Bank Lawyer's Blog

Callousness Looms Large

The ICBA's CEO, Cam Fine, isn't happy about the most recent Bank Fail Friday Bloodbath. He calls it a sad day for main street. He also discloses a portion of an email he received from someone with inside knowledge of the way the FDIC takeover team treated the employees of the Bank of Eastern Shore, the only one of the five "too-small-to-save" community banks for which the FDIC did not find a buyer. Cam thinks that the email "speaks volumes about the kind of unequal justice under law and lack of respect that ICBA speaks out against when comparing the treatment of Main Street institutions and their management and staffs with Wall Street, too-big-to-fail institutions and their managements and staffs." I'll let readers draw their own conclusions on that point.

I wish I could share Cam's sense of outrage. After 37 years of witnessing the truth of P.J. O'Rourke's maxim that "giving money and power to government is like giving whiskey and car keys to teenage boys," I'd be shocked if bureaucrats didn't act like what many (but not all) of them are: the folks the jocks in high school stuffed in their lockers and the cool crowd wouldn't talk to, finally getting their payback by using the power of a governmental position to treat others the way they'd been treated during their Wonder Years. Frankly, the only sane inmates seem to be those that escape the asylum. Many of those who become "careerists" support the astuteness of one of Dennis Prager's observations:

The larger the state, the more callous it becomes... the colder its heart. It is also true that the bigger the corporation, the more callous its heart. But unlike the state, corporations have competition and have no police powers.

On the other hand, Prager's assertion regarding corporations always being subject to competition is becoming uncomfortably questionable with respect to the big banks that the Occupy movements love to vilify. In today's Housing Wire, Christopher Whalen criticizes the Obama administration's proposed Homeowner Bill of Rights, and in the course of his critique, has some sobering words about what has become of "competition" among banks, at least with respect to the residential mortgage lending business.

The mortgage industry is comprised of a cartel of the four largest banks, which happen to be the largest loan servicers, as well as the owners of most second liens. Federal bank regulations reinforce the cartel structure of the secondary market for loans by allowing large banks to treat servicer and tax balances as core deposits.

This expanded balance sheet enables the large banks to hold equally big portfolios of mortgage servicing rights and also gives the top four banks — JPMorganChase, Bank America, Wells Fargo and Citigroup — a competitive advantage in dealing with the various federal housing agencies in the creation of mortgage-backed securities.

Thus, when a small bank wants to sell a loan into a securitization with a wrap from Fannie Mae or Freddie Mac, it typically sells the loan for as much as half the origination spread or more to one of the large banks.

The big bank then structures the RMBS that issues bonds to investors and retains the mortgage servicing rights. The large banks control the entire process, yet the Homeowner Bill of Rights does nothing to change this situation. Now you know why large banks seem to be more profitable than smaller banks.

Big government is callous, but so is big business. I think we've plenty to fear from both. Concentrating most of the mortgage business in the mitts of the Gang of Four cannot be a good thing for consumers over the long haul. Beyond the mortgage lending arena, in the banking business generally, the trend seems to be toward concentration in fewer, larger entities. To lovers of big government and big business, that's all fine and dandy, I suppose. To the rest of us, however, that trend is troubling.

Loaning To The Little Guys: A Dastardly Turn Of Events

Five years ago, when The Care Bair womanned the helm at the FDIC and was prodding banks to make payday-like loans to poor consumers, but to cap those loans at a 36 percent APR, most banks who experimented with the products were scratching their heads, trying to figure out how to make money on small loans made at those rates when the borrowers posed such a high default risk. These days, when banks of all sizes are strapped for income-yielding products and are dipping appendages bigger than than their pinky fingers into the icy waters of small loans, left-leaning propaganda rags main stream newspapers like The New York Times are aghast at how "big banks" are "preying" on "the little people."

An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers like Mr. Wegner with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees.

Predictably, consumer advocates, including the chart-topping consumer band "Recess Richie and The Jackboots," are threatening to inspect these products with a bias-detecting electron microscope of political correctness to ensure that banks don't actually provide a needed service to lower-income consumers at a price that permits the bank to make a profit.

The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products.

[...]

“We look at alternative financial products offered by both banks and nonbanks through the same lens — what is the risk posed to consumers?” said Richard Cordray, director of the bureau. “Practices that make it hard for consumers to anticipate and avoid costly fees would be cause for concern.”

Buried in the middle of the piece is this disconcerting news for Cordray and his fellow-travelers.

Still, in an April survey of prepaid cards, Consumers Union found that some banks’ prepaid cards come with lower fees than nonbank competitors.

Wait a minute! If banks are jumping into these products and offering them at rates that are lower than those offered by non-bank predatory payday lenders, wouldn't it be logical to expect that this might eventually force the non-bank small-loan lenders to lower their prices in order to compete? Given most banks' funding advantage over most of their non-bank competitors, isn't it likely that if the banks are able to find a pricing model that allows them to expand this business while lowering existing rates and fees, this would ultimately benefit low-income consumers? Therefore, shouldn't consumer advocates, including the "We're Just Here To Help You" crowd from the KGB CFPB, think that banks entering this business is a potentially good thing for consumers? Shouldn't they encourage, rather than discourage, this trend?

Personally, I think bankers are thinking about getting into this line of business need to have thick hides, because it's a business in which the more successful you are in offering the right type of products and services to your targeted customer base, the greater your chance of being determined to be a discriminatory thug, fit only for being stretched on the rack, then drawn anhd quartered.

Mr. Wegner, the U.S. Bank customer, said that once he mentioned that he needed a bank account, an employee started selling him prepaid cards, check cashing and short-term loan options. Mr. Wegner, who makes about $1,200 a month, said that he felt like a second-tier customer.

“It was clear that I was not getting the same pitches that wealthy clients would,” he said. Since that initial visit, Mr. Wegner said he avoided the branch so he was not approached with offers. “I go through the drive-through now,” he said.

Next year, Mr. Wegner will be complaining that the bank never offers him any credit options at any price. He'll moan about having become invisible.

Mr. Wegner, wealthy clients have high incomes and substantial assets to pledge as collateral and, therefore, pose much less repayment risk to the bank. Of course they're not going to be offered products and services they won't purchase, just as you won't be offered products and services for which you do not qualify under prudent underwriting standards, the kind mandated by safety and soundness standards that are imposed upon banks by law. This is called "living in the real world."

It's obvious that there's an element of the chattering classes that desires that banks be run as public utilities that parcel out credit as mandated by politicians and bureaucrats at rates and fees deemed "fair" by government committee. Until that system's in place, banks will be damned if they do and damned if they don't.

There Is No Due Process?

Last night's post on United Western Bank generated a lot of traffic. Apparently, people are attracted by a David-versus-Goliath scenario. However, there's more to it than that.

In response to an earlier post on the attempt to give bankers a right to an "effective" appeal of examination decisions, one of the principal owners of a financial institution that failed during this latest crisis sent me an email that seems appropriate to post at this time. Obviously, this is only this individual's point of view, and the other "players" in the drama would likely disagree. However, his viewpoint is so well expressed, that I've decided to present it. I've changed some information to protect this individual from identification and retaliation (not that a federal regulatory agency would even THINK of EVER doing such a thing, of course). Other community bank owners, directors, and senior officers can share his pain.

It is my understanding that the processes you describe as set out in the Financial Institutions Examination Fairness & Reform Act have been  available to banks (at least [Bank Regulator] banks) for some time.  However, the ombudsman was more like a retired diplomat (for Monaco not Russia), rather than an informed, empowered decision maker.   And the administrative law judge is difficult to access (& triggers a severe adversarial breach in the relationship with the regulator), & the point at which it can be considered is too late in the process.

All of this discussion about oversight & review of due process presumes that the regulators basically know what they are doing, & exercise their regulatory authority in an appropriate manner.  The Office of Inspector General’s material loss review of the [Bank Regulator]’s handling of [The Bank] looked at the process the regulators went through & reviewed their narratives & calculations, but they never evaluated the validity of their loan evaluations nor whether the assumptions underpinning the subsequent reserve calculations could be substantiated.

So what recourse is there in the event the regulators don’t know what they are doing, or that they exercise malfeasance in their examination process?  At [The Bank] we had a complicated operation with large mortgage banking cash flow swings, complex servicing valuation issues, & large commercial real estate credits.  The field regulators were much more accustomed & qualified to review simple consumer credits.   Perhaps there were people up the chain of command at [The Bank Regulator] that could have weighed in in a more informed way, but they were embroiled in a political life & death struggle for their own survival & couldn’t be bothered to waste their time overseeing the destruction of a community bank.

[The Bank] was well capitalized [(Actual Precentage Omitted)] prior to the [Bank Regultor's] final examination in [Date Omitted].  They forced us to make a massive unsubstantiated addition to the bank’s loan loss reserve that immediately put us into a severely undercapitalized position.  And as you know we were extinguished within [A Short Period Of Time].  Now [A Number Of] years later we can look back & start to assess whether we, or the [Bank Regulator], was “right” in calculating the appropriate reserves.  If the books could ever be opened up & revealed in the bright light of day, the world would see that the [Bank Regulator]’s calculations were in fact totally wrong.  [The Bank]’s original reserve calculations very closely mirrored how the bank’s loans have actually performed (or not performed & subsequently liquidated).  Certainly, in these unprecedented market conditions, we didn’t dispute the need for added capital.  The question is, was it best for the FDIC, the depositors & the bank’s customers for the bank to be shuttered, or for it to work through its problems.  An informed & empowered ombudsman might have looked at the bank’s overall loan quality (delinquency rates: commercial RE0; consumer loans < 1%, etc.); profitability of the bank (earnings before reserves were about $[Substantial Dollar Amount] in [The Year Before The Bank Failed]; & history of operating in our market niche ([Many, Many] years), & decide that there should be an impartial, 3^rd party validation of the field examiner’s loan loss calculations before they pronounce the death sentence.

Instead, the government stole our life’s work, & destroyed an important community bank for the state [Where The Bank Was Located].  [The Acquirer From The FDIC] was able to swoop in & flip the bank in a [Relatively Short Peroid Of] time & walk away with a gain in excess of $[A Boatload].  This outcome is market validation of the error the regulators made.

But there is no due process, & this case will never see the light of day.  However, I don’t think this circumstance is unique to [The Bank].  If you look at the profile of the banks that have been put into receivership by the regulators in this cycle there appears, to me, to be a clear bias against private, closely held community banks.  Do the regulatory bureaucrats, with their mid-tier government pay scales secretly begrudge the entrepreneurs that run many community banks?  It bears closer examination, because the results of their bias will clandestinely define the future of the financial services industry & how communities & consumers are served.

As I said, that's one person's point of view. Each reader can decide for himself or herself where they stand on the primary causes of the community bank failures that have occurred thus far in the current cycle. Nevertheless, the foregoing illustrates why so many community bankers are following the United Western Bank litigation with much more than tepid interest.

United Western Makes Its Case

Last Friday, United Western Bank filed a motion for summary judgment against the OCC (as successor to the OTS), asking the federal district court to order the OCC to give the bank back to its rightful owners: the company that owned it immediately before the OTS placed it into an FDIC receivership in January of last year. We've been following this case since it was filed, and the latest motion contains a clear statement of the plaintiff's arguments as to why it believes that the decision of the OTS to seize of the thrift was "arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law."

Robert Barba, writing in yesterday's American Banker (paid subscription required), does a nice job of summarizing those arguments in much less than the fifty-seven pages that comprise the motion, although the full motion is worth the time it takes to read it. Among those allegations is that over six months prior to seizing the bank, the OTS had made up its mind to seize the bank and, therefore, all subsequent action and inaction by the OTS was designed to further this foregone conclusion.

"Though the bank did not know it at the time, the OTS had already determined as of June 2010 to seize the bank," the filing said. "Documents initially withheld by defendants but later obtained in court-ordered discovery revealed the true picture: by June, the OTS had begun writing the memorandum to justify the seizure and was already in discussions with the FDIC over how to handle an 'orderly resolution'."

The OTS, OCC, and FDIC fought tooth-and-nail to prevent the bank from gaining access to a raft of interagency documentation. The judge was insistent that they produce it and they eventually did (not wanting to be found in contempt). Although much of it is subject to protective orders, so that the rest of us can't see first-hand how the regulators made their decision to seize the bank, enough of the details are evident from the narrative contained in the motion to understand why the OTS never wanted its internal discussions and its discussions with other regulators to see the light of day. There are a number of "WTF?" moments contained in the narrative, and they might be laughable if they didn't involve the destruction of a business that had been built over the previous eighteen years, using a business model that was approved repeatedly by the OTS until the economy collapsed in the second half of 2008. Then, the entire business model suddenly sucked.

I'd encourage those interested (frankly, that should be any community banker, even those who think they've currently got the world by the tail) to read the motion from stem to stern. It's a disconcerting tale of how a business can be turned upside down overnight, not just by assets that go sour, but by a 180 degree turn in attitude by the bank's primary regulator. As I tell entrepreneurs who think they want to give the banking business a shot, there's no Chapter 11 for a bank. You don't get a "do-over" once things start going south. Moreover, once regulators at a high enough level "go negative" on you, they not only won't assist you to survive, they can occasionally actively impede your ability to survive. In this case, the plaintiff is alleging just that.

A few allegations stand out to me. One is that the bank's owner and senior management tried to address every concern raised by the regulators, often under ridiculously short time frames. That seems to be true. Also, the fact that the allegedly "unstable" deposit base hung in there through tough times bolsters the arguments of the plaintiff that the bank's business model (as far as liquidity was concerned) was a battle-tested one. Finally, the fact that the bank had proceeded so far down the path to raise capital (and appeared to be doing it successfully) in order to meet an individual capital requirement imposed by the OTS that was higher than that required of most other institutions, notwithstanding actions by the OTS that appear to have hindered that effort, bolsters the plaintiff's allegations that the OTS had "pre-determined" to seize the bank no matter what the bank did, and then threw roadblocks in the bank's way.

As Barba points out, the OCC has until May 18th to file a response, and there will be additional chances to reply by each side in June. All we've heard thus far is the plaintiff's story and until we get a chance to read the OCC's story, we won't know how much traction the plaintiff's spin might have with the court. Obviously, I represent people on the other side of the fence from the OCC (and the late OTS), and my bias is for the plaintiff. On the other hand, it ain't over until the federal judge sings (and I would never use the term "fat lady" to describe Judge Amy Berman Jackson). Therefore, we'll have to withhold final personal judgment until we see the repsonse.

As I said when I first discussed this case, "the terms 'arbitrary and capricious' and 'without any basis in law' are terms of art. They constitute the high bar over which United Western and the other plaintiffs must vault in order to triumph over the bureaucrats." I still think that's the case. However, based on the well-written motion, if there ever was a case where that burden had a chance of being met, this one is it. If the OCC's counterattack leaves the facts largely as they stand and, instead, focuses on the high bar the law sets for any plaintiff to hurdle, my personal, off-the-cuff belief is that the plaintiff has a real shot at winning (and a rare win it would be). Somehow, I don't think an argument that would consist of "Yeah, we were a pack of circus clowns, but you have to defer to us anyway" is going to be a winner.

Everyone understands that even if Judge Jackson grants the plaintiff's motion, the OCC will appeal that decision, and will never rest until its last right of appeal is exhausted. That's why battling the federal bank regualtors in court takes substantial patience, fortitude, and cash. The plaintiff appears to have all three.

Oh, yes, it also takes top-flight legal counsel. The plaintiff appears to have that base covered, as well.

American Bar Association to CFPB: That's Not "Legally Sound"

In a recent article in The American Banker (paid subscription required), Kate Davidson discussed the opposition that's been building to the CFPB's proposed rule that we discussed last month. In line with the arguments made by Reed Smith's Travis Nelson that we highlighted in the previous post, the ABA thinks that the CFPB is engaged in a stretch beyond the breaking point.

"The ABA has serious concerns regarding the assertions in the proposed rule's commentary that the bureau can require or compel supervised entities to submit privileged information in connection with the bureau's supervisory and regulatory processes," the group wrote. "In addition, the ABA is concerned that, because the proposed rule is based in part on this unfounded assertion of the bureau's authority to compel production of privileged materials, the proposed rule may not protect the privileged status of that information, thereby placing supervised entities at risk of losing the privilege with respect to materials furnished to the bureau."

To refresh the reader's memory, the CFPB is proposing a rule that would ostensibly protect the privileged nature of communications that are turned over to the CFPB by regulated entities on the basis that such entities are "compelled by law" to turn over attorney-client-privileged material whenever the CFPB asks for it, just like, the CFPB claims, is the case with other federal banking agencies.

The bar association, however, said that claim is "not legally sound" and would erode fundamental attorney-client privilege protections.

"Although the ABA understands that banks often produce privileged materials to federal banking agencies when requested to do so during examinations, the ABA is not aware of any reported federal appellate court case holding that federal banking regulators — or any other federal agencies — can require production of privileged materials, nor do the federal banking statutes contain such authority," the group wrote. "Furthermore, the application of this alleged agency authority to compel production of privileged information with regard to non-banks is wholly unprecedented."

The ABA "dismissed" cases cited by the CFPB because none of them address the right of the agency involved in the case (and, by analogy, the CFPB) to "compel" the production of attorney-client-privileged material. All sides to the argument agree that it would be helpful to have Congress extend to the CFPB the express protection of privileged material that an entity voluntarily produces, and the House did just that late last month. However, banks and CFPB-regulated non-banks aren't crazy about the CFPB's attempt to enact a regulatory fix that is based upon an assumption that the CFPB can step all over attorney-client privilege whenever it gets the whim.

Davidson also points out that the Clearing House, American Bankers Association, Consumer Bankers Association and the American Financial Services Association submitted a joint letter last week that supported the continued protection of privileged material and expressed concern with the CFPB's approach. In other words, the financial institutions industry stands united in its opposition to the CFPB on this particular issue, and they're aligned with the lawyers on this one. I don't think the opposition is going to back down an inch on this issue, so stay tuned for more fireworks if the CFPB continues to press its case.

Ripping Down The Signs

Yesterday, a Republican from Missouri and a Democrat from Georgia reached across the aisle and instead of stabbing each other in the face, jointly introduced a bill in the US House of Representatives that would eliminate the requirement that banks post a notice of ATM fees on the outside of the ATM (instead, the electronic notice on the pop-up screen would be sufficient). There's been talk for some time that class action lawyers have been traveling the country ripping off the signs and then suing the banks because they're absent. If enacted, this law would shut down that robo-rip-off scheme.

The NAFCU's Steve Van Beek thinks the bill's a good thing, but only "a first step."

While the bill being introduced is a good first step, the unnecessarily confusing regulatory requirements remain in place.  In other words, the legal and compliance risks for credit unions do not change until this bill is passed (if it is passed). 

[...]

Think about the unnecessary burden this way:  The current legal and regulatory environment has financial institutions and ATM operators taking time away from serving their customers/members to go out and photograph their ATMs in order to provide defenses against class action lawsuits. 

Steve thinks the CFPB, if it's really interested in removing unnecessary regulatory burdens, ought to not only jawbone Congress in support of this bill, but "should take a good, hard look at their regulatory authority under the Electronic Funds Transfer Act and determine if they can remove this ridiculous requirement and get institutions back to providing services to their members rather than taking photos of their ATMs."

Dude, if that happens, I'll buy you a Hot Toddy to ward of the chill as we both do figure eights over an ice-covered Hell.

Ultimately, the overriding problem is that playing Whack-a-Mole with class action attorneys can wear you out. As soon as you put a bullet in the brain of one racket, they concoct another "claim" in order to feed their gaping maws. It's the American overlawyered way.

Barney Disses Barack, Gives Self Props

As he sees the light at the end of the tunnel (whose tunnel, he's not saying), Barney Frank is growing...well...frank in his opinions about the crowning legislative achievements of the last few years. With respect to Obamacare, he's not kind. He thinks The One made a mistake in pushing that piece of sausage through the grinder, not because the content of the law was unwise in any objective sense, but because the political reality of this selfish society ensured that it would be wildly unpopular.

“The problem with health care is this: Health care is enormously important to people. When you tell them that you’re going to extend health care to people who don’t now have it, they don’t see how you can do that without hurting them. So I think he underestimated, as did Clinton, the sensitivity of people to what they see as an effort to make them share the health care with poor people.”

Yeah, that's it, Barn. Those of us who already have health care don't want to share it with poor people. That's why a majority of Americans don't like Obamacare. Stop sipping that Kool-Aid, Hoss, and start gulping it. You're wasting time with a slow-motion slide into derangement. It's time to go all-in!

As to the pork link that bears his name, however, Barney is positively orgasmic.

Rep. Barney Frank (D-Mass.) is happy with the financial reform law bearing his name, and contends that critics of the measure are either ideologues or uninformed.

[...]

"The conservative critics are just right-wingers who don't want any regulation. And if you listen to the liberals, much of the criticism is uninformed," he said in the wide-ranging interview. "I believe among the people who know what we've done there's great support."

Barney, if people really knew all the things you've done, there wouldn't be enough tar and feathers in North America to allow them all to pitch in on your farewell reception. What we do know is bad enough. Therefore, I think you've got it bass ackwards: In your case, ignorance is bliss.

I'm going to miss Barney come 2013. Then again, we'll still have Maxine Waters to provide blog fodder.

Bank of America "Sues Itself." Yawn...

A reader emailed to ask why I wasn't all over last week's HuffPo "expose" about Bank of America "suing itself" in a foreclosure action. Since I've teed off on BofA on occasion for foreclosure missteps, my correspondent wondered why I wasn't picking this low-hanging "snark fruit." The reason is simple: it's a non-story.

Bank of America, as the servicer of a first loan owned by a third party, commenced a foreclosure action on a first mortgage loan. The bank, in its individual capacity, had a second lien loan on the same property. Since the foreclosing servicer must name all junior lien holders in the foreclosure proceeding if it wants to extinguish the junior liens, it named the bank. The bank is agent for the owner of the first lien loan and is also the owner, in its individual capacity, of the second lien loan. It has to name itself. This is "Foreclosure 101."

The allegations of Professor Alan White are absurd. It strikes the professor that this set of facts is "classic robo foreclosure." He further mocks the attorneys and paralegals who worked for the bank of this matter.

"It is a little bit mindless on the part of the lawyer," White said. "They don't need to sue themselves."

The only thing relatively "mindless" is a law professor who touts himself as a predatory lending expert and who either doesn't understand basic foreclosure law or, if he understands it, mischaracterizes what "must" be involved.

A commenter identified as "InkMiser" sums up the problem with the article quite well.

The bank is perfectly correct in naming itself in the case because of its second mortgage interest. Professor White obviously knows nothing about foreclosures, land titles, and the ABSOLUTE statutorily mandated need to name as defendants all persons with an interest in the property. Although there may be robo-signing involved in the case, it has nothing to do with the requirement for BOA to sue itself. What the article misses is WHY BOA had a second mortgage. It had a second mortgage because (and although I'm guessing, it is an educated guess) the when the property was purchased, the buyer did not put down sufficient money to avoid paying private mortgage insurance. The first mortgage is for (usually) 80% of the purchase price and the second mortgage is for the balance of the price. The other thing this story missed is the nuance in paragraph 5. BOA is filing suit, but it admits it doesn't own the loan. It is only servicing the loan for its "investor." There are many things very wrong with the mortgage industry in America. A bank naming itself as a defendant in a foreclosure case in which it has an interest in the property is not one of them.

Other knowledgeable commenters make similar points, and also discuss various reasons why the bank as junior lender may be "hanging in there" as opposed to merely releasing the junior lien. One of those potential reasons may have to do with the adverse tax effect on the borrower of debt forgiveness. Admitting that there may be a method to the madness doesn't fit the ideological agenda of either HuffPo or Professor White, who blogs at Credit Slips. That blog is known as the former hangout of Liz Warren and a purveyor of fevered screeds that bash banks with arguments that don't pass the smell test. Obviously, he's the kind of "go to" talking head HuffPo loves.

So, dear correspondent, I've now offered a post about the story. How do you like it so far?

Cybercrooks Are Like Sharks: They Never Stop Feeding (Or Phishing)

Brian Krebs' latest horror story blog post about a new kind of corporate account takeover by cybercrooks contains many lessons for commercial bank customers. It also shows how the tactics of thieves are constantly evolving to take advantage of weaknesses of their victims and to close holes in their criminal schemes. While the initial "hook" of the story is the shift of criminals away from the use of "money mules" to the use of prepaid cards to funnel pilfered funds into their pockets, the details of the crime demonstrate a dishearteningly high level of technological sophistication, resourcefulness, intelligence, and effort by the thieves. These folks are, obviously, not Larry, Moe, and Curly.

Prepaid cards are more attractive to thieves than "money mules" because, as Krebs notes, many of these "mules" are so inept that they screw up the illegal transfers. Some even beat the thieves at their own game and keep the money for themselves. As Krebs wryly observes, "there are probably good reasons that a lot of these folks are unemployed."

Prepaid cards are a convenient alternative to mules because the crooks "have access to massive amounts of stolen data that can be used to fraudulently open up prepaid cards in the names of people whose identities and computers have already been hijacked. Once those cards are approved, the crooks can simply transfer funds to them from cyberheist victims, and extract the cash at ATMs. Alternatively, wire transfer locations like Western Union even allow senders to use their debit cards to execute a “debit spend,” thereby sending money overseas directly from the card." That's what happened in the case Krebs discusses.

That case involved a wholesale gasoline dealer, Alta East. "According to the firm’s comptroller Debbie Weeden, the thieves initiated 30 separate fraudulent transfers totaling more than $121,000. Half of those transfers went to prepaid cards issued by Metabank, a large prepaid card provider."

To make a long story somewhat shorter, here's the scheme:

• Crooks compromised the email account of an Alta East customer.
• They sent an email to a number of Alta East employees that asked about an Alta East invoice and attached a pdf file that was infected with a ZeusS Trojan-related Javascript element.
• Four Alta East employees clicked on the infected file, which downloaded the element, which in turn was used to gain access to information used to access Alta East's corporate bank accounts with Provident Bank. The element was so stealthy that it was not discovered by six different anti-virus products, but only by an outside consultant who eventually found it through an analysis of a hard drive conducted in an external environment.
• The thieves disguised their communications with the bank by using a proxy network of a nearby nonprofit business, whose system they'd also compromised, rather than Alta East's system.
• The thieves instructed the bank to transfer part of the funds to 15 prepaid cards and the rest to money mules scattered throughout the country.
• In accordance with its agreements with its customer, the bank notified Alta East by email the same day the transfers were ordered, but Alta East employees neglected to review the message until the next morning, by which time the transfers had been made.
• Alta East may recover $41,000 from the mules, but it stands to lose $80,000 and, apparently, has no way of recovering anything from the prepaid cards.

Krebs offers some valuable lessons, and I'd encourage banks and their customers to read them. One that I tell commercial bank customers constantly is the following: "Unlike consumers, businesses have basically no legal protection from their bank due to losses from cyber fraud. Yes, organizations should push their banks to do more on security. But for better or worse, small to mid-sized businesses who are counting on their banks to prevent this type of fraud are setting themselves up for disappointment and major financial losses."

Before banks take comfort from this advice, they should recall that one of the requirements of the new FFIEC Guidelines is to educate their customers about online banking security. Education programs were supposed to be in effect by the end of 2011. Krebs lessons for customers ought to be read by banks and incorporated into their educational materials or programs. After all, it's only a question of time before some enterprising plaintiff's attorney makes the failure to educate effectively the cause for a lawsuit against a bank the next time a customer suffers a loss in a scheme like this one.

Blow 'Em Up!

Wall Street analyst Dick Bove pushed back hard against "break-up-the-big-banks" advocates like Dallas Fed President Richard Fisher and FDIC vice chairman Thomas Hoenig, and his views, in turn, generated some heat from detractors.

In his latest broadside against efforts to split up the nation's largest financial institutions, Bove said the dollar is at risk of losing its standing as the world's reserve currency. That would mean foreign creditors could demand that the nation pay its more than $15 trillion of outstanding public debt immediately.

Conversely, growing the banking system and unleashing big institutions "to use the tools they have developed" will protect American financial interests globally.

"In doing so, the biggest American banks will aid the growth of the American economy and protect American prosperity," said Bove, the vice president of equity research at Rochdale Securities. "The problem is the United States does not want this. It is shrinking its big banks.

"It is using every political technique it can muster to reduce their profits and profitability. It is on a vendetta to curtail banking activity."

Bove also contends that big banks are necessary to ensure the "global currency supremacy" of the U.S. dollar. That supremacy, Bove asserts, is necessary to avoid "riots in the streets."

"The biggest benefits that the United States gains from having the global reserve currency is that this nation has never really had to concern itself with its budget or trade deficits," Bove said. "Unlike other countries that overspend and then must develop systems to pay back what they borrowed, the United States has never had to worry about this problem. It simply prints money and uses the printed money to pay its bills. No other nation in the world is allowed to do this."

But if the U.S. banks continue to fall behind their global competitors the dollar's standing as the global currency could suffer, hampering the ability to print more dollars to fund debt. Bove envisions riots on par with those in Greece if the U.S. is forced into austerity measures because it cannot keep printing money to pay its debts.

In other words, in order to avoid the inevitable results of our profligate deficit spending binge from occurring until all of us presently alive are dead, and future generations are then hosed, the big banks must become large enough to absorb not only smaller banks but even the Sun's rays, and become black holes of need and greed that chew up everything of value and in turn spit out US dollars into the world like manna from heaven. I get it. That sounds like a plan for a society whose motto might be a line spoken by Abraham Lincoln's character in the movie Bill and Ted's Excellent Adventure: "Be excellent to each other, and party on dudes!"

Commenters to the linked article, written by Jeff Cox and posted on CNBC's "NetNet With John Carney's" web site, took issue with Mr. Bove. A sampling:

---what an a$$ hat

---Isn't this the same clown who upgraded Lehman, days before their bankrupcy, screaming, "BUY BUY BUY!!!!" ??
What an assclown.

---break them up, blow them up, and @#$% them up

Ah, calm and reasoned discourse carries the day again, I see.

Regardless of what you think of Bove's position, I like the fact that he's raising the issue. With so much of our recent banking policy, including the bailout programs and Dodd-Frank, having been quickly implemented and, in the case of Dodd-Frank, shoved down the throats of its opponents, taking the time to think through radical change BEFORE it's implemented might be worth a try, notwithstanding the fact that such a modus operandi flies in the face of the Pelosian Theorem ("You have to pass the bill before you can know what's in it!"). Contrary voices raising an intelligent argument ought to at least make us stop and carefully think through the consequences of radical change before we make it. That would be a refreshing change of pace, wouldn't it?

And as fond as I am of the term "a$$hat," I don't think it advances that agenda.