently sent a letter to President Bush suggesting that Bair be appointed to a formal role involving foreclosure mitigation under the Emergency Economic Stabilization Act of 2008.

We had previously heard rumors that Ms. Bair has been angling for Hank Paulson's job in an Obama administration, although other rumors indicate that JPMorgan Chase's Jamie Dimon is the early favorite for that position (if he wants it). Publicly, Ms. Bair has stated that she'd be happy to stay on at the FDIC if Obama wants her to stay there and, you know, doesn't have to use her position to pay off a donor. Otherwise, she'll go back to her first love: ivory tower academia, where real life never interferes with a grand intellectual theory of the way the world IS. ("Paging Mr. Greenspan, Mr. Alan Greenspan: Please pick up a white courtesy telephone.")

Speaking of how reality "bites," uber-blogger Tanta at Calculated Risk took a look at Ms. Bair's efforts with IndyMac and could barely restrain a yawn.

So, in two months, just under 40% of borrowers estimated to be eligible have received written mod offers, and of those, just over 20% have responded. We still don't know how many actual modifications that will be, since income verification is still pending on the accepted offers. Nor do we know how many more borrowers have become "eligible" (i.e., 60 days delinquent) since the August estimate.

Certainly 3,500 modifications successfully completed in two months is better than nothing. Then again, I don't think IndyMac's modification rate prior to the FDIC takeover was exactly "nothing," either. Bair doesn't address that, so we still don't know if the FDIC's "expedited" approach has really been measurably better than what IndyMac was already doing. At best, it's probably only marginally better, which wouldn't be so much of a problem if Bair hadn't spent so much time earlier in the year scoring cheap rhetorical points about uncooperative servicers not doing enough to help. In any event, the Bair Plan doesn't seem likely to bring the mortgage crisis to a screeching halt by year-end.

And do note that Bair herself, in her testimony, does not trot out the fashionable line that the delays are all due to securitization rules and red tape...

That suggests to me it isn't the fact that the loans are securitized that is the major problem. It also suggests that the program is moving out of subprime and well into prime territory in order to find borrowers who can and want to arrive at a 38% mortgage-payment-to-income ratio. I guess that's progress; if you apply the program to borrowers who are, as a class, more likely to be able to afford their mortgages anyway, you do get more successful modifications. But something tells me that's not quite what we all had in mind.

Unlike Ms. Bair, Tanta has been involved in the mortgage banking business for decades, and writes with an authority on the subject matter that Ms. Bair can't muster. Moreover, Tanta's not concerned with staying on Barney Frank's "good side."

It's too early to tell whether the systematic approach to loan modifications is real or hype. Time will tell. We won't get out hopes up.

Ms. Bair was interviewed recently by Charlie Rose on PBS. Here's a link to the segment. She continues to hammer on the theme that the bailout must focus on helping delinquent borrowers stay in their homes through loan modifications, although she admits that the qualification for a modification must be determined on a loan-by-loan basis. How a "loan-by-loan" evaluation differs from what loan servicers other than the FDIC must do is left unexplained. In addition, during the twenty-five minute interview, she fails to present any justification for her advocacy of loan modifications in terms of the safety and soundness of the institutions that her agency regulates and/or insures. I know she has offered those justifications, but she never takes the opportunity to explain them to Charlie Rose's viewers. Instead, she speaks of the FDIC's "calling" and makes its employees appear to be seminarians rather than government bureaucrats. One is left with the impression that she believes that the right to a loan modification is a self-evident truth. Perhaps it's all wrapped up with the right to "life, liberty and the pursuit of happiness." Finally, watch the clip of Nancy Pelosi at the end, who also praises the pants off of Ms. Bair, and also indicates that the Democrats have not given up their desire to give bankruptcy judges the right to write down principal balances of residential mortgage loans and to rewrite their terms. She alleges that what every delinquent borrower needs to stay in their homes is the right to file for bankruptcy. Great news for bankruptcy attorneys; lousy news for the mortgage business.

Maybe some day, we'll all look back nostalgically at the good old days, when the loan-to-value ratio of a residential mortgage loan was "only" 80% and you didn't have to be Donald Trump to afford the points and interest rate. Then again, by the time the national experiment with the nationalization of the banking business is finished, perhaps we'll be telling out grandchildren about the days when lenders other than the federal government made mortgage loans.

Feel My French Fist of Fury, Hacker-Pig!

From Monty Python and the Holy Grail:

King Arthur: Go and tell your master that we have been charged by God with a sacred quest. If he will give us food and shelter for the night, he can join us in our quest for the Holy Grail.
French Soldier: Well, I'll ask him, but I don't think he will be very keen. Uh, he's already got one, you see.
King Arthur: What?
Sir Galahad: He said they've already got one!
King Arthur: Are you sure he's got one?
French Soldier: Oh yes, it's very nice!

If what passes for the present-day French king has "got one" (other than Carla Bruni, that is), he's likely not got it any longer.

The French government was forced to admit that no one was safe from internet fraud yesterday after it emerged that thieves had managed to hack into President Nicolas Sarkozy's personal bank account and siphon off cash.

The unknown hackers removed several small sums of money from the account after obtaining Sarkozy's online access codes. An inquiry was launched after the president noticed the transactions and complained to the police, said a government spokesman.

The French aren't going to take this heinous act lying down, notwithstanding that "supine" is the national position when faced with a determined adversary, at least if World Wars Un and Deux are any indication.

"The swindlers will be punished," Luc Chatel, secretary of state for consumer affairs, told French radio. He said more work needed to be done to tighten internet banking security in France, which, according to the national crime agency, has seen a 9% rise in offences this year.

"[This] proves the system of internet checking [of bank accounts] is not infallible," Chatel said. "These cases are sufficiently rare that we haven't had to really organise ourselves, but [they are] sufficiently serious for us to reflect on how to improve the system."

That's a nice twist on bad news, that Monsieur Chatel spun, isn't it? The French, unlike the Yanks, don't have to worry about this sort of thing very much, since they're pretty much a cheese-eatin', wine-sippin', snail-suckin', congregation of domesticated poodles, while the barbarian Americans are used to this sort of lawlessness. Just one more spatter of mud on the pristine French culture thrown off by the grinding, oversized, tires of the Americanization Globalization Monster Truck. As if the pollution of MacDonalds' Happy Meals weren't enough of an affront, now the Gauls have to deal with this "cybercrime" merde.

They will punish the porcs who perpetrated this, however. Luc promised it, and when Luc promises something, you better believe this: it WILL be delivered. In a little gift box, tastefully wrapped, and accompanied by a baquette, a side of Brie, and a slightly chilled bottle of Francois Pinon Vouvray 2005, but delivered nonetheless.

We'll send over John Edwards to help you feel your pain, Luc. Please, though: no police escort for the former Senator. He's easily distracted by sirens, being possessed of the Pavlovian reflex to the sound of a passing ambulance common to all former P.I. lawyers.

***********************************************************************************************************************

On another matter, an insider who wants to remain anonymous, e-mailed to advise me that the appraisers who are featured in my post of October 19, 2008, and who are suing Countrywide for (allegedly) blacklisting them, were deemed unacceptable by Countrywide because their appraised values came in too high, rather than too low. The story in Housing Wire on which that post was based didn't explain that aspect. Most complaints about lender pressure involve expectations of inflated, not deflated, appraised values. It goes to show that the appraisal biz is a lot like Goldilocks and the Three Bears. Some appraisals, like porridge, are too hot and others too cold. It takes a lot of attempts (and sometimes, apparently, a heavy hand) to find one that's just right.

Look At Me, Ma! I Gotta Brand New Practice Group!

While the world teeters on the precipice of financial ruin, the legal profession-at least in the good old U.S. of A.-revs up its engine of avarice and guns for the finish line that all men of good will and charitable understanding race toward: wealth beyond the dreams of Croesus.

At least two Tampa Bay area law firms created special cadres of lawyers in new practice groups focused on business related to the $700 billion Emergency Economic Stabilization Act.

Commonly referred to as the financial bailout plan, the act and the resulting additional governmental regulation, uncertainty and other issues are expected to generate millions of dollars in legal fees as lawyers target opportunities for clients and themselves.

Nearly 100 lawyers from Holland & Knight's various offices are participating in the firm’s new Financial Recovery Team practice, which includes some Tampa lawyers.

“We’re leveraging our experience and expertise with an interdisciplinary team,” said Steven Nesmith, one of five team coordinators and a lawyer in Holland & Knight’s Washington office.

"Special cadres of lawyers in new practice groups." "Leveraging expertise." Doesn't all that hype send-ala Chris Matthews-a "thrill up your leg"? Or, to the contrary, does it remind you of the same laugh-worthy marketing blather that accompanied the "subprime mortgage practice group" promotions of earlier this year?

In the old days, the rain makers gathered about themselves their minions, who possessed whatever skill sets the Big Dogs thought useful in assisting the client, and, raising their hands heavenward, would shout (as The Prophet Senator Obama might exclaim): "Behold His Mighty Hand!" (Rambo McCain would also love to shout such a phrase, but he can't raise his arms above shoulder height). Anyone who would suggest the need for a catchy new "team name" would be banished to the Austin office, there to toil in the fields of low-to-no bonus with the rest of the fruits and nuts.

A large, old-line Denver, Colorado, law firm, has even thought it wise to promote a "Changing Markets Practice Group."

The changing markets group will “provide an integrated response to each client’s specific issues and needs as they relate to the changing business environment,” the firm said in its statement.

One of the benefits of writing this blog is that I get to hear not only from the seriously disturbed but, occasionally, from the seriously witty. As one old-time law firm management consultant wrote to me about this latest approach to marketing: "Are they saying that until they organized this new practice group, they were not able to 'provide an integrated response to each client's specific issues and needs as they relate to the [always] changing business environment'? What the heck were they doing to service clients through previous changes in the business environment?" Such observations can cast a little ray of sunshine on even the gloomiest day.

I realize that the primary purpose of these announcements is simply to get the name of the firm in the press, so that potential clients say to themselves, "Oh, yeah! Those guys!" Still, you have to wonder if the old saw, "any publicity is good publicity," is always true.

Barely Bair-able Backstabbing

Via the San Antonio Business Journal come excerpts from an affidavit filed in the litigation between Wachovia and Citigroup over the failed attempt by Citi to take Wachovia off the outstretched hands of the FDIC, excerpts that show what we previously speculated: the FDIC was double-dealing Citi behind its back while publicly affirming its deal with Citi.

While waiting for his airline flight to take off on Thursday, Oct. 2, Wachovia Corp. President and CEO Robert K. Steel received an unexpected call from Federal Deposit Insurance Corp. Chairman Sheila Bair indicating that Wells Fargo & Co. was prepared to make a buy-out offer for Wachovia.

Bair encouraged Steel to “give serious consideration to (the) offer,” despite the fact that Wachovia had only days earlier entered into a nonbinding agreement in principle to sell its banking operations to Citigroup for $2.2 billion. That deal also called for the FDIC to use taxpayer money, if required, to limit Citigroup’s exposure to losses on Wachovia’s $312 billion loan portfolio to no more than $42 billion.

Wachovia’s board voted on Sept. 29 to pursue the FDIC-assisted Citigroup offer — shortly after the FDIC’s Bair had informed Steel that Wachovia’s dire financial condition “posed a systemic risk to the banking system.” As part of the pact inked with Citigroup, Wachovia also entered into a binding “exclusivity agreement” that barred Wachovia from negotiating with any other parties while the Citigroup offer was still on the table.

The above facts are laid out in an affidavit sworn by Wachovia President and CEO Steel. That affidavit is part of a federal lawsuit filed earlier this month by Wachovia against Citigroup. The litigation, which is currently pending in U.S. District Court in New York, asks the court to declare the Wells Fargo offer for Wachovia “valid” and to find that it is “not prohibited by the letter agreement” Wachovia had entered into with Citigroup.

[...]

The FDIC is now onboard with the Wells Fargo offer as well, after its chairman, according to Steel’s affidavit, played a role in the unraveling of the Citigroup offer that the agency had initially helped to orchestrate.

In a press release issued on Sept. 29, a few days before Wells Fargo made its official bid for Wachovia, FDIC Chairman Bair stated that the FDIC-assisted Citigroup offer “was necessary to maintain confidence in the banking industry given current financial market conditions.”

A few days later, though, on Oct. 2, according to Steel’s affidavit, Bair had apparently changed her mind about the Citigroup bid and told Wachovia General Counsel Jane Sherburne that the Wells Fargo offer “sounded superior” — in part, it seems, because it put her agency in a more advantageous position.

“When my plane landed in North Carolina later that evening (on Oct. 2), I returned Chairman Bair’s call to further understand (Wells Fargo Chairman) Kovacevich’s proposal,” Wachovia’s Steel states in his affidavit filed in federal court in New York. “She (Bair) described it to me as requiring no government support with no risk to the FDIC fund.”

Read the whole article for more detail on how Ms. Bair played matchmaker for a Wells-Wachovia marriage after playing the same role with Citigroup and Wachovia. It gives you an idea of what you're dealing with when you think you have a deal that involves government assistance. Sometimes, you've actually got a one and sometimes you're used and abused, then thrown away with next morning's trash.

Citigroup sounds an alarm, of course.

“There would be little incentive for potential acquirers to remain at the table if, as Wells Fargo did here, a party could step in and undercut the very deal the FDIC had orchestrated and determined to be in the public interest,” Citigroup’s court pleadings argue.

As fictional Texas Ranger Gus McCrae in the television miniseries "Lonesome Dove" told his old friend and former Ranger Jake Spoon, just before he hung him for cattle rustling and sod-buster killing, "You know how it works Jake, you ride with an outlaw, you die with an outlaw." Citigroup was playing in the big leagues with people with a different sense of the word "honor" than, say, that sense of honor possessed by Mother Teresa, people who would just as soon give you a Chuck Norris style roundhouse kick to the face as they would even look at you. Everybody brings their hired guns to the closing table and tries to pick everyone else's pocket. I believe it's an ancient Chinese proverb that states, "He who swims in the cesspool should not complain when he finds a turd in his trunks." Or was that a Moldavian proverb? But I digress.

No, the public won't weep over the fact that Ctitgroup never saw it coming. It's a giant, impersonal "thing" to most readers, and the only "thing" most people care about is their own much, much smaller "thing." Yet, the bankers who run Citigroup obviously will "take a lesson," as will others who might be tempted to play the same game. The next time around, everyone will be better prepared.

Right...

Bailout Recapitalization Program: Will It Be Boom Or Bust?

 It's funny how your perspective changes, depending on whether you're on the inside looking out or on the outside looking in.

Today, Secretary of the Treasury Henry Paulson claimed that banks from all sides were beating down his door to get some of that good, old recapitalization mojo working for them.

Banks of all sizes are interested in a piece of the federal government's $250 billion fund to recapitalize financial institutions, Treasury Secretary Henry Paulson said Monday.

"We have received indications of interest from a broad group of banks of all sizes," he said at a briefing in Washington.

[...]

Banks must apply for funds by Nov. 14, Paulson said. They must consult with their primary federal regulator before applying.

Better hurry, banks of all sizes! Get the capital while it lasts! Don't be the bank on your street corner not to be the beneficiary of the bailout!

Strangely, we found evidence that not all banks were salivating over the ability to sell preferred stock and warrants to the Feds, even at the "low, low rate" of only 5 per cent per annum.

Banks, however, may not rush to sign up for the infusion, said Sean Ryan, analyst with Sterne Agee. Executives may be concerned about the stigma and about letting the government into their affairs, though the government stake does not have voting power.

That certainly seemed to be the case in a couple of stories in the business press today. From Colorado came word, via the state banking commissioner, among others, that banks there weren't a mile high with glee over the opportunity, although some were taking a "wait and see" attitude.

“I would have to assume that we won’t see as many local banks taking advantage of it, but that’s just speculation,” said Jennifer Saltzman, vice president of the Colorado Bankers Association, several hours after the Oct. 14 announcement. “Colorado banks are in good shape, and it seems to be geared at distressed banks.”

Not so fast, some bankers say.

“Would I do it? I might,” said Jay Davidson, founder and CEO of First American State Bank in Greenwood Village, on Oct. 15. “I’m looking at it right now, honestly. But I don’t want to.”

The problem is, banks that have been active commercial real estate lenders, such as First American, now are under pressure from regulators to increase the amount of capital they hold relative to loans they make.

“I’ve always lent to commercial real estate,” Davidson said. “I haven’t changed the way I lend, but now they’ve changed the rules on me. What they’re basically saying is ‘your bank is fine, you’re doing great, but I don’t think I like 10 percent risk-based capital anymore. I want 12 percent.’ And you know what it takes to raise that kind of money. There’s no trust-preferred market. I can’t get debt to fund my capital right now. This would be the worst time in the world to dilute my shareholders by issuing common stock.”

The obvious step is to stop making new loans, and reduce some of the loans already on his bank’s books.

“But that is totally contrary to what we should be doing, which is lending into this market,” Davidson said.

[...]

“It’s going to take a little while to see what impact this has and how it filters down,” said Colorado Banking Commissioner Richard Fulkerson. “To a large extent it seems like the community banks are going to be pretty well isolated from this.”

Although some large banks have signed up to participate, “trying to extrapolate from that what impact it’s going to have on FirstBank, or Alpine Banks, or some of the larger organizations here in the state, I’m having a difficult time drawing a connection,” Fulkerson said.

Fulkerson's sentiments were echoed on a national level by Edward Yingling, CEO of the American Bankers Association and Cynthia Blankenship of the Independent Community Bankers of America. 

Of the regional and community banks we've personally spoken with about the program, most are in good condition (at the moment, at least) and not in need of additional capital. Some, in anticipation of worsening economic conditions, to prepare for pressure from the regulators along the lines of that outlined by Mr. Davidson above, to take advantage of acquisition opportunities that are likely to present themselves during this period of likely consolidation, or all of the above, have raised additional capital from the public markets (for those who are owned by a publicly-traded holding company) or from private sources (mainly, existing investors, in the case of privately-owned banks). They aren't interested in having the federal government sticking its beak further into their nest. They're aggravated enough as it is with the second-guessing that has been going on since this crisis hit the fan. On the other hand, some, like First American, are "thinking about it."

Many of the institutions most seriously considering this program appear to be those who are under pressure (in some cases, extreme pressure) to raise capital, in order to avoid, or to comply with, formal enforcement action. I anticipate that there will be many of those who will seriously explore with their primary federal regulator and the Treasury whether they currently qualify, or, more likely, what changes must be made in order to qualify. In some cases, that may mean a change in management, or even a change of control. In other cases, the US Treasury-infused capital may have to be accompanied by additional capital from private sources. I can see the promise of the infusion of Treasury capital being used as leverage by the regulators to quickly force through some management or other operational changes that might otherwise take more time and effort.

While Treasury has touted the recapitalization program as one designed for "healthy banks" (like the original "Gang of Nine"), this process may be similar to the operation of a car wash. Some cars come in only slightly soiled and others come in completely filthy. By the time they exit, they're all spic and span.

We live in interesting times, don't we?

Countrywide Condemned For Blacklisting...Again

The hits just keep on comin' for Countrywide, don't they?

A group of appraisers in Idaho filed a class-action lawsuit Thursday against Countrywide Financial Corp. – Now, Bank of America Corp..., after its recent acquisition – claiming the company used “strong-arming tactics to intimidate appraisers to generate reports in line with Countrywide’s business objectives.”

[...]

The suit alleged Countrywide used improper appraisal techniques that benefited the lender and punished those who did not participate by blacklisting individuals and companies; in turn, causing “substantial damage to thousands of appraisers,” in addition to distorting real estate prices.

“The integrity of real estate appraisals is more important than ever and time and time again Countrywide is showing its customers and partners that it only cares about profits and market control,” said Steve Berman, managing partner at Hagens Berman Sobol Shapiro, the firm representing the appraisers.  “The bottom line is our nation’s at a breaking point where we can’t take anymore corporate dishonesty in the home market…”

According to Berman, if appraisers don’t “play ball” with Countrywide by producing a report affirming the appraisal value Countrywide expects, they’re blacklisted.  The suit alleged, as of Aug. 28, 2008, more than 2,000 appraisers appeared on “the list.”

The claim stated that any appraisal submitted to Countrywide from a blacklisted appraiser was automatically sent to LandSafe, who can render an appraisal “unusable” if it doesn’t fall within Countrywide’s guidelines. The claim called LandSafe a “captive puppet” of Countrywide, enabling their unethical business practices.

And according to the complaint, Countrywide has been using the blacklist practice for more than four years.

The complaint states the plaintiff, Capitol West Appraisers, refused to succumb to Countrywide’s alleged pressure — as a result, the company was placed on the list.

The allegations are reminiscent of those made by appraiser Jennifer Wertz settled against Wamu not long ago, which also alleged blacklisting by another major mortgage lender when an outside appraiser (Wertz) refused to "play ball" with the lender's (Wamu's) desire for whatever appraised value supported the loan it wanted to make, "fair market value" be damned. With what happened subsequently to Wamu, I'd say Jennifer settled her lawsuit at a prime time, notwithstanding snide remarks by some appraisers that she "took the money and ran." If she did, "good on her." We also discussed a lawsuit filed last January in Houston by a former employee of a Countrywide unit, who alleged that he'd been fired for blowing the whistle on Countrywide's alleged practice of pressuring outside appraisers to inflate appraised values. None of this was news to outside appraisers.

New York  Attorney General Andrew Cuomo negotiated a Home Valuation Protection Program and Cooperation Agreement with OFHEO, Fannie Mae and Freddie Mac, in accordance with which a Valuation Code of Conduct was to take effect January 1, 2009. According to Appraisal Scoop.com, that adoption date has been pushed off one to three months. The HVCC was supposed to stop these types of abuses. Insiders have their doubts. Others predict it may spell the end of the independent real estate appraiser.

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