Bank Lawyer's Blog

From The Mailbag: Gripes About The OCC

An interested reader emailed me and offered a couple of thoughts about the United Western Bank/OCC litigation that was the subject of last night's post. First, he focused on the fact that the OCC's "statement of facts" (which the plaintiff has moved to strike) makes much of the fact that the bank "voluntarily" stipulated to the entry of a Cease and Desist Order against the bank, and that the stipulation contains "findings of fact" that concluded that the bank engaged in unsafe and unsound practices and violations of law. My correspondent found that disingenuous, inasmuch as the third recital to the stipulation provides that the bank does not admit or deny any statements or conclusions in the C&D other than two that relate to jurisdiction. This is typical of many consent orders entered into with the federal banking agencies. The bank does not agree that the stipulations of fact or the conclusions drafted by the OCC are correct. My correspondent thinks that the OCC is attempting to construe such "voluntary consent" into a consent that conditions exist that justify the appointment of a receiver. If so, that will have a negative impact on the willingness of banks to sign such agreements in the future.

I agree that there apears to be an attempt to use the bank's consent to the entry of the C&D as an argument that the facts and conclusions contained in the order, such as that the bank is in an unsafe and unsound condition, are somehow "true" and incontestable. I doubt whether that suggestion will have an impact on the judge. As to the willingness of banks to sign such stipulations in the future, it's too early to tell. However, a few more banks in the future might be inclined to fight a C&D rather than stipulate. As my correspondent also wryly observes, if Maxine Waters has her way, the era of consent orders may be coming to an end in any event. If that's the case, the administrative law judges are going to be awfully busy.

My correspondent also opined that the OCC's motion displays a clear bias against private equity investors. Although he didn't clarify the specific provisions of the motion that supported this contention, I assume they were the provisions that discussed the OCC's rejection of the conditions precedent imposed by the potential investors, including the waiver of certain restrictions of the C&D and other "unacceptable supervisory concessions." To me, this bias has been obvious in not only the OCC, but in the FDIC and the FRB, for the last several years. We've discussed this issue previously. The requests for supervisory concessions were normal (and sane) protections that any knowledgeable private equity group would impose before they infused hundreds of millions of dollars into a bank that had "issues."

PE legend Wilbur Ross told the American Banker last week (paid subscription required) that he's had it with the "Big Three." He's now focused on investing in European banks. From my discussions with private equity investors recently, others are following his lead overseas, even to Eastern Europe. It's a heck of a state of affairs when the Ukraine looks rosier than Utah, but there you have it.

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.

Examiners Second-Guessing Community Banks On Executive Compensation?

A recent article in Bank Safety & Soundness Reporter (paid subscription required) claims that while Dodd-Frank focused federal bank regulators on incentive-based compensation at the largest banks, bank examiners "are using safety and soundness criticism and the threat of formal action to micromanage not only the incentive plans, but also the base salaries of bank executives and directors." And they're targeting banks of all sizes, not merely the biggest.

"We are seeing increasing scrutiny by the regulators on senior management compensation," says Thomas Bieging, a partner with Bieging, Shapiro & Barber, LLP, Denver, Colo. "The issue is not just incentive compensation, which has been addressed in Dodd-Frank, but rather base or salary levels.  The attitude seems to be that if the bank declined under the existing senior management’s watch, then their core compensation should be adjusted downward or increases severely limited."

"Examiners will continue to pressure bank boards to take action – to reduce or limit core compensation – even when presented with a compensation study from a third party showing compensation levels to be within the median range for the bank’s peer group," he adds.

Your managers may have held the bank together during tough economic times. Your board may want to recognize that effort and managerial skill. It doesn’t seem to matter, Bieging says, since examiners "attribute little or no value to the fact that senior management kept the bank afloat during turbulent times."

[Full Disclosure Alert: Tom Bieging is a partner in the law firm with which I have an "Of Counsel" relationship.]

According to Bieging, boards who appear to be ignoring the examiners on this issue are being threatened with being cited for engaging in an "unsafe and unsound banking practice."

Former FDIC lawyer Jeff Gerrish states that he's seeing even small banks being pummeled over base compensation.

"We have one client at a bank around $300 million who is making around $600,000. The regulators decided that this was excessive."

It’s not an easy case to justify salaries like this to examiners who, as a practical matter, make a lot less than that, Gerrish adds.

"If a bank officer makes $300,000-to-$500,000 and the bank examiner makes $80,000 per year, that’s a problem right there."

[Must restrain fist of snark! Must restrain fist of snark!}

Man, that was painful.

Let's just say that comparing the CEO of a bank to a bank examiner for salary purposes is--to steal a phrase from Irina Dunn--comparing a fish to a bicycle.

In this area, it appears that national banks may be in a comp/clamp-free zone.

OCC examiners have shown little interest in second-guessing board decisions about salary, says Peter Weinstock, a partner with Hunton & Williams LLP, Dallas, Texas. That has not been the case with their colleagues in the FDIC and Federal Reserve, he adds.

"For over twenty years, the OCC has been principles-based [in regards to salary]," he says. "If the board is doing what they’re supposed to do, and they’re free of self interest, the OCC will tend to defer to the board. They’re least interested in micromanaging salary. The Federal Reserve and the FDIC are much more interested in evaluating performance and comparing performance against what the compensation is relative to the rest of the industry."

The problem is that if the bank's ratings fall, scrutiny on all areas of the bank increases, and executive compensation is apparently one of the hot buttons. Micro-managing percentage increases in base compensation and appropriate percentages of incentive compensation seems to be part of pain that a bank should expect to experience. However, even for "good banks," Bieging sees a need for more "backup."

"We’re seeing banks that aren’t in this situation setting up compensation committees and looking for more data to support their conclusions at the board level," Bieging says. "They’re looking at various surveys out there to see where they stand, on a regional and national basis. It’s an appropriate thing to be doing and it’s becoming a more common practice."

As in so many areas of the banking business these days, killing scores of trees so you can leave a paper trail is not an option but a necessity. 

What A Tangled Web We Weave

Steve Van Beek at the NAFCU Compliance Blog had a nice three-part series of posts on the CFPB's recent announcements and round table discussion about overdrafts. In the first post, Steve talked about the issue of linked accounts. The CFPB has suggested that an alternative to overdraft protection is to link checking and savings accounts, so that if the checking account is overdrawn, money could be pulled from the savings account to cover it, rather than having the customer be hit with an overdraft fee. Noting that this only works if the savings account has sufficient funds in it (and assuming that the type of folks who are allegedly most "victimized" overdraft fees--the working poor--would ordinarily have sufficient funds available to establish a savings account in the first place), Steve also observes that Regulation D is implicated, but is apparently not on the CFPB's radar screen.

Regulation D limits the number of withdrawals from a savings account to six per month.  This includes any withdrawals/transfers to cover overdrafts in a checking account.  And, this is a combined six per month.  So, if a member were to make two other "Reg D" withdrawals in a given month, the member would only have four left for transfers to the checking account to cover overdrafts.

A Question for the CFPB:  What happens when a member has linked accounts and overdraws 8 times in a month?

An additional wrinkle is that Regulation D remains with the Fed,and was not transferred to the CFPB. So Steve asks a couple of additional pertinent questions.

Here are a couple of questions that I have for the CFPB:

• Will you be talking to the Federal Reserve about the Regulation D transaction limitations?
• Assuming you are unsuccessful in your discussions with the Fed, will the CFPB work to inform consumers of the Regulation D limitation when it promotes overdraft coverage via "linked accounts"?

Steve expresses his exasperation about tunnel vision from which "some regulators" suffer when they only consider their own regulations when they decide to screw with financial institutions. Steve didn't say "screw with," but I'm sure he thought about it, so I'll say it for him because I lack both common sense and any conception of self-restraint.

Steve's other two posts on overdrafts are here and here. He raises good points and, while we embed Youtube videos of mock PSAs, we're glad someone is doing the heavy lifting.

Speaking of which--I missed one PSA last night that "spoke" to a nephew who's currently majoring in beer pong at a Southeastern Conference institution of "higher" learning. In his honor, I offer you one more warning that can save you not only a lot of money, but tons of grief.

Regulators Fear The Ombudsman

Hell hath no fury like a bureaucrat scorned.
---Milton Friedman

According an article in today's Bank Safety and Soundness Reporter (paid subscription required), federal bank regulators are pushing back hard against the Financial Institutions Examination Fairness and Reform Act (discussed on this blog last week), a proposal that would give banks the right to protest adverse examinations through a "truly independent" Ombudsman. Among the arguments that regulators employ is that the proposed bill might impede a regulatory agency's ability to unilaterally impose capital requirements on an institution in excess of those demanded of "well capitalized" institutions. According Federal Reserve Board spokesman Kevin Bertsh, that's a risky proposition.

"These provisions conflict with the provisions recently enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which require the federal agencies to consider the risk that banking firms—including those that are well capitalized under current regulatory definitions—pose to the financial system and impose enhanced supervisory requirements on those firms. These provisions also fail to recognize that the regulatory definitions for the various capital thresholds were designed to apply generically to banking firms and do not take into account the idiosyncratic risks at individual firms or the potential effects on a bank’s capital position of risk-management deficiencies or concentrations in problem assets. Therefore, meeting these predefined thresholds does not imply that a bank has no need of further capital."

The OCC's Jennifer Kelly echoes Bertsh's concerns.

"A lesson learned from the recent crisis is that the PCA definition of 'well capitalized' does not provide a sufficient capital buffer to maintain a bank’s viability in the face of higher levels of risk," Kelly says. "This is especially true for community banks that may have a concentration of exposures to certain types of borrowers or industries and geographic areas. We also know that raising capital becomes more difficult as a bank’s condition deteriorates and that declining capital ratios often are a lagging indicator of increasing risk in the bank’s assets. That is why we direct banks with significant concentrations, or deteriorating asset quality that may pose a risk to their capital, to increase capital before their capital levels breach regulatory minimums – at a stage when they are able to take action to ensure that they can continue to lend to sound borrowers."

Here's the problem with the regulators' arguments: The legislation would not prohibit a regulator from requiring capital levels that exceed the Prompt Corrective Action regulation's definition of "well capitalized," unless the Ombudsman, after a hearing, determined that the excess capital requirements were not justified. What it would do is give a bank upon which such higher levels are imposed the right to protest that imposition through a procedures that subjects the determination to some modicum of due process. If the regulator has valid grounds for imposing higher requirements, then they have nothing to fear, right? It will be like shooting fish in a barrel to support the higher capital requirements. No regulator would ever be arbitrary or capricious, or lack substantial evidence to support the need for higher capital levels, would they? Of course not! Never happens! So, the worst that could happen is the target date for the imposition of those higher capital levels is pushed back for the period of time it takes to have the hearing, which isn't going to be long, perhaps a few months at the outside.

Remember, the right to protest about which the regulators claim they are concerned is the right to protest capital requirements in excess of the "well capitalized" levels. I don't see how you can validly contend that a 60-to-90-day delay in requiring a bank with a 6% leverage ratio to have a 10% leverage ratio is presenting undue risk to a bank, especially a community bank. The bank still has to maintain "well capitalized" levels in the interim. It's not as if the bank would be in a death spiral.

It seems to me that perhaps what the regulators actually fear is having to justify the grounds for their decisions to an objective third party. Given the fact that higher capital requirements impede the ability of banks to lend, the imposition of high capital requirements on an ad hoc basis is a critical decision that affects not just the bank, but potential borrowers and the communities served by the banks. In case it's escaped anyone's attention, our economy needs more small businesses hiring more employees and generating more business. Businesses need access to bank borrowing to do that. Therefore, before making such a decision, the regulators ought to believe that they could justify that decision to a third-party decision maker if challenged by the bank. If they don't think they can do that, then they shouldn't require the higher levels. If they do think they can do that, then what's the real problem here?

Regulators Warn Of The Dangers Of Due Process

A bipartisan group of representatives is trying to move forward through the House a bill (the "Financial Institutions Examination Fairness and Reform Act") that would provide a modicum of due process for bankers who believe that they've been dealt an unfair report of examination by their federal banking regulator. The scheme involves the use of an ombudsman (actually, an ombudsman on steroids) and, if the bank wants to take it that far, an administrative law judge. It's not as objective a forum as a federal district court, but it's not as public a forum, either. When you're dealing with a report of examination that contains adverse findings, especially findings you think are damaging and unfair, the confidentiality of the proceedings are likely an attractive trade-off.

As expected, the federal banking regulators have responded like they'd been prodded in their sensitive areas by a taser on "full-tilt-boogie" setting. According to an article in last week's American Banker by Kevin Wack (paid subscription required), bank regulators warned of dire consequences should their "hands be tied" by that dreaded Fifth Amendment to the U.S. Constitution.

"The bill would, in certain instances, tie the hands of regulators when they believe a bank's risk profile requires more capital," Jennifer Kelly, the Office of the Comptroller of the Currency's senior deputy comptroller for midsize and community bank supervision, said in testimony to the House subcommittee on financial institutions and consumer credit.

[...]

"A few months' delay in implementing corrective measures, particularly in times of precipitous economic decline, can mean the difference between failure and survival for a troubled bank," she said. "More fundamentally, we believe the authority granted to this office would compromise the independence of the banking agencies."

Yes, I can see where having your hands tied by due process requirements can be annoying. Baby Doc Duvalier used to complain about the same thing, so he just had everyone he didn't like shot. As to "the difference between failure and survival" boiling down to "a few months' delay" during which a hearing must take place before someone more objective than either contestant, that's a load of something you don't want to step in, even if you work around cattle all day and are used to the smell. Please name one bank that failed over the last three years where the outcome would have been affected by a 60- or 90-day delay to contest an adverse examination report. Please name one troubled bank that did not fail during such perriod but would have failed if "corrective measures" mandated by an adverse examination report would have been delayed by 60-to-90 days.

[Sound of crickets chirping]

Committee members were, for the most part, unsympathetic to the regulators' concerns.

"I kind of wonder if we're a little bit in an alternative universe here," Capito said, referring to the difference between the agencies' testimony and the assertions of bankers that the regulators' standards are tightening and inconsistent. "Is there a big disconnect here?"

Rep. Lynn Westmoreland, a Georgia Republican, whose home state has been hit particularly hard by bank failures, responded to the argument that Congress should not meddle with exam standards by asking the regulators: "So do you think we can screw up this more than ya'll have?"

Kelly responded that the OCC is constantly talking to banks and soliciting their views on inconsistencies in exams. "So we are continuing to try to work these issues very aggressively," she said.

Later, upon learning that the FDIC bars retaliation against banks that complain about their exam results, Westmoreland resorted to a colorful analogy.

"That's like your dog having its teeth into your neighbor's leg, and you telling the neighbor, I don't allow it to bite," he said.

It's hard to warm up to politicians these days, but those were some righteous licks those folks got in.

Here's the bottom line, I think: this bill stands a chance of being passed this year that is somewhere between "slim" and "none." Until the national elections in November, Congress is merely a frozen mass of brake lights clogging the legislative superhighway. On the other hand, these bills, and the fact that they're receiving bi-partisan support, set down markers that can be useful in "persuading" regulators to ease up on the jackboots planted on the neck of the community banking business before their wings are seriously clipped by Congress. They can also point a path to a future legislative approach if partisan gridlock ever breaks free (for which some readers tell me I'm daffy to even hope). I expect to see similar bills proposed that will also take a "fundamental due process" approach in other areas of bank regulation where banks believe the regulators have seized "A Bridge Too Far."

UPDATED 02.06.12 TO MAKE MORE COHERENT THE POINT ABOUT 60-T0-90 DAY DELAY NOT BEING A "LIFE-OR-DEATH" PROPOSITION. BLAME THE ORIGINAL VERSION ON INATTENTION CAUSED BY THE SUPER BOWL, WHICH IS AN EXCUSE THAT PRESENTS ITSELF ONLY ONCE A YEAR.

Churning Butter

It doesn't matter which political party is leading the charge, because all the sound and fury signify nada. 

Today, Housing Wire reported that Republican Congressman Darrell Issa has sent a letter to the House Ethics Committee that accuses four house members of receiving what were affectionately called "Friends of Angelo" loans "back in the day."

"Testimony and documents show that Countrywide used the VIP program to build relationships with government officials and others positioned to advance Countrywide's business interests," Issa said in the letter.

Issa said the program lasted from January 1996 to June 2008. It gave loans to federal government employees and others who worked at Fannie Mae and Freddie Mac.

"My staff is also aware of the possibility that loans with VIP-benefits were conferred to other members and serviced by a separate loan processing branch," Issa said.

This is such incredibly old news that it makes you realize why Congress can't get anything useful done, like tax and budget reform: its members are too busy trying to screw with one another over issues that no one outside of the lunatic fringe of both political parties gives a flying wombat about.

Nearly two and one-half years ago, we mused about the fact that Chris Dodd and Pete Conrad were cleared of ethics charges on the same program, in which Countrywide gave influential members of Congress preferential treatment on home loans. At that time, the name of Congressman Adolphus Towns was also mentioned, but absolutely nothing happened to him, either. So, after all this time with absolutely nothing being done to any of our politicians who bathed in this little cesspool, why is this being resurrected now?

Oh, yeah: 2012 is an election year.

Certainly, we expect an ethics committee than ran off the rails trying to investigate Maxine Waters' more obviously questionable activities to wake up and look deeply into whether, six years ago, four House members got their discount points waived or an interest rate that even Warren Buffet couldn't garner. Of course, we also expect Bill Clinton to swear off sex and enter a Franciscan friary next week.

Last Friday in Austin, Federal Reserve of Dallas CEO Richard Fisher told his audience that the reason for our economic malaise lies squarely on the shoulders of the US Congress.

"The brows of economic forecasters and business operators begin to furrow when contemplating the international landscape," Fisher said in his speech. "But the face of both the economist and businessman turn into something akin to Edvard Munch's Scream when contemplating the frightful consequences of indecision and political mischief at both ends of Pennsylvania Avenue in Washington."

Amen! Preach it, Brother Richard!

A Word To The Unwise

For all the snark slung about on the pages of this blog, it might be difficult to comprehend that my approach to life is something other than "scorched earth". However, I recently had an opportunity to discuss the very real downside of bank management and directors taking a personally hostile stance toward banking regulators who criticize them. In this case, it involved some folks with strong business and banking track records, high IQs, and healthy egos, who bristled when bank examiners and supervisory personnel do what they do: criticized management performance and board supervision. It's called "regulating." The offended senior officers and directors fired back consistently with adversarial barrages and plenty of attitude. As a result, the regulators have been, shall we say, less than charitable.

The banking business does not afford banks an opportunity to file a Chapter 11 petition and "reorganize" when the business model is transformed by an economic recession from brilliant to stupid. Instead, federal law requires that as a bank's financial condition deteriorates, the regulators must place restrictions on the bank's activities that almost ensure that it will never emerge from the death spiral and will, rather, augur into the ground from 40,000 feet up at 32 feet-per-second squared. While that unpleasant result is unfolding, the regulators will be focusing on the prospect that if the bank fails, the FDIC's Inspector General's post mortem will inevitably conclude that a primary cause of the failure was the limp-wristed, somnolent, borderline incompetent supervision of the bank in the years leading up to its demise. The IG will opine, with the perfect 20/20 hindsight usually displayed only by field examiners (sorry, snark suppression is only good for one or two paragraphs), that if only the bank examination and supervisory staff had, much earlier in the game when only Nostradamus could have foreseen the outcome, lowered the boom on the miscreants running the bank, all this unpleasantness could have been avoided or, if not completely avoided, mitigated to a large extent. Therefore, the management and directors of banks in financial distress are going to be criticized by the bank's regulators, who want to show that they're as tough as Mike Tyson on a bad acid trip. It goes with the territory.

There are a number of ways of responding to such criticism, but I never advocate the spit-in-your-face, kick-you-in-the-groin, question-your-mother's-lineage approach. Setting aside the issues of basic human dignity, manners, and civility (in an era in which Fox News versus MSNBC spit-spewing typifies much of our "civil discourse"), regulators are human beings (contrary to popular opinion), but human beings who wield a tremendous amount of power, power that is entitled, in most cases, to judicial deference as long as the regualtors can make a case that their actions were not arbitrary and capricious without collapsing in hysterical laughter. You might as well walk up to a sleeping Bengal tiger and poke it in the eye with a stick. You can disagree with them, even sue them, in so many different ways that don't involve provoking bitter personal animosity. There is simply no upside in that approach and so much downside.

I always advise taking the high road, even in those cases where what you want to take is a baseball bat, a running start, and a swing for the fences.

Wal-Mart and Monolines

Over four years ago, I observed that trying to get into the banking business with a "monoline" business plan was going to be more difficult than finding a bat-free belfry in the hallowed halls of Congress. I hadn't counted on the persuasive power of any business with the word "green" in it. 

A couple of weeks ago, the Federal Reserve Board approved the application of Green Dot Corp. to purchase a Utah bank.  The bank will be renamed "Green Dot Bank" (who woulda' figured!) and will start issuing all of Green Dot's pre-paid cards, which have been issued by Synovus Financial Corp. Green Dot's business plan is the marketing, selling, and servicing of prepaid cards through retailers, primarily Wal-Mart (which is also a shareholder). That's the plan, that's all there is to the plan, and it's a classic "monoline" business plan if I've ever seen one (and I've seen my share). That fact didn't bother a majority of the Board, but it sure bothered Governor Elizabeth Duke, who dissented.

Duke is bothered by the narrow focus of the business plan, which makes the bank susceptible to storms that can arise in that narrow business sector, which today appears to be prospering, but, as we have seen with subprime mortgage lending and commercial real estate, today's goldmine can turn into tomorrow's garbage heap in a hurry. Try walking into the Fed with a monoline business plan that's focused on making CRE loans and see how fast it takes the Fed to hand you your head. I mean, try walking in with an entity that's not partnered with Wal-Mart.

That partnership also caused Duke some heartburn. Duke worried that since "a single large retail partner" would account for a majority of Green Dot Bank's revenues, a loss of that "single large retail partner" could spell doom, and rather quickly. She also poo-pooed the conditions the majority placed on the Fed's approval (including maintaining a 15% leverage ratio for five years and restricting dividend payments), since they do not address her monoline concerns. These aren't unreasonable concerns and, again, you have to wonder whether the average financial business could wander in with such a game plan and not be shot down in flames. I wouldn't bet on it.

This is yet one more example (among many) of Wal-Mart's relentless drive to put the Sheila Bair era behind it and do whatever it can do to exploit (in a good way, of course) its street cred with The Peeps and sell the unbanked bank-like services without, of course, becoming a bank holding company, which would cause (and has caused) bankers throughout this country to break out with a severe case of shingles and to phone their mothers for chicken soup.

Love 'em or hate 'em, you have to respect 'em.

Turban Durbin's Big Bust

While money may or may not be the root of all evil, it's certainly the root of much snark. Last week three big trade associations for retailers sued the Federal Reserve Board (paid subscription required) for allowing it to be influenced by the banks it regulates when it established that "reasonable" and "proportional" interchange fees were 21 cents instead of 12 cents (as originally proposed by the Fed). The retailers were flinging mud pies at the Fed and the banks it regulates.

"The Federal Reserve was required by law to come up with swipe fees that were 'reasonable' and 'proportional' but what we got were neither," Mallory Duncan, senior vice president of the National Retail Federation, said in a press release.

"Instead, the Fed allowed themselves to be influenced by the very banks they are supposed to regulate and raised the originally proposed cap to include expenses the law said were not allowed. In doing so, they literally gave away half the savings that could have been seen by merchants and their customers. We want them to go back and follow the law this time."

Firing back, a flack for the banks dripped sarcasm like acid over the retailers.

Trish Wexler, spokeswoman for the Electronic Payments Coalition, which represents financial institutions on the interchange fee issue, said in an email: "Apparently, retailers aren't happy with their $8 billion windfall - even though they're pocketing all of it, with no evidence of passing any of it back to their customers. And now they want even more?"

"We all know the truth — retailers won't truly be happy until they pay zero to accept cards," Wexler said. "They don't want to pay their fair share of this system that brings them more sales and increased security, and want customers to foot the bill instead. That's simply not fair."

As Clint Eastwood's character in Unforgiven told Gene Hackman's character, right before Eastwood shot Hackman in the face with a Spencer rifle, "Fair's got nothing to do with it."

Not if merchants are to be believed, it doesn't. The Wall Street Journal featured this delicious tidbit recently.

Business owners, who are receiving their first bills since the new rules took effect on Oct. 1, say in some cases they are now paying more than before—further reducing the already-slim chance that consumers would see lower prices as a result of the changes.

In some cases, companies that process transactions on behalf of merchants are raising select fees while refusing to pass on to merchants the lower rates now charged by banks, according to letters sent to business owners.

Separately, some merchants that process a large number of debit transactions for small purchases—for example, under $15 in some cases— are seeing those rates rise because Visa Inc. and MasterCard Inc. have eliminated discounts that they had previously offered.

"What's now becoming clear is that the winners are few and far between, as gains for some of even the very largest retailers seem illusive," says Tony Hayes, who specializes in the payments industry at consulting firm Oliver Wyman.

This was all completely foreseeable when the big box retailers bought the Durbin Amendment in 2009. If you take away income from one source, the payment processors and the issuing banks have to make up the lost income from other sources. Anyone with an ounce of common sense and an even rudimentary understanding of basic business principles would have figured out that this piece of federal government price fixing wasn't going to work as touted. Of course, that excludes most members of Congress, like Dick Durbin.

Speaking of whom, in yet another bit of irony: Citigroup, a large credit card issuer, is listed by OpenSecrets.org, as being Dick's third largest campaign contributor. Not getting what you pay for Citi? Please note, as well, all the law firms in Durbin's Top 20. including, in the top spot, one of the major class action law firms in the country. Big retailers, big banks, and big law firms: that about sums up who twists the tails of the spider monkeys howling in the halls of Congress these days, doesn't it?

If this keeps up, I might have to join an "Occupy" movement. Thus far, the only one that's interested me is "Occupy Jennifer Lopez," but my wife's not going to stand for that, so I'll keep looking.