Bank Lawyer's Blog

The World According To TARP? No Mas!

When you hit the Maryland shore this summer, you'll find plenty of yummy soft shell crabs to eat. However, you won't find banks stumbling over each other to get at the latest iteration of TARP. I mean, what's the US government trying to do, turn TARP into a franchise like Harry Potter or The Terminator? Come to think of it, The Terminator might be apt.

“If this proposal walks, talks and smells like TARP, very few banks are going to want to participate in it,” said R. Michael Menzies, CEO of Easton Bank and Trust Co. and chairman of Independent Community Bankers of America.

It smells like TARP, alright. TARP that's been left out in the sun for three weeks, then thrown into a vat of rancid yak fat to give it that piquant bouquet that one finds wafting off of only with the finest brands of EPIC FAIL.

For bankers like Richard Oppitz, the program won’t solve what they see as the biggest roadblock to more small-business lending: a dearth of credit-worthy businesses looking to borrow money for expansion.

“We have plenty of capital and money to lend,” said Oppitz, regional president for Essex Bank’s Maryland division. “It’s just a matter of finding qualified borrowers.”

Bankers are also worried about mixed signals from the government.

The Obama administration is encouraging banks to make more small-business loans while federal and state banking regulators have been carefully scrutinizing the loans the banks have already made, Oppitz said.

“For banks, what really counts is what the examiners say, not what the people back in Washington say,” said Bert Ely, a banking consultant.

Of course, we all know how well the coordination between Washington, D.C. and the examiners in the field is working on commercial real estate loan loss reserves and collateral write downs, don't we? I'm certain that the same Marine Corps Drill Team lockstep coordination will prevail with this program.

While this time around the government is promising there won’t be the same kinds of strings that came with TARP, such as restrictions on executive compensation, community bankers aren’t convinced. They’re fearful of signing up for the program, only to find the Treasury Department changing the rules in mid-stream, as happened before, said Gerald Blanchard, a partner in the banking group at law firm Bryan Cave LLP.

“The banks were appreciative of the capital, but they weren’t appreciative of all the strings that came with it,” Blanchard said.

It's hard to believe that bankers aren't trusting the word of the federal government that it won't trick-screw participants with after-the-fact changes to the deal. After all, they're the government, they're here to help, and they'd never employ The Flounder Defense.

Hanging over everything is the fear that customers and investors may again view banks that choose to participate as financially weak. That could keep banks from signing up, said Frank Bonaventure, who chairs the financial institutions group at law firm Ober Kaler.

“TARP was very much misunderstood by the general public,” Bonaventure said. “It wasn’t a bailout, because it came with some significant costs that had to be paid back.”

It's not merely a matter of being "misunderstood by the public." As we've noted previously, some banks who didn't take TARP money have waged advertising campaigns against those who did, using the fact that their competitors took TARP as somehow branding them as almost Un-American.

We expect that if Congress ever actually enacts legislation to authorize this latest waste of taxpayer money, there will be a number of banks that will step up and take it. On the other hand, I think that number will be relatively low. Most banks will treat it like toxic waste.

The FDIC Needs To Speak More Slowly

Readers have asked me if I had seen the now infamous video put out last week by a couple of a snark-meisters with a video camera and a ton of attitude, who hammered the FDIC's loss-sharing agreement with OneWest that covered the "owned" residential loan portfolio that OneWest purchased from the FDIC as part of the resolution of failed savings bank IndyMac. I'd seen it, and so had the FDIC, which issued a press release last Friday, along with a "supplemental fact sheet," that dealt with the viral video by basically calling the video's producers a bunch of nitwits and dung-eating liars. For a number of reasons, including the fact that I'm representing folks who have bid and will continue to bid on failed bank deals with the FDIC that involve loss sharing agreements, I don't intend to get into the substance of the erroneous conclusions made by the video's authors with respect to loss sharing agreements.What I don't say can't be held against me.

However, I do I wish that the FDIC had either ignored the video entirely or done a more thorough job of rebutting it. Listing bullet points and expecting folks who don't deal with these issues regularly to connect the dots is unrealistic. While the Calculated Risks of the world immediately "get it," they are vastly outnumbered. You need to take the rest of the world by the hand and lead it through the error of its ways step-by-agonizing-step. I realize that the FDIC folks were as exasperated as they are when I make Sheila Bair my personal piñata, and I'm certain that they wanted to treat them like they treat me: as a pimple on the backside of humanity that ought to be lanced, cauterized, and banished from view. Nevertheless, as I frequently tell my friends in the regulatory agencies, you've got to be better than I am. 

Also, focusing on relatively unimportant errors (as far as the central theme of the video was concerned), such as the incorrect allegation that the FDIC was getting ready to borrow from the US Treasury, and making a big deal out of such a side issue, makes it appear that the FDIC can't deal with the main point of the video and is trying to distract its critics by picking low hanging fruit and dangling it in front of our eyes. Not only did the dismissive tone of the FDIC's press release sound like it was uttered by a pissed off seventh grader ("and, like, these guys were just acting, like, you know, so STOOOOOPID!"), but it merely cranked up the video's hosts' adrenaline levels the point that they added another three minutes of rebuttal to their video and posted various supportive blogger links (including a link to one guy who appears to claim that OneWest may not actually exist because he couldn't find it listed in the SEC's database. Dude: OneWest is a federal savings bank. Try the FDIC's database). They were just as sarcastic and in-your-face today as they were last week, and now they've got all that additional site traffic and reams of comments from enraged realtors and borrowers who can't get loan modifications or short sales approved. Most of them are pointing their fingers at the FDIC. If a smackdown was intended to be administered by the FDIC, it didn't work, because the opponent bounced back up with renewed vigor and his fans are bellowing their renewed support.

The video appears to have been based upon a blog post from last September by Robert Hertzog of Arizona, who related the tale of a short sale from hell that was repeated by the video's hosts. The example used in the video is identical to the one set forth in the Hertzog's post, and Hetzog utters the line "Wait, it gets better...The FDIC just announced that they are 'considering' borrowing money from the U.S. Treasury in order to replenish it's deposit insurance fund (the same fund being used to pay all of these banks in the Loss Share Agreements)." That's very similar to a line used in the video that enraged the FDIC. What was true in September 2009 (that the FDIC was considering tapping a Treasury line) was not true when the video was made last week. A little research by the video's makers, instead of simply parroting Hertzog's outdated  statement, would have eliminated that false statement. Of course, a little research by the FDIC would have uncovered the source for this misunderstanding and made for a more measured response than "liar, liar, pants on fire." I mean, if a quarter-wit like the author of this blog can track down this evidence, the giant brains at the FDIC would certainly be expected to do the same.

Hertzog isn't backing down in the face of the FDIC's latest blast, either. He came out swinging today by reciting the entire history of the incident, restating "the math" and his analysis of the loss sharing agreement, and alleging that not only his client, but three more realtors in Arizona, got OneWest to back off a deficiency note on a short sale by writing to both US Senators from Arizona and OneWest's CEO with "the math" on their individual cases. He concludes with the equivalent of asking the FDIC when it's going to stop beating its wife: "So, my question to the FDIC and OneWest is, if this story is so 'blatantly false' as you claim it to be, why does OneWest change its tune when they are reminded of their greed?"

The FDIC doesn't want my advice and certainly assumes I'm not worthy to give it any (and I can't argue with it on that point). Nevertheless, they're going to get it. My advice would be to tackle "the math" head on. Take people through it like you were dealing with a "challenged" class, and not condescending to them, but trying to make them understand your point because you honestly want them to comprehend it. Connect all the dots for us. Bury us in analysis, at least enough that the only people left to carry on the fight will be the wing nuts and the tin foil hat wearers, who shall always be among us and for whom we shall always have to make allowances, and then ignore.

While you're at it, explain again why loss sharing makes sense, and what the alternatives to loss sharing are, and why none of them are preferable to the FDIC. Assume we're idiots, but well intentioned idiots. Because it's not just two guys and a video camera who are waging war against loss sharing. It's one of those aspects of the resolution process that more informed critics are starting to pick apart.

If you're not up to all this work, then the next time a half-baked video gets fired up, ignore it. Because some times, you need to swat a fly with a sledgehammer or it will never stop buzzing.

And You Don't Even Own Clubs

Great news: "[T]op investment banks are now intending to hire one-third more graduates this year than last. Their remarkable resilience to the downturn, and this year's strong recovery in the financial markets, mean that opportunities still exist in banking for those with the skill and tenacity to get them."

That sure warms the cockles of my heart. How about you?

What they don't tell recruits, however, is that the world of investment banking is full of hidden perils, not the least of which is the risk of a broken heart. From Columbia Business School's Follies of 2006 comes a trailer for a movie about the dangers of office romance in a business that broke the back of the American economy.

Note to politically correct hypersensitive readers: if you're offended, take it up with CBS. Don't hate the playa, hate the game.

Bashing Bankers to Push Brew

Obama's recent bout of banker bashing didn't originate in the fertile minds of his brain trust. No, it's been a time honored tactic of brew sellers in the UK. Witness last year's Strongbow Beer ad where a chorus of workers gathered for battle in a formation reminiscent of the movie "Braveheart" tells bankers to "Sod Off."

You've got to admire the crusty elan of the oldest banker flipping the bird to his critics on his way out of the scrum, though. You couldn't pull that one off on US broadcast networks. Thank god it's flex day Friday, when readers are scarce.

Bank of America's Galveston Fish Story

I realize that whenever a bank (or any other business entity) is sued these days the standard public response  is some variation of "the lawsuit is without merit and we intend to vigorously defend," but occasionally, you wonder why the bank didn't simply settle the dispute short of letting it get to the point where a lawsuit is initiated. Some claims are just public relations losers regardless of the legal issues involved. Take the case of the Galveston, Texas, homeowner who discovered that his vacation home had been seized by Bank of America, which thought it was taking control of a home on which it had foreclosed and which proceeded to change the locks on the house and turn off the power by throwing the main power switch.

Unfortunately, at the time the power was cut off, there was 75 pounds of  Alaskan halibut and salmon sitting in a freezer. The homeowner, a retired professor, and his wife were planning to throw a party for 30 guests. Instead, after entering the house a week after the power was turned off, they, and the police officers who responded to their call that their home had been invaded, were poleaxed by the overpowering stench of rotting fish. I assume it will take more than a single air freshener to police up the atmosphere in that dwelling.

“It was the most unbearable stench,” [homeowner Dr. Alan] Schroit said. “It was so unbearable the police officer asked if we could leave the house so he could take the report; it was absolutely horrible, a gooey mess.”

Needless to say, the fish fry was canceled.

The problem for Bank of America is that it seized the wrong house. The professor thinks the bank might have been looking for a house on another street with the same house number. However, he and his wife don't have a loan with Bank of America. I assume they're not likely to apply for one in the near (or distant) future. Whatever the reason for the error, that was a major "oops" moment for the nation's biggest bank.

The professor and his wife apparently are claiming that substantial damages were incurred as a result of the power being cut off, in addition to the rotting fish odor issue.

“The property sustained water damage, potential mold contamination arising from the standing freezer residue, water, heat and high humidity conditions during the time the electrical power was off,” according to the lawsuit.

Schroit said he kept doors and windows open for days to try to rid the house of the foul odor. Cleanup efforts were substantial, he said.

The floors had to be cleaned, as did the joists of a lower-level ceiling, through which fish blood seeped, and some painting had to done to get the house back to a “preinvasion” state, according to the lawsuit.

Perhaps the bank thinks the plaintiffs' monetary demands exceed the bounds of reasonableness. At this point, the bank isn't saying much other than it is familiar with the claims and "we do not believe the case will show merit.”

Maybe it does, maybe it doesn't. You can't determine that from the press report, although it does seem that because the plaintiffs are doing most of the talking, and that big banks aren't exactly admired by the reading public these days, the bank's image is taking a hit. Therefore, you'd think that unless the plaintiffs were trying to extract a windfall, the bank would want to avoid the bad publicity. After all, these stories give reporters a chance to publicize the fact that this isn't an isolated case for Bank of America.

According to an Oct. 30 article in the Floyd County Times, a Wheelwright, Ky., man filed a lawsuit against Bank of America for repossessing his home by mistake and refusing to pay for damages other than replacing the locks.

“Christopher Hamby arrived home on Oct. 5 to find the locks on his doors changed and winterization chemicals placed in the plumbing and various lines cut at the residence,” according to the article.

Hamby also did not have a mortgage with Bank of America, according to the article.

These KIds And Their Crazy Internet Thing

Arianna Huffington's recent push to have the common folk move their deposits from big bad banks to little good ones has been the talk of community bankers for the past week or so. Huffington's not only smart and articulate, but a a looker, so unrepentant male chauvinist pigs like some of the knuckle-dragging mouth-breathers who blog here haven't yet tired of the topic. Even if they disagree with some of her political and social views, they don't mind watching her argue them.

Thus, it was with some interest that we watched a video (embedded below) sent to us by a reader who happens to be connected to www.newsy.com, a website that is apparently trying to give a "fair and balanced" approach to certain hot issues of the day, yet to make its treatment of differing viewpoints as quick-hitting as it needs to be for an audience suffering from a collective case of attention deficit disorder. Since they were kind enough to alert me to their "beta" product, I'm pleased to embed the video in a post.

Personally, I enjoy being referred to certain blog posts I might have missed on a specific topic (like Vince Veneziani at Clusterstock slandering all the savings and loans during the 1980s that didn't fail). It's also interesting to see the incorporation of the viewpoints of main stream media and the blogosphere in the same broadcast, as if bloggers were actually sources of credible opinion. That's pretty far-fetched, don't ya' think?

On the other hand, strung together soundbites are not my cup of tea. True, I'm not the brightest bulb in the light store, but even a dull normal like me needs a bit more depth on occasion.

Watch it and judge for yourself. It's a new, new thing, so it's entitled to a shot, right?

I Heart (Community) Bankers

As hard as it may be to believe, Ariana Huffington has a new love interest: community bankers. Last week, she and Rob Johnson urged readers of Huffington Post to move their money from the evil clutches of too-big-to-fail bankers at Bank of America and JPMorgan Chase into the warm, soft embrace of all those "George Baileys" that Ms. Huffington and Mr. Johnson imagine community bank CEOs to be. Ms. Huffington and her merry band of progressives believe that they can make common cause with populists on the starboard side of the political ship-of-state and tap into the public's distaste for tone-deaf big bank executives who took TARP and paid themselves boatloads of year-end bonuses while sniffing that all the out-of-work prols can just eat cake. She and her cohorts want the common folks to help out the "struggling" banks that Ms. Huffington refers to as "America's Main Street community banks."

She may be on to something. There's nothing like the feeling your sticking your thumb in the eye of some fat cat to start the new year off on the proper note of peace on earth and good will to men (and women, too, of course). Heaven knows, community banks can use all the help they can get at this point.

My erstwhile progressive friend Alain Sherter at BNet, who suffers my conservative tomfoolery with good humor, beat Ms. Huffington by more than a week. Alain wrote an article two weeks ago calling on the Obama administration to do more to help community banks. He doesn't appeal to populist anger, however. He instead basis his appeal on facts.

Here’s the thing — small banks are also systemically important. Unless such institutions thrive, small businesses can’t grow. Community banks hold roughly 11 percent of total industry assets, but make 38 percent of all small business and farm loans. Banks with less than $1 billion in assets make more than half their loans to small businesses, according to the FDIC.

Without financing, these enterprises can’t create jobs. Equally important is the kind of jobs they create. These companies are where most of us start our working lives. Without such investment, to state the glaringly obvious, many communities already struggling with the effects of the housing and commercial real estate busts face deeper problems. The system — namely, the economy — doesn’t work.

If this era of goodwill keeps up, bankers (of the community variety, at least) may finally be able to show up at cocktail parties and admit their actual profession. I know my clients have been growing tired of claiming that they could tell people what they do, but then they'd have to kill them (in self defense). They may also be able to remove the paper bags from their heads when they head out the back door of the bank to slink home at the end of the day.

We'll see how successful this "move the money" campaign turns out to be. Personally, I expect the whole movement to blow over rather quickly, and people pushing this "cause" to move on to the next new thing. Moreover, unless the FDIC and the other federal bank regulators also start "feeling the love," all the good will generated by Ms. Huffington, Mr. Sherter, et al. will be for naught. Requiring community banks to boost capital, increase reserves, write down the value of assets, and otherwise restricting their deposit gathering and lending activities, which is what is happening now, will severely crimp their ability to put all those wonderful new deposit liabilities to work.

Thank You, Sir! May I Have Another?

While we've previously focused on all the banks that are turning up their noses at the sweet smell of TARP II, we almost missed the fact that there's at least one small bank that scooted back to the trough for another generous helping of TARP Lite.

WashingtonFirst Bankshares Inc. has sold a second round of preferred stock to the Treasury through the Capital Purchase Program, part of the Troubled Asset Relief Program.

On Oct. 30, Reston-based WashingtonFirst got a $6.84 million infusion from TARP, nine months after it got $6.63 million through the program.

MMMMMM, MMMMM! I'll bet that Son of TARP goes great with fava beans and a fine Chianti.

The bank says that it will be using that capital to make loans to debt-deprived borrowers (as required by the terms of TARP II) .

Regulators offered the bank the money and it chose to take it, said Shaza Andersen, CEO. “We have a huge amount of requests for loans right now.”

She said the bank will use the funds primarily to make loans, though it also is in expansion mode. It is hiring for seven new positions and is exploring options for new branches and acquisitions in Maryland and Northern Virginia.

Wait a minute...It's "also in expansion mode." I sure hope none of that fine preferred stock bought by Uncle Sam is used to gobble up fellow banks. That wasn't the announced purpose of either TARP Senior or Junior. The next thing you know, one of these banks might actually use the additional capital to cushion its loan write offs and build its loss reserves. When will the perfidy cease?

As to other banks who gave TARP a cold shoulder, Ms. Anderson thinks their concerns are unfounded.

Many banks didn’t take TARP money because they were unhappy with the frequently changing restrictions and the added scrutiny that came with it — particularly the limits on executive compensation.

Andersen isn’t concerned about the restrictions, and says that WashingtonFirst executives don’t make enough to be affected by the compensation caps.

Those executives may not make enough to meet the caps today, but since there were no compensation restrictions in effect at the time the first round of TARP capital was issued, how can you be assured that Congress won't lower the caps next week, next month, or next year? How can you be assured that Congress won't impose some other restrictions on TARP takers that make it onerous to have received "cheap" TARP capital? Well, of course, you can't be assured. You're betting on a hope and a prayer, otherwise known as the "good faith" of legislators and regulators.

One thing is certain, however: Ms. Anderson is not concerned about surveys like those we discussed last week, that show TARP-takers take it on the PR chin in the eyes of their customers. If Ms. Anderson is correct, and "there are a lot of small businesses" who need the loans that WashingtonFirst will provide "right now," then perhaps her bank will eventually end up a public relations "net winner."

Taking TARP Takes a Toll

It appears that all those banks that didn't take TARP money and used that fact to publicly bash their brothers who did take TARP needn't have bothered to spend all those bucks on billboards. According to Rich Brose of Maritz Research in a recent interview on Fox Business News (a hat tip to "Tweeter" Abby Carr), the mere fact of taking TARP has cost TARP takers an average loss of 26% in customer trust over those competitors who resisted TARP's siren call.

According to Rich, Martiz's research shows a steep drop in overall trust of banks since last April. Especially hard hit by the "lack-of-trust factor" were those banks that received government assistance in the form of TARP's capital purchase program. Traditionally, the percentage of consumers who say that they trust their bank (as opposed to "the other guy's bank," I suppose) is in the 90s. The most recent surveys by Maritz show that the trust factor has fallen to 68% with respect to consumers whose banks haven't taken TARP, and to 42% among consumers whose banks stepped up to the plate and took a fastball in the face for Uncle Sam.

Another disturbing survey result concerns the percentage of those surveyed who thought that the US government ought to regulate executive compensation at all banks (not just those who received government assistance). That percentage is 53%. That means that for all the tough talk we hear by talk-show pundits who claim "the people" oppose "creeping socialism," there's a good indication that a majority (a slim majority, but a majority nonetheless) are ready and willing to see "leaping socialism" employed, as long as the recipients of that socialist control are banks.

As with so many of these surveys, you have to wonder what comes to the mind of the polled when the word "bank" is used. James Stewart in "It's A Wonderful Life"? Doubtful. More like Angelo Mazillo, would be my guess.

I love the way that one of the interviewers goes off on a rant about her bank (and she names it) "nickel-and-diming me to death" with a recent uptick in fees. That puts a personal spin on it that we can all enjoy and, after all, it's Fox News, so no one expects anything other than "fair and balanced," right? Even those of us who make out livings from serving banks like soulless slugs can sympathize with her irritation.

The rest of this week we'll be stuffing our pie holes and guzzling various harmful intoxicants, watching football, and generally making a slothful nuisance of ourselves, just like the rest of America. Enjoy the holiday, even if you're a vegan and wouldn't touch a Turducken with a ten-foot pole.

Hot Off The Wire

I've received some updated information concerning prior posts that I'll pass along.

In a recent post on de novo banks, I mentioned an interview with Commerce Street Capital's Charles Ingram and Derek Cunningham. Charlie thoughtfully provided me with a link to that interview. These folks have their thumb on the pulse of this issue, and the interview is well worth reading for those interested in the topic. I hope that both of those links lead to the correct material. I understand that last week, I inserted a link in one of my posts to a totally unrelated blog post on the blog "First Things," which deals with issues related to religion in the public square. That's why, boys and girls, you should never drink and blog. At least I didn't link to a porn site.

Another update concerns our perennial regulatory "hot ticket," Colorado Director of Real Estate, Erin Toll. When last seen on these pages, she'd been issued a temporary restraining order by a Denver judge that blocked enforcement of an administrative subpoena she'd issued for the bank records of a mortgage broker her office was investigating. Last week, the judge refused to issue a permanent injunction and upheld the Toll's power to issue such a subpoena. Toll was investigating whether the broker was steering funds to unlicensed brokers. According to Judge John Madden (not related, we assume, to the "Biff, Bam, Boom" former football coach and TV commentator of the same name), “bank records of the mortgage loan originator and his company would reveal if such funds were … distributed to unlicensed individuals in amounts indicating that such individual was being paid for originating the loan. It is possible … that methods could be utilized to mask such transactions, such as arranging for side payments by a borrower, making multiple payments to the individual in smaller amounts, or making payments to intermediaries.”

As we mentioned last time, at least one critic accused Toll of "terrorizing" licensed brokers by the use of such subpoenas. While I'm not opposed to the use of hyperbole in the service of entertainment, I don't see "the horror, the horror" in the use of a subpoena in this case. Toll's doing what she ought to be doing: following the money.

Our final bit of updating concerns PlainsCapital Corp., a Texas bank holding company that took a public relations beating administered by some of its competitors because it had the audacity to take TARP CPP money that the Treasury Department was begging banks to take. In a sign that is all too familiar at this point, PlainsCapital announced that its about to do the first bank initial public offering since 2007. It expects to raise $141.5 million and use $92 million of it to pay back all of the TARP capital. Like Ricard Nixon, PlainsCapital will soon be able to tell its critics that they won't have PlainsCapital to kick around anymore. At least, not over the issue of TARP. Texas banks kick each other around over a lot of things, so some other bank's boot is bound to be up their backside over some other manufactured marketing ploy sooner or later. However, PlainsCapital is steamed about how it was treated by some of its competitors, so when the boots start kicking, expect PlainsCapital to be wearing spurs.

This is another indication that the recently announced plan by the Obama administration to make "cheap TARP CPP" investments available to community banks is not likely to meet with open arms by all of its intended beneficiaries. Many banks who took it TARP in previous rounds and can find any way to pay it back are doing so as soon as they're able.