ILCs: Plenty Of Fight In The Dog
It's not the size of the dog in the fight, it's the size of the fight in the dog.
---Mark Twain
While the OTS has been getting much of the attention of the trade press for being singled out by "The One" and his minions for liquidation, the industrial loan corporation charter and similar forms of "non-bank banks" are also on the administration's chopping block. The Democrats in the House have been pushing for the end of the ILC for the last few years, especially during the eighteen month period that ended in early 2008 when the FDIC put a moratorium on insurance applications for new ILC charters and for non-financial firms acquiring existing ILCs. "Rampaging Robert" Bennett, the Republican Senator from Utah who sits on the Senate Banking Committee, effectively killed attempts to pass such legislation in the Senate (although it passed in the House in 2007). He shows no signs of relenting.
During testimony last week before the Senate Banking Committee (paid subscription required), Treasury's "Tim Terrific" Geithner was pummeled by Bennett over the issue.
"There is not a single ILC that contributed to the crisis, not a single ILC that went down," Bennett said. "Destruction of an industry is not a modest change. … You are taking an area that worked and going to abolish it. You are engaged in overkill, in my view."
He left unspoken a threat to take Geithner snipe hunting with Dick Cheney if the Obama administration pursues the ILC charter's immolation. Since Utah is home to most of the remaining 45 to 50 remaining industrial banks, thrift and loans, industrial loan companies, and similar "loophole" financial institutions, Bennett definitely has "skin in the game." Plus, he's got a track record of winning when nit comes to protecting his home state's turf.
Also with skin in the game is Senate Majority Leader "Dirty Harry" Reid of Nevada, which is home to some of those institutions, as well, and which is a state whose economy doesn't need to lose anymore economic firepower of any sort. As he did with previous fights over this issue, Harry's not wild about face time and has left the public fighting to Bennett. As I speculated before, however, I don't think Senator Reid will stay out of the game if the Democrats push the issue.
It should be noted that while the Obama proposal is not to outlaw the charter itself (as it has proposed to do with federal savings banks and savings associations). Instead, the administration wants to require ILCs to be defined as "banks" under the Bank Holding Company Act, which would eliminate the ability of "non-financial" holding companies like Target, Harley-Davidson, Pitney Bowes, BMW and others to continue to own them and to also carry on their "commercial" activities. They would also have to meet the FRB's capital levels and would be examined and more closely regulated just like other "bank holding companies." As noted by David Enrich and Robin Sidel in a recent Wall Street Journal piece (paid subscription required), the practical effect of this change would be to cause the holding companies to close the ILCs down.That, in turn, may very well have the effect of choking off credit to businesses and consumers at a time when the economy needs these financing sources.
Though relatively small players in the financial system, ILCs provide a wide variety of products and services to businesses and consumers. The offerings range from financing purchases of Harley motorcycles to loans that cover corporate medical payments to insurers. Eliminating or sharply curtailing those operations could make it harder or costlier for customers to get credit.
While most ILCs and their holding companies are publicly taking a wait-and-see attitude, and Utah bankers profess optimism, the proposal has got to be severely annoying to the industry. A well-placed source told me that a couple of months ago, a delegation of executives of Utah ILCs and other interested parties from Utah made a trek back to D.C. to visit with FDIC Chairman Bair as to when the FDIC might, in actuality, remove the moratorium on ILC acquisitions and new charters in light of the fact that the moratorium had expired over a year ago and yet the FDIC had not approved any pending applications since that time. "Chair Bair" told them that these were tough times for new charters but that if some holding company came up with big bucks to help take a load off the FDIC's back in the form of a rescue of an FDIC-insured ILC that needed the assistance, that might play favorably with the FDIC. No mention was made of the idea that the federal government was getting ready to unload a world of hurt on the business model itself, so that the whole discussion was likely moot. That may mean that Ms. Bair (reportedly not a favorite of Tim Geithner's) was out of the loop on this issue, or it may mean that she was simply not forthcoming. Regardless, they could have saved themselves the trip had they known what was coming down the pike.
It's very early in this game, but if I were forced to bet now on the eventual winner, I wouldn't back the anti-ILC crowd. ILCs and their supporters have large investments to protect, businesses that make good sense for them and their customers, and, perhaps most important, plenty of fight in them if the going gets nasty.




