Bank Lawyer's Blog

Richard Cordray Says: I Am Who Am

hubris n : overbearing pride or presumption...Hubris (sometimes spelled hybris; also called superciliousness; Greek: ὕβρις) is a term currently used to indicate overweening pride, self-confidence or arrogance, often resulting in fatal retribution. In Ancient Greece, "hubris" referred to actions which, intentionally or not, shamed and humiliated the victim, and frequently the perpetrator as well. It was most evident in the public and private actions of the powerful and rich. The word was also used to describe those who considered themselves more important than the gods themselves.

When hubris speaks, the CFPB expects all of us to listen.

In what was either the cheekiest throw down of a gauntlet or else one of the stranger phrasings for a professional in public life in recent memory, the head of the Consumer Financial Protection Bureau declared the CFPB is a “regime (that) will govern the mortgage servicing market – including both the banks and their nonbank competitors – in perpetuity.”

That was from the prepared remarks of Richard Cordray, director of the CFPB, speaking in Washington on Wednesday to the National Association of Attorneys General.

I assume by using the term "in perpetuity," King Richard believes the either the CFPB will be exempt from the parousia or, if it occurs, the CFPB will be sucked up in The Rapture with the rest of The Elect.

The term "regime" is apparently also used by oue Peerless Leader without even a hint of irony. It's the perfect description for an entity as unaccountable and powerful as The Adjustment Bureau.

You understand why the reporter who wrote the article sounds both bemused and incredulous. Apparently, he isn't up on his Sophocles and Aeschylus. If he was, he would know that a "tragic hero" burdened with the "fatal flaw" of hubris always seemed to crow right before the gods struck him down. It's also why, in ancient Greece, hubris was a capital crime. Nothing good can come of it, unless watching a puffed up popinjay get what he so richly deserves floats your boat.

I suppose that Cocksure Cordray was simply irked that the day following his boast, Congress was to take up The Consumer Financial Freedom and Washington Accountability Act, a Republic-concocted piece of sausage designed to bring the CFPB back to reality.

The bill would replace the single CFPB director as numero uno with a five-member commission appointed by the president and confirmed by the Senate. Supporters say this would ensure that a diversity of viewpoints inform the CFPB’s regulatory and enforcement agenda. It would also conform the bureau’s governance to that of other federal agencies charged with consumer or investor protection.

[...]

The bill further subjects the CFPB to the regular appropriations process and makes the CFPB a stand-alone independent agency rather than a bureau within the Federal Reserve System.

Accountability? What a low blow that is to those who know better than you do what's best for you and your neighbor, too. These perpetual demi-gods should only be accountable to The Cosmic Muffin, The Hairy Thunderer, or, perhaps, The Huffington Post. But Congress and the President? Please.

Cordray's sensitive skin was also likely chapped by the blistering of knuckle draggers like Texas Republican Congressman Jeb ("The-Only-Good-Democrat-Is-A-Dead-Democrat") Hensarling, who publicly bellowed that it was high time Cordray and his crew had their wings clipped.

“We know that this is an agency that was designed to be unique, if not perhaps rogue; it is an agency like no other. Arguably it is the single most powerful and least accountable Federal agency in the history of our nation and thus demands rigorous oversight. The American people deserve better."

"Rogue"? I thought Sarah Palin was "designed" for that job.

Keep the over-the-top stuff coming, Richie. We're eating it up.

Wells Fargo Is Not Firearm-Friendly

While community bankers in the Show Me State are not only packing heat, they're unloading it on would-be bank robbers, the effete Big Banks in Florida unload not on the bad guys, but on pistol-packin' Annie's in their own ranks. 

Ivette Ros grew up in a house where her father kept guns. For her, it was a natural step to get a concealed weapons permit and then to carry a 9 mm handgun. 

The 37-year-old Tampa resident is a single mother of three children and said she carries the gun for safety.

“It’s just something about having it versus not having it,” she said. “I feel naked when I don’t have my gun.”

Her employer didn’t feel the same way. Carrying the gun got her fired, she said.

Ros has filed a lawsuit in circuit court against Wells Fargo Bank, which she said fired her last year from her job as manager at the bank’s Oldsmar branch. Her lawsuit says the firing violated her constitutional right to carry arms and asks for monetary damages and attorney fees.

Wells Fargo (whose brand, ironically, is a stage coach and whose marketing has not infrequently in the past emphasized its roots in the American West, a land where the .45 Colt revolver was made famous), claims it was doing the right thing by firing Ms. Ros.

When it comes to employees carrying guns into the office, though, the company’s rules are clear, said Kathy Harrison, a Wells Fargo spokeswoman.

“Team members are strictly prohibited from possession of firearms and weapons on company premises,” Harrison said.

The company does offer exceptions when a state statute exists allowing for someone with a concealed weapons permit to keep a gun in their locked vehicle in the company parking lot, she said.

So, Ivette's mistake was in not leaving the gun in a locked car in the bank's parking lot, where, as even a bulb as dim as the one that writes this blog could deduce, it would be of limited value against an armed robber. Instead, she kept in concealed on her person, where, as our friends in Missouri have shown, it has a certain usefulness in spitting out lead in situations where lead poisoning is an appropriate malady to strike your typical armed sociopath.

Ms. Ros' attorney claims that the bank's policy violates his client's Second Amendment rights.

“The second amendment is not a privilege. It’s a freakin’ right.”

Well, yes it is. However, a law professor points out a flaw in that freakin' argument.

Jason Bent, an assistant professor of law at Stetson University College of Law in Gulfport, said the constitution limits the government’s ability to restrict gun possession. A private employer such as Wells Fargo is another matter, he said.

“There is nothing in the state statute that says the employer has to let her bring it into the building,” Bent said.

The "statute" he mentions is the concealed handgun law in Florida.

The Second Amendment reads: "A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed." That is, "infringed" by the government. I agree with Professor Bent that I don't see state action that violates the Second Amendment here. Then again, I'm no freakin' Second Amendment expert.

While personally, I support the right for any woman to carry the biggest, baddest piece of firepower she can conceal on her person, as a bank lawyer, I also support the right of a bank to make and enforce reasonable rules concerning firearms on its premises. On this one, my rational side (rarely on display in these pages) leans toward the big, bad bank.

That said, I would like to sit down with Ms. Ros some day and compare our respective concealed weapons.

The More Things Change

Six years ago, right before the Big Bang that sunk this country's economy, we discussed problems of declining net interest margin on bank profitability, the ineffectiveness of the rate-cutting efforts of the Federal Reserve to boost that margin, and that banks were desperately seeking income from all sorts of other fees (including overdraft fees) and new lines of business to combat the problem. Over half of a decade later, the situation sounds distressingly similar.

Central Massachusetts banks are feeling the squeeze — the interest rate squeeze.

Financial performance among banks based in Worcester County during 2013 reflected the fine line institutions are facing as they grapple with slim margins while investing in technology and working to comply with new federal regulatory requirements.

"We really, over the last five to six years, have seen the net interest margin shrinking year after year," said Thomas J. O'Connor, vice president in charge of the financial institutions practice at G.T. Reilly & Co. of Milton, an accounting and consulting firm that works with community banks. "It's really the market conditions. These aren't institutions that have done anything wrong. If anything, they've done everything right."

[...]

All the banks face a common problem: Costs to manage customers' deposits while complying with federal regulations, especially reforms enacted under Dodd-Frank legislation in 2010, are steady to rising. Yet interest rates paid by borrowers taking out new loans are low.

The result is low net interest margins, or the net income that banks make charging and paying interest relative to the bank's assets. In Central Massachusetts, eight banks had net interest margins smaller than overhead costs relative to assets during 2013.

"Bank earnings are going to be suppressed until interest rates start to rise at some time in the future," said Commerce Bank President and Chief Executive Brian W. Thompson. "I don't think there's any expectation that's going to happen until sometime in 2015."

You can substitute "Central Massachusetts" with pretty much any other geographic area, and you'll have the same problem as far as the interest rate yield curve is considered.

The yield curve problems go back even further than 2008, when the world came crashing down around us. The following is from a blog post I wrote in August 2005:

The underlying economic problem for the banks is the flat yield curve. It's frankly without precedent (outside of a recession), or at least that's what my bank and hedge fund clients tell me. I defer to them on such matters, because I'm merely their mouthpiece with no mind of my own. However, assuming that this is true, banks can't make nearly enough money making conventional loans for the simple reason that the spread between what they pay to borrow the money (for example, by issuing a certificate of deposit to a consumer) and what interest rate they can charge on a loan they make with the funds borrowed, isn't enough to cover operating expenses, much less make a profit. That's the problem when the spread between two- and ten-year bonds is 20 basis points (0.02%), and the spread between two- and thirty year bonds is 40 basis points (0.04%). Thus, there has  been increasing pressure on banks to increase fee income, from whatever sources are legal.  The fees charged are legal. The banks are trying to make money. It's what they do.

Later that year, the curve became inverted.

If Mr. Thompson is correct, the interest rate squeeze will have lasted over a decade. Thus, while much has changed in the world of banking in the last nine years, banks find themselves in a distressingly similar place today: trying to make a buck from sources other than interest rate spread. They are trying to do so while coping with a post-Dodd-Frank world in which the elephant in the room, the CFPB, sets the tone for vigorous opposition to "taking advantage" of "fog-brained consumers" who don't have a clue what's in their own interests. "Taking advantage" means "making any money from banking services provided to." Thus, overdraft fees have been savaged, debit card interchange fees have been squeezed, proprietary trading hammered, and "subprime," "payday," "tax refund anticipation," and "deposit advance" all have been rendered to be four-letter words by the federal banking regulators.

The future sure looks rosy, doesn't it?

HUD Defends The Middle Ground

HUD, which took a proactive stance on the controversial doctrine of "disparate impact," issuing regulations that codified the criticized doctrine in order to attempt to require the federal courts that construe it to give HUD's interpretation judicial deference, has decided that when it comes to the equally controversial scheme of a number of municipalities to "condemn" underwater residential mortgage loans, HUD must remain "neutral."

Housing and Urban Development Secretary Shaun Donovan kept his carefully neutral stance this week on the potential use of eminent domain to restructure underwater mortgages.

Mortgage and housing industry groups have asked HUD to rule that Federal Housing Administration-insured loans will not be used to refinance mortgages on properties that are condemned and seized by local government under eminent domain.

But Donovan said that the use of eminent domain to force the sale of private-label mortgages out of securitized trusts must be decided by the courts.

There are very specific rules about the use of eminent domain, Donovan said at a Politico event Wednesday, and “it needs to be decided by the courts.”

The application of the doctrine of disparate impact to fair lending laws must also be decided by the courts. That fact hasn't stopped HUD from issuing regulations on the subject. The least the agency could do is to take a stand on the potentially detrimental impact on the residential mortgage lending business, including FHA mortgages, caused by the use of eminent domain to sieze mortgage loans from lenders. The FHFA has weighed in to protect its interests, which happen to be aligned with the lenders from who FNMA and FHLMC buy loans. Why can't HUD?

Perhaps the fact that the expansion of the conflating the disparate impact doctrine into the fair lending arena and a creating a crackpot scheme like condemning mortgage loans are both anti-lender, pro-populist theories dreamed up by Leftist activists might have something to do with it. In HUD's case, as in the FHFA's, hurting lenders harms the agency, so the laws of self-interest would seem to dictate that HUD oppose both of them. Ultimately, however, the losses of HUD are back-stopped by the US taxpayer, and as we all know, neither side of the political spectrum has been overly concerned with taxpayers when it comes to serving a "higher cause."

Community Banks Bagging Non-QRM Mortgage Loans

While it's only anecdotal, the evidence is accumulating that the law of unintended consequences in the land that the man-made beast known as "Franken-Dodd" roams, is working its inexorable way through the community banking businesses, and especially that portion of the business that relates to residential mortgage lending.

One local community banker is saying his bank will no longer offer certain home loans because of new mortgage lending regulations.

Hunt Campbell, president and CEO of $117 million First Alliance Bank in Cordova, said his bank will no longer make mortgage loans to borrowers who don’t meet the standards for new qualified mortgages that went in to effect Jan. 10.

Campbell said that the bank can't generate enough non-QRM loans to make taking on the additional risk worthwhile.

According to the Federal Reserve, Campbell is not an outlier.

According to the Federal Reserve Bank of Atlanta’s latest Beige Book for the Sixth District, which includes the lower half of Mississippi and central and east Tennessee over to the Georgia-South Carolina border, some mortgage lenders have exited the mortgage lending business altogether or changed their business models because of the added risks.

 Some lenders indicated they were shifting their focus from residential mortgages to small business and commercial real estate loans, the report said.

Cambell's parting words are ironic.

“The place where a bank can wind up if they’re deemed to be out of compliance in certain areas — you can get a DOJ referral and wind up fighting Eric Holder and Co.,” Campbell said. “It’s just not worth it.”

The reference to Holder is ironic because, notwithstanding lip service paid by the CFPB and other regulators that a QRM-only bank would not, by that factor alone, be deemed to be running afoul of CRA or Fair Lending laws, Holder and his crew have been champions of pushing the "disparate impact" theory to its logical limits, and beyond.

No community banker can sleep well at night knowing that there is a Catch-22 waiting to make his or her life miserable. Make non-QRM loans and make them on less favorable terms (to the borrower, at any rate) than QRM loans, to compensate you for the higher risk? Not only do you not have the benefit of the Dodd-Frank "safe harbor," you might end up with a fair lending "referral" based upon a disparate impact argument. Make only QRM loans? Disparate impact-based Fair Lending or CRA violations are not out of the picture, due to "other factors" that the regulators throw into their analysis.

In these times, given the nature of the crew manning the bridge of the good ship USA, there is no true "safe harbor" in residential lending.

FinCEN Consults The Dude For Guidance On Banking Marijuana Businesses

I love some of the headlines I read last Friday and over the weekend on the preposterous "guidance" issued by FinCEN last Friday on the process financial institutions should follow in providing financial services to marijuana-related businesses. The most common (incorrectly used) metaphor was that the guidance "opened the door" for banks to inhale deeply the second-hand smoke of reefer madness. That's either a mighty tiny door or an infinitesimally small opening. As one of the first comments I received (from a skilled financial institutions compliance attorney) put it so well:

This is the biggest joke.  Basically, it tells FI’s that you are finally given the green light to conduct transaction activity for Marijuana Businesses but every time you do, you have to file some form of SAR that might potentially include information from a DOJ memo that you have never read and probably never heard of, all so that you can go out and do the leg work for our investigations.  They should just let FI’s do business with folks on the OFAC list and just make them file lengthy and detailed SARs on those people every single time the conduct any transaction.

Other comments received from financial institution attorneys, especially those who represent either banks or marijuana businesses that want to get together, were equal parts F-bombs and derisive laughter.

Reactions from banks and trade group representatives in Colorado, the state with the most immediate need for action at the federal level, were uniformly negative.

"We're still not going to bank them," said Jim Reuter, executive vice-president of FirstBank, the state's second-largest bank in terms of market share."We are not comfortable taking this guidance alone and on its face," Reuter said. "There's simply too much at stake."

[...]

"They should proceed with maximum caution," CBA president Don Childears said he'll advise its members. "But, honestly, we'll be telling them to not proceed at all."

A FinCEN spokesman tried to put a positive spin on the non-starter.

"This reduces the burden on banks," FinCEN's Shasky Calvery insisted in an interview. "Marijuana under federal law requires a SAR. Now, the necessity is limited, reducing the banks' burden a bit and more importantly clarifies where law enforcement focuses its attention."

"reduces the burden"? Really? It still requires a SAR! In every instance the bank "banks" a marijuana business! The type of SAR may vary, but determining which type of SAR is now required adds to the burden, it doesn't lessen it. As my correspondent above noted, the guidance adds to the already-staggering burden that federal regulators place on financial institutions to do law enforcements "leg work."

CBA's Childears agrees that the burden is not lessened, it's increased.

"It's just bizarre. The threatening language about the liability for prosecution," he said. "Now, not only must we know our customers' business, but our customers' customers' business."

Moreover, under the guidance, the bank is required to refer to "The Cole Memo," a memo that is internal to the US Justice Department and that was not attached to the guidance. The bank has to worry about Mr. Cole's "priorities" of bad-guy behavior and the evil consequences of consorting with Mary Jane in various degrees of seriousness (including harvesting foremen who rely too much on the catch-phrase "Say hello to my little friend"), and also to do all kinds of detailed due diligence, including watching out for a boatload of "red flags," including these two gems:

• The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
• The business receives substantially more revenue than its local competitors or than might be expected given the population demographics. It also is still illegal under federal law to service a recreational marijuana business.

That is merely a tiny taste of the problematic nature of the burden imposed by the guidance. We could go on and on, but why bother? The IBC's Barbara Walker said what many of us feel: "Better luck next time."

"The bottom line would continue to be the need for the (banking regulators) to address in writing all of the many issues of concern to the financial services industry," said Barbara Walker, executive director of Independent Bankers of Colorado. "The (Federal Deposit Insurance Corporation, Federal Reserve and Office of the Comptroller of the Currency) are simply asleep at the wheel on the many serious issues posed by Colorado's laws. It's shameful."

"Asleep at the wheel." That sometimes happens when you get to toking when you should not be smoking.

Ben Knows Best

When you read news like the recent reports that Benjamin Lawsky, superintendent of the New York Department of Financial Services, asserts that "[n]onbank mortgage servicers are growing too fast and regulators need to protect homeowners by making sure these companies can handle the volume of business they are taking on," you assume that Lawsky must have a great grasp of the mortgage servicing business, information technology systems, staffing, business growth, mergers and acquisitions, personnel management, and, in a business environment, how to do it right and, most important, how to avoid doing it wrong. You'd think that. Of course, if you did, you'd be sucking wind.

According to his official biography, Lawsky is a lawyer. As anyone who reads this blog knows, that qualifies you for...the practice of law...maybe. It also likely means that you're adept at opening your pie hole and emitting various loud intonations about a myriad of subjects about which you have little, if any specific knowledge. All that goes with the job description.

Lawsky's bio also touts the following mortgage servicing specific job experience:

• Governor Andrew Cuomo's Chief of Staff.
• Deputy Counselor and Special Assistant to then-Attorney General Cuomo.
• Assistant United States Attorney in the Southern District of New York, "where he prosecuted white collar crime, organized crime, and terrorism cases."
• Chief Counsel to Senator Charles Schumer on the Senate Judiciary Committe.
• Trial Attorney in the Civil Division of the Department of Justice.

So, when Lawsky shoots down Ocwen's purchase of Wells Fargo's servicing rights on the grounds that he's concerned about Ocwen's ability to handle the increased volume, you can see how his background has made him uniquely qualified to second-guess Ocwen on that matter. After all, when it comes to private business acquisition decisions, Lawsky's job experience has provided him valuable insight's into such matters as which way Andy Coumo's wind is blowing on Tuesday morning, does Chuck Schumer take his grande chai latte with one lump or two, and which upstate village mayor needs to be kneecapped for not supporting the boss in the last general election.

Ocwen may or may not be able to adequately handle the Wells Fargo servicing business. Homeowners may, in fact, need protection in this or some other similar instance. However, why would we believe Lawsky on this specific issue? Why, instead, does he appear to be the second coming of The Spitz (absent, we hope, the "crossing-state-lines-to-visit-Ashley" issue)?

We'll see how all this shakes out. Perhaps it's not merely one more political grandstanding stunt by a New York pol on the make, and is based upon hard evidence. If it's based upon industry-specific expertise, we assume someone other Lawsky is supplying it.

Bad Banking!

My friend and occasional guest blogger Pat Dalrymple, a former community banker, felt the need to blow off steam again, so I'm indulging him. Actually, he's a lot more optimistic than I am, but that doesn't take much.

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The smart money today is emphatic in advising not to get into banking as a buyer of, or  controlling investor in, a financial institution, especially in a smaller, so-called “community bank”..

The reasons cited are many and cogent:

·         Regulatory restrictions are choking off profitability.

·         There’s a dearth of acceptable assets for investment to soak up the deluge of cash deposits flowing into banks.

·         The Dodd-Frank Act has triggered regulations that make compliance difficult, complex, expensive, and virtually impossible to accomplish.

·         Appreciation in a bank’s market value is minuscule, compared to the windfalls that investors experienced over the past 40 years.

·         Big bank competition makes it impossible for a small bank to thrive

·         The quality of small bank loan portfolios is suspect.

·         Banking isn’t fun anymore.

There are others, but you get the picture.

In fact, every one of the above is true.

Yet, if we’ve learned anything in the last 5,000 years or so of recorded history about war and commerce, when the experts say “do”, don’t.  When the word is “don’t”, seriously consider doing the opposite.

Airplanes could never sink a battleship, submarines were nothing more than toys.  Why would anyone invest in a flying machine, a horseless carriage, or a device that lets people talk on wires?’’

In this instance, we’re not talking about buying stock in a mega-bank.  That’s probably a pretty good bet over the long haul, because the big banks almost can’t help but make money, positioned as they are at the crossroads of global industry and commerce.  The opportunity, if there is one, lies with little banks in relatively small markets: the institutions under, say, $200 million.

Big banking and little banking are two almost completely different businesses that, paradoxically, are governed by the same set of regulations.  Inevitably, these regs are applied differently to the two industries.  Our focus here is on the smaller of the two, but, in terms of the number of individual institutions, and thus in opportunity, much the larger.

So, let’s take a quick look at all of the good reasons not to buy a bank:

Regulatory stifling of profitability:

This  maybe should be first on the list of considerations, and it has to be recognized as a challenge at the outset.  It’s absolutely a fact of modern commercial life that the regs make it difficult to make money the old fashioned way.  Most community bank business models are using pre-crisis blueprints, which may not work in a post meltdown environment.

We’re all products of our training, and bank management teams certainly weren’t conditioned to adust when the basic rules of the game changed.

So, the plan for a purchaser may have to run contrary to a lot of conventional wisdom to thrive in the current economic ecosystem. Fore example,  if the bank isn’t already doing so, become the go to residential mortgage lender for your customers.  When the bank can’t make a loan which could ultimately result in a profitable long term relationship, (which will be often these days) find ways to assist that customer to find alternative financing.  And above all, don’t forget to make money doing it.

Also, carefully look at the cost/benefit equation of paring expenses. All banks, big and little, have been cutting costs for the past several years.  Most community bankers are convinced they’ve cut to the bone, but they’re wrong; they’re running the business that they built and were trained to run, and that model just doesn’t exist in the old format.

For example, small banks that have branches probably shouldn’t.  The deposits accumulated simply  don’t justify the cost. Paradoxically,  management has kept the branches open to “preserve the institution’s franchise value” for potential purchaser.  Ignored is the strong likelihood that, should that buyer come along, the branches will be shuttered soon after the sale closes.

Finally, in viewing a troubled bank, the income statement can tell an interesting story: when all of the expenses attendant to regulatory restrictions and undercapitalization are erased, one often finds that, even with last century’s business model, the bank can be adequately profitable.

Scarcity of good assets:

This phrase merits some redefinition:  There are a lot of quality loan assets around; they just don’t fit the regulators’ discriminatory definition of what’s good.  Of course the result doesn’t change.  If  the regulators classify the loans as second class citizens in the general population of paper, then that’s what they are.

Conventional wisdom says that a lot of bank dollars are chasing few assets, so the big fish will force the little ones out in the feeding frenzy.  But CW, as usual, may have it wrong.  Money center institutions have managed to cinch up  the regulatory bonds past even what the examiners have done to them.  This is because, in response to the post Dodd-Frank regs, they’ve instituted multiple layered internal policies that have destroyed their flexibility.  Good loans often go to big banks to die, especially if they have to move up the approval ladder.  Savvy community banks with good CAMEL ratings are using their huge edge in flexibility and processing time to take high quality business away from the bullies in the high rise offices.

Cost and complexity of compliance:

Nothing causes more angst and molar grinding among bankers than complying with the plethora of consumer laws and regs enacted and promulgated in the wake of the Great Meltdown.  But most of the wailing is done by old duffers like me that have been around banking since way back in the last century.  Fortunately for everybody, we’ll die off, to be replaced by bright young people who will grow up in an over-regulated environment and will opine, “Gee, what’s so hard about that”.  And no matter what us old cowboys tell you, it doesn’t really cost an arm and a leg to accomplish the task.

Minimal appreciation in the bank as a salable asset:

True; you can’t buy a bank and sell it three years later at 3.5 times book.  Putting equity money into a financial institution today is a longer term investment.  But the cash on cash return can be very impressive, which will very nicely enhance book and market value.

Forget about owning a little bank.  Big banks have all of the business:

No businesses are better positioned in their marketplace than community banks.  Few businesses do a worse job of exploiting that advantage.  (See the flexibility factor noted above)  Imitation is the sincerest form of flattery:  the big banks know the advantage of looking little to the home town folks, and often they’re more successful at it than their smaller brethren.

A prospective purchaser of a bank must understand the marketing plum to be acquired that very likely has been woefully underutilized.

Small bank loans are second class paper: 

True for some; at least from the new regulatory perspective.  And almost certainly so for institutions that are the prime targets for investors.  These are the troubled banks that sometimes had to be satisfied with the skim after the cream was scraped off by competitors.

However, any of these loans that are currently performing in a post-nuclear financial landscape are survivors, and have a very good chance of continuing to be.  One of the dichotomies of negotiation for a bank involves the owners touting the net interest margin of the portfolio, while the shopper counters with, “Yeah, but look at the loan quality”. Actually, the quality may be pretty good. The deals have   been through the fire and they’re still anteing up that high interest rate, which can be pretty neat for an investor.

And then there are the non-accrual loans, those gems that you can’t book income from until they go away, one way or another.

What’s weird, is that a lot of these really rotten deals are performing.

My pilot friends tell me that any landing you walk away from is a good one.  My wisest banking friends say that, in the final analysis, a good loan is one that gets paid back.  This bottom line criterion doesn’t necessarily meet 21^st century regulatory discrimination, but, in some instances, it can set up a nice little windfall for an investor, because all of that deferred interest on the loans that continue to perform will ultimately find its way to the bottom line.

That’s about it, so……….

What?  Oh yeah….having fun.  Well, if you’ve been a bank exec for more than ten years, it probably isn’t much fun.  In, say, 2004, the 3-3-3 banking rule didn’t actually prevail (you know, pay 3% for your deposits, mark your loans up 3%, and be on the golf course by 3) but it was a day on the beach compared to 2014.

On the other hand, if you can buy a clean bank, or make sure that the existing owners clean it up before handing over the keys, then you might have a pretty good time, given the potential profit margin.

Loans To The Poor: Going Postal

When the news broke recently that the US Postal Service is considering going postal on financial services, especially small dollar loans to the "under-and-un-banked," my knee-jerk reaction was the same as Cam Fine's:  "Have you ever stood in the lines at Christmastime at a post office?" I believe Cam also said it was the worst idea since the Edsel.

The proposal was floated in a white paper, and I assumed it was merely a trial balloon by the USPS. At any rate, the initial reaction of the banking industry was so negative that I also assumed that in this year of mid-term elections, partisan gridlock would assure that it was an idea that was DOA. Therefore, I didn't plan to comment on it.

However, my initial WTF? reaction was reinforced beyond a shadow of a doubt when I read last week that Princess Fauxcahontas thinks that the idea is more compelling than a vial of amyl nitrate poppers, a quart of Crisco, and Jennifer Lawrence unchained. Cutting to the chase, Liz thinks that it's unfair that the poor pay more for financial services. This fact is "unfair" according to a standard of "fairness" that has been well articulated in Das Kapital. It is the function of the federal government to rectify this "unfairness" by creating a central government-controlled lender that ensures that credit costs for the poor are "fair."

The poor pay more [for credit], and that's one of the reasons people get trapped at the bottom of the economic ladder.

The poor pay more, as a percentage of their gross monthly income, for just about everything, including food, utilities, rent, and transportation. That is why many of the poor need to borrow: they don't have enough monthly cash coming in the door to pay for the necessities of life. Many of them have a tough time paying back the principal they borrow, much less the finance charges. That's why they are considered poor credit risks and why charging them more for the credit risk they pose makes sense in a free market system.

I assume that Warren doesn't believe that the best solution to "the poverty trap" is to focus our collective efforts on creating more better paying jobs and providing an education that gives the poor skill sets to obtain and perform those jobs. Instead, based upon her world view that the real culprits here are "sky-high interest rates and tricks and traps buried in the fine print of their loan products," Warren wants to focus her (and our) efforts on taking a historically inefficient giant bureaucracy and making it the center piece for a government-controlled effort to give more loans to the poor, which I assume she believes will allow the poor to borrow their way out of the poverty trap. 

Good luck with that scheme.

Hank Paulson Lets His Hair Down

Former Secretary of the Treasury Hank Paulson (known to the Hip-Hop community as "P. Hankie") sat down recently for an interview with Dallas Business Journal reporter Nicholas Sakelaris, and gave us the low down on the bail out of the Big Banks in 2008. As you might have expected, Hank the P claims that he had no choice. It was bailout the big boys or The Apocalypse. There was no middle ground.

We had some difficult decisions. We did some things that were unpleasant, even to us. But I felt then and looking back at it now, I think we got the big things right and made a big difference. We staved off disaster.

To those who claim that the capitalist system works only when those businesses that make bad decisions are allowed to suffer "creative destruction," Hank's response seems to me to be that all that theory is fine in the ivory tower, but down on The Street (Wall Street, that is), when the rubber meets the road, the tough get going, or something along those mixed metaphorical lines.

Many, many Americans were unhappy because they wanted to hear that the people who made the mistakes were being held accountable. But if I had to decide between that and stability, I erred on the side of stability. All Americans would have been hurt if the system had collapse. Those that had been responsible and those who had been irresponsible. Those who had made mistakes and those who didn’t make mistakes.

Our first priority was to prevent catastrophe to protect the American people.

That’s hard to explain and that’s hard for the American people to really understand a catastrophe that never occurred. What they see is a very serious problem that did occur. I can say, we took steps and it would have been much worse if we hadn’t taken them and guess what, the money we put out in the TARP and the capital to banks and insurance companies came back plus $32 billion.

Hard to explain? No, I think you just explained it, Hankster, and I also think most of us catch your drift.

When asked if he, personally, could have done more to prevent the problems that led to the economic crisis that required such a massive bank bail out, Hank claims that the underlying factors were pretty well "baked" into the system by the time he was appointed in 2006. He also says something to which the FDIC might give at least a head nod when it decides whether or not to sue officers and directors of a failed bank: nobody saw anything this bad coming down the pike.

...I didn’t see something of that magnitude. I had witnessed crisis every eight to 10 years. But this is a once in a 75-year crisis. In this one, the excesses had been building for decades.

[...]

This is one that was unprecedented. People hadn’t taken a look at our regulatory system in a long time. The financial markets had outgrown the regulatory system and it didn’t fit so we didn’t have the powers we need.

A guy with Hank's pedigree and access to information didn't see this train wreck coming, but the board of directors of a half-billion dollar community bank should have anticipated it. You see the absolute logical consistency of these positions, don't you? Don't you?

[crickets chirping]

I happen to think that Hank Paulson is right on the money. The bailout prevented a catastrophe. I realize that Libertarians who read this blog get shooting pains in their lower abdomen when they read such opinions in this sector of cyberspace, but that's why the drug companies spit out analgesics.

As Hank says, it's tough to defend the position that you prevented a catastrophe that never occurred. At least, it's tough in a society where many often stake out positions and marshal the facts to support them. Following the facts wherever they actually lead takes a different mind set.