Bank Lawyer's Blog

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.

Son of TARP Takes Flight

I suppose that it's too soon to have more than a knee-jerk reaction today's announcement by President Obama that he'll propose legislation to "goose" lending to small businesses and to help community banks with what's left of the TARP money. Inasmuch as I have a knee (two of them, to be precise) and I'm certainly a jerk, I'll offer one up.

An SBA lending boost was first proposed seven months ago and the federal government is just now getting around to helping small business borrowers and their lenders. As has been the case throughout the bailout, small fry are the red-haired stepchildren of the family of folks who are "entitled" to a government handout. To me, this is all too little, too late. If it helps some businesses and some community banks, that's great. Yet, if, as the president correctly states, "there is too little credit flowing to our small businesses," what's changed in the last year in that regard? Why are we just now getting around to dealing with small businesses and their community bank lenders? If these steps "will lead to more jobs, more growth, and a stronger economic recovery,” why weren't they taken much, much sooner?

[I hope that this criticism of the administration doesn't cause the Anita ("I Wanna Be Mao's Girl") Dunn and Robert ("Glenn Beck Is Not Objective") Gibbs to go on a "Funnell hunt" like the "Fox hunt" they've been conducting recently. On the other hand, that might be kind of fun.]

As to this latest "Son of TARP," it may be true that a 3% (as opposed to 5%) dividend rate on preferred stock, and a waiver of warrants for small fry, will attract some community banks to jump in bed with the government. Nevertheless, I think that the hurdles to taking TARP that we've discussed in the past, including the negative public perception of "TARP Babies" (used by some non-TARP takers to publicly castigate TARP recipients in public advertising) and the fact that the government has changed the rules of the game after the fact, will deter many potential recipients from seeking to jump in bed with the government. Many banks who previously took TARP capital infusions have been lining up to pay them back, and some of those recipients have not been happy with the Treasury Department trying to "stick it to them" with the valuation of the warrants that the banks must repurchase. Likely the most enthusiastic applicants will be those banks desperate for a capital infusion, who are also likely to be in such bad shape that they'll not qualify for approval by their federal primary regulator.

Time will tell. Until I see concrete evidence to the contrary, I'm reserving a "healthy skepticism" about how successful this latest round of government largess will be.

You know, if the TARP trickle down continues, sooner or later we're all going to get a little taste of TARP. That will make people like Bill Zucker very happy.

Tone Deaf Player Ejected From Band

When I read this story from The Los Angeles Times late last week, I thought to myself that there has to be a limit to how tone deaf a person can be to public sentiment and still keep his or her job. Wells Fargo takes a deed to a $12 million Malibu beach house owned by victims of Bernie Madoff's Ponzi scheme who conveyed it to the bank to satisfy a debt and the next thing the neighbors know, wild wing-dings are being thrown at the beach pad by none other than Wells Fargo's head of commercial real estate. I mean, let's turn aside from the appearance of impropriety argument and just concentrate on the public relations disaster-in-the-making. How dumb can you be? Did you really think that no one would notice and, even if they did, they'd give you a pass? Really?

Colony residents said the woman they believe to be [Wells Fargo Senior Vice President Cheronda] Guyton, along with her husband and two children, took up occupancy in home No. 106 in Malibu Colony shortly after Lawrence Elins turned it over to Wells Fargo Bank on May 13.

The residents said the family spent long weekends at the home and had guests over, including a large party the last weekend of August that featured a waterborne arrival.

"A yacht pulled up offshore, with one of those inflatable dinghies to take people back and forth to the shore," said Roman's wife, Elaine Johnson. "About 20 people got taken over in the dinghy."

Way to fly in under the radar, Cheronda.

In a prepared statement, the bank said it would investigate the matter thoroughly and that an employee's use of property that had been surrendered by a borrower to satisfy a debt to the bank would be a violation of the bank's code of ethics. I know what you cynics are thinking: The term "bank's code of ethics" is an oxymoron. That may be so, but violating it can still get you in hot water. As Ms. Guyton discovered, post-haste.

On Monday, Wells Fargo & Co. said it terminated an employee for misconduct at a bank-owned property in one of California's most well known celebrity enclaves.

Cheronda Guyton, senior vice president in charge of commercial foreclosed properties, had been seen using the property to host weekend guests and throw private parties, according to published reports.

[...]

Wells Fargo said an internal investigation into the matter had found that "a single team member was responsible for violating our company policies" and that "employment of this individual has been terminated."

"We deeply regret the activities that have taken place as they do not reflect the conduct we expect of our team members," Wells Fargo said.

I'll bet they regret those activities. Think of all the time, effort, and expense that Wells Fargo pours into its branding, public relations, and advertising, all of it is designed to build trust with the public, particularly consumers for a bank with the focus of Wells Fargo. Along comes one employee with a tin ear and the whole effort comes a cropper. At least you can't accuse Wells Fargo of dilly-dallying about taking action. The story hits the press on Friday and by Monday the subject of the story is gone. Of course, it will take a while for the bad smell she left behind to dissipate, so the bank will have some fond memories of her to cherish as her yacht's wake disappears over the banking horizon.

On the other hand, in this day and age, you can rest assured that some other numbskull associated with some other financial institution will soon pull an equally bone-headed PR move and take the heat off Wells Fargo. It's darn near inevitable.