My post of last Monday caused some people to sit up and growl, including current and former OTS employees. Not only the OTS wrote me, but also a number of others, including a member of the Wertheim family, and a few tin foil hat wearers convinced the entire affair was further evidence of socialist creep. A PR employee of the OTS even sent me links to "facts from public documents," for which I thanked him, even though those of us at Bank Lawyer's Blog prefer to wallow in the soothing, tepid waters of our prejudices and regard one man's facts as another man's damned lies.
Although I haven't spent a great deal of time following up on this, having to actually make a living from something other than blogging, here are some conclusions I've reached since my previous post:
- The former owners of the failed thrift, the Wertheims, seem like very decent people. They've done a lot of good for New Mexico, and it's sad to see their bank steamrolled by this crisis in real estate values, which is only getting worse, notwithstanding Panglossian blatherings by some snake oil salesmen in D.C. Also, "shoulda', woulda', coulda'" regarding real estate lending is a game for second-guessers who've never actually run a bank. Unfortunately, the Wertheims and the other directors and senior officers of the bank better be prepared for that game, because that's one the FDIC loves to play.
- An allegation made by more than one reader (all of them pro-OTS) was that the real estate assets couldn't have been worth what the Wertheims claimed because no other investors stepped in to buy the thrift before it failed. No acquirer in the current environment is going to buy a thrift the size of Charter Bank in the situation that Charter Bank was in after OTS-directed writedowns, when they know they can get a relatively risk-free deal if they just wait until the FDIC receivership and, if they win the bid, get loss coverage from the FDIC. As Bruce Hornsby sings, "That's Just The Way It Is." Given the the current paradigm (including the fact that open bank assistance for too-small-to-bailout community banks will never happen outside of that wonderfully unsuccessful TARP CPP), private investors who buy from the FDIC don't need to take any practical risk on future losses of commercial real estate assets compared to the risk they face if they acquire the same bank without the loss coverage on commercial real estate, even if they think that the OTS was overly aggressive in writing down the collateral values of those assets.
- The September 2009 Thrift Financial Report to which I was linked by an OTS representative support the OTS in countering Ed Morrissey's contention that at the time the thrift failed, the loan portfolio was substantially performing. Morrissey's article is wrong to imply that. The delinquency rates cited by Ed at the end of his article are not applicable to September 2009, when, as the OTS PR person pointed out to me, "Charter Bank had high levels of loan delinquencies, particularly in construction loans (single family and commercial) and loans for land: 19.48 percent of gross outstanding construction loans were at least 30 days delinquent and 22.88 percent of gross mortgage loans for land were at least 90 days delinquent." That's correct, a year after the OTS required massive write downs of the the value of real estate loans that were, at that time, substantially performing, the thrift was in trouble. How much of that trouble, particularly in the construction loans specifically cited by the OTS, was caused by overly aggressive writedowns and loss reserves with respect to loans whose history did not reflect the need for such levels of reserves and devaluations? For example, since a federal savings bank can't have more than 400% of its capital in nonresidential real estate loans, does it seem possible that a sudden deduction to capital might impair the thrift's ability to loan funds needed to keep particular projects or borrowers alive? Also, since the maximum loan-to-value ratio of residential construction loans is 85% and of nonresidential construction loans is 80%, do you think it might cause a problem with continuing to fund such a loan if the collateral value of that loan is suddenly whacked by a substantial percentage? Although thrifts have implied "salvage powers" to exceed such limits to salvage their investment, bank attorneys have seen cases recently where the regulators have ignored such implied powers and have required banks to stop funding loans or to start liquidating assets where regulatory limits would be exceeded. I'm not saying any of these events occurred at Charter Bank or contributed to the high delinquencies because I don't have personal knowledge, but I am saying that because you take a snap shot on September 30, 2009 and say on that date the financial condition of the thrift is X, that doesn't tell you why the thrift arrived at that point. The contention of former Charter Bank CEO Glenn Wertheim, as set forth in the press accounts quoted in last week's post, is that the relevant date to look at is a year earlier than September 2009, when the OTS made aggressive valuation allowance and collateral devaluation demands on loans that were performing. He claims that the OTS made this situation much worse than it had to be by taking such actions. The "facts" sent by the OTS do not refute that allegation.
- The act of appraising a piece of real estate is as much art as it is science. An appraisal arrives at an individual's "opinion" of fair market value. Reasonably knowledgeable people can disagree on value, which happens all the time. In its order appointing the FDIC as receiver, the OTS claims that even accepting both management's analysis and a third party appraisal report (which the OTS rejected), the thrift was still "undercapitalized." That's like saying that even if we hadn't shot you in the head, you would have still had the flu. "Undercapitalized" means you're severely ill but salvageable. "Critically undercapitalized" means you're dead. Given the stakes, wouldn't a third valuation have been something the OTS could have found acceptable, using a mutually acceptable appraisal group? Why the rush to accept the worst-case appraisal, that of the OTS? Why the rush to close this bank down?
- Some readers objected to Ed Morrissey's blaming all this on CRA. I, too, thought that was Kool Aid drinking on Ed's part, which is why, if people had bothered to read my post, I didn't mention it. As I've said before, in my opinion, CRA was not responsible for the subprime mortgage credit meltdown and wingnuts who keep ranting about it condemn themselves as rebels without a clue. Thus, please stop setting up straw men to knock me down. My bloviations always have sufficient legitimate holes in them without manufacturing false ones. That said, Morrissey has a large readership on the right, and the fact that he's on the case of the OTS at all does nothing but add to the woes of a federal agency that needs not a single additional one.
- The OTS is not alone in its aggressiveness on real estate valuations and loss reserves. To me, it's no more aggressive than the FDIC, OCC or FRB (Barney Frank's letter notwithstanding). Community banks of all charter types are finding this out. Therefore, trying to single out the OTS as a renegade in this respect is a fool's errand. On this issue, charter flipping is not an answer.
- A colleague told me that the fact that I got so much feedback, especially from the OTS, is somehow complimentary of me. I disagree. I'm just some solo practitioner with a background in this area who fires off a rant four or five times a week at most, usually off the top of my head and with a beer in one hand (as evidenced by several typos in the first version of this post). I enrage as many as (or more than) I interest. Instead, I think it shows the defensiveness of the OTS to criticism from any quarter. As I reminded one of my OTS correspondents, the agency would have been better advised to simply ignore a crank like me. After all, I'm not a reporter, I'm one of those pajama-wearing "blogger" nutjobs.