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.

United Western: The OCC Responds

Over the weekend, I had a chance to read the opposing motions for summary judgment filed by United Western Bank and the OCC in the lawsuit filed by the bank to overturn the order of the Acting Director of the OTS to place the bank into an FDIC receivership in 2011. Late last week, the bank filed a motion to strike the OCC's entire statement of facts on the grounds that it was a back-door attempt to circumvent local rules on the length of pleadings in this particular type of case. However, I'm basing my personal bloviations on the entire motion and accompanying statement of facts filed by the OCC.

In my comments on the plaintiff's motion, I stated that I thought that the OCC would have to rebut the facts as alleged by the plaintiffs in some detail , not merely focus on the high bar the law sets to overturn the decision of the OTS. The OCC did that, although we'll see what happens to those "facts" when the judge rules on the plaintiff's motion to strike. Regardless, the judge has access to the entire administrative record and isn't bound by a party's selective inclusions, omissions, and spin. Unfortunately, at this stage, I am.

Given my personal experiences in dealing with the OTS, the FDIC, the FRB, and the OCC over the past five years, and with the OTS in connection with a strikingly similar situation ten years ago, I believe the plaintiff's allegations that there were no serious criticisms of the bank's business plan, which involved a focus on institutional deposits as a major source of low-cost funding that the bank used to invest in mortgage backed securities and other mortgage-related assets, until the economy slowed and then crashed. Although earlier reports of examination (ROEs) may have mentioned the liquidity risk posed by a concentration on such funding sources, I suspect that the ROEs also stated that the bank was aware of and adequately managing that risk. It wasn't until the economy tanked that the senior management and directors of the bank transformed themselves, in the eyes of the OTS, from geniuses to cud-chewing bovines. At that time, the business plan suddenly made no sense, was unsafe and unsound, and had to be changed as quickly as possible in the face of the worst recession since the 1930s. While the bank's management and board was trying to steer the bank in a new direction, you can't turn an aircraft carrier as quickly as you can a cigarette boat, especially when the current is flowing strongly against you and icebergs are bearing down from the windward side.

Of course, that wasn't the concern of the OTS. It's concern was the fact that the bank's risk profile had suddenly turned unfavorable because of outside circumstances, and that if it failed, the OTS supervisory personnel responsible for overseeing the bank might be criticized by the Office of the Inspector General of the FDIC for not acting forcefully enough, early enough. Bureaucratic butt-covering trumped all other considerations. From then on, the OTS made sure that it didn't cut the bank any slack. That attitude led to aggressive mandated writedowns in the value of securities and other real estate-related assets, increases to reserves, and hits to capital.

I also accept the plaintiff's allegation that the OTS decided long before the bank actually failed that it was doomed, but allowed the bank's management to go through a Chinese fire drill of ultimately fruitless capital-raising and liquidity-stabilizing efforts in order to give the ultimate dropping of the hammer on the bank's head a patina of inevitability. Although it's not alleged in any of the pleadings, and I have no information from outside sources, I suspect that the OTS personnel with decision-making authority may have decided that they simply didn't "like" the ownership and senior management of the bank, didn't want them in "the business" any longer, and weren't going to approve any recapitalization plan that involved any concessions on the part of the OTS (such as waiving certain conditions of the Cease and Desist Order and agreeing to a non-standard holding company guarantee). I think that if it had desired to do so, the OTS could have worked with the bank to structure a recapitalization plan, including certain waivers of the C&D's terms, but chose not to do so for reasons that may not be expressly revealed by the administrative record.

Even if the above assumptions and outright speculations might be correct, the problem for the plaintiff is that, ultimately, all the OTS has to show in order to prevail is that there was a rational basis for the Acting Director's determination that one of the following three grounds existed for the appointment of a receiver: (1) the bank was in an unsafe and unsound condition to transact business; (2) the bank was likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business; or (3) the bank was undercapitalized and failed to submit a capital restoration plan that was acceptable to the OTS. The court must defer to the opinion of the Acting Director of the OTS on these matters unless the court determines, based solely on the administrative record, that the decisions of the Acting Director were arbitrary or capricious or lacked any rational basis. The plaintiff must overcome the presumption that the decisions of the director were not arbitrary or capricious by a preponderance of the evidence, again as reflected solely in the administrative record. As I've observed previously, this a high hurdle for a plaintiff to jump and is one important reason that few such lawsuits are brought.

All three grounds for the appointment of the FDIC as receiver seem to hinge on the rejection by the OTS of the bank's capital restoration plan, the undercapitalized status of the bank (albeit at a 5% core capital level), and the perceived "instability" of the commitments of the remaining institutional depositors not to withdraw their funds. The OTS articulated seven grounds for the rejection of the capital plan, all of which the plaintiff alleges are without a rational basis. The OCC, on the other hand, articulates in its motion several reasons to support its decision to reject the capital plan (including, for example, disapproval of the acquisition by the bank of a securities clearing business, "excessive" planned growth of the bank, and requirements by investors that certain requirements of the Cease and Desist Order be waived by the OTS). The alleged instability of the institutional depositors is also an issue where the OCC appears to have demonstrated a rational nexus between the facts as shown in the administrative record and the Acting Director's determination that a potential "liquidity crisis" could occur in the near future due to the OTS' rejection of the capital plan. While the plaintiff argues that there was no evidence that the remaining institutional depositors were likely to withdraw their deposits in the near term, the OCC alleges that the administrative record shows that the largest depositor had given the bank until February 15, 2011 to recapitalize, following which date, if recapitalization did not occur, the depositor would withdraw its funds (in an amount which exceeded the entire liquidity of the bank, according to the OCC). 

My concern for the plaintiff's case is that while knowledgeable bankers can conclude that if the OTS was interested in working with the bank's management to reach an accommodation with outside investors that would have addressed their concerns and permitted the bank to be recapitalized and to survive, it could have done so, the OTS can articulate reasons for its decisions not to do so that are based solely on the administrative record to prevent the plaintiff from meeting its burden. This case appears to be a prime example of why it's so tough to overturn a receivership decision. You can think that the OTS made a series of bad judgments, but it's difficult to prove that those judgments were made without a rational basis.

The case is not over. Each side gets another shot at replies. Moreover, I'm not being paid to parse the nuances, so the views expressed in this post are not finely honed. However, at this point, no matter what my heart tells me, my head tells me not to bet against the OCC.

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.

Blow 'Em Up!

Wall Street analyst Dick Bove pushed back hard against "break-up-the-big-banks" advocates like Dallas Fed President Richard Fisher and FDIC vice chairman Thomas Hoenig, and his views, in turn, generated some heat from detractors.

In his latest broadside against efforts to split up the nation's largest financial institutions, Bove said the dollar is at risk of losing its standing as the world's reserve currency. That would mean foreign creditors could demand that the nation pay its more than $15 trillion of outstanding public debt immediately.

Conversely, growing the banking system and unleashing big institutions "to use the tools they have developed" will protect American financial interests globally.

"In doing so, the biggest American banks will aid the growth of the American economy and protect American prosperity," said Bove, the vice president of equity research at Rochdale Securities. "The problem is the United States does not want this. It is shrinking its big banks.

"It is using every political technique it can muster to reduce their profits and profitability. It is on a vendetta to curtail banking activity."

Bove also contends that big banks are necessary to ensure the "global currency supremacy" of the U.S. dollar. That supremacy, Bove asserts, is necessary to avoid "riots in the streets."

"The biggest benefits that the United States gains from having the global reserve currency is that this nation has never really had to concern itself with its budget or trade deficits," Bove said. "Unlike other countries that overspend and then must develop systems to pay back what they borrowed, the United States has never had to worry about this problem. It simply prints money and uses the printed money to pay its bills. No other nation in the world is allowed to do this."

But if the U.S. banks continue to fall behind their global competitors the dollar's standing as the global currency could suffer, hampering the ability to print more dollars to fund debt. Bove envisions riots on par with those in Greece if the U.S. is forced into austerity measures because it cannot keep printing money to pay its debts.

In other words, in order to avoid the inevitable results of our profligate deficit spending binge from occurring until all of us presently alive are dead, and future generations are then hosed, the big banks must become large enough to absorb not only smaller banks but even the Sun's rays, and become black holes of need and greed that chew up everything of value and in turn spit out US dollars into the world like manna from heaven. I get it. That sounds like a plan for a society whose motto might be a line spoken by Abraham Lincoln's character in the movie Bill and Ted's Excellent Adventure: "Be excellent to each other, and party on dudes!"

Commenters to the linked article, written by Jeff Cox and posted on CNBC's "NetNet With John Carney's" web site, took issue with Mr. Bove. A sampling:

---what an a$$ hat

---Isn't this the same clown who upgraded Lehman, days before their bankrupcy, screaming, "BUY BUY BUY!!!!" ??
What an assclown.

---break them up, blow them up, and @#$% them up

Ah, calm and reasoned discourse carries the day again, I see.

Regardless of what you think of Bove's position, I like the fact that he's raising the issue. With so much of our recent banking policy, including the bailout programs and Dodd-Frank, having been quickly implemented and, in the case of Dodd-Frank, shoved down the throats of its opponents, taking the time to think through radical change BEFORE it's implemented might be worth a try, notwithstanding the fact that such a modus operandi flies in the face of the Pelosian Theorem ("You have to pass the bill before you can know what's in it!"). Contrary voices raising an intelligent argument ought to at least make us stop and carefully think through the consequences of radical change before we make it. That would be a refreshing change of pace, wouldn't it?

And as fond as I am of the term "a$$hat," I don't think it advances that agenda.

Treasury Contemplating TARP Closeout Sales?

When word leaked out last week that the US Treasury Department was considering selling the preferred stock it held in over 350 banks as a result of its TARP capital injections, I think the remaining TARP banks had a mixed reaction. On one hand, there's always the advantage of dealing with the devil you know as opposed to the devil you don't. It's theoretically possible that Treasury might sell the whole kit and kaboodle to Gordon Gekko, who might downsize some his acquired banks with extreme prejudice.

On the other hand, there's always the disadvantage of continuing to deal with a federal bureaucracy that is motivated by factors that focus less on the bottom line than on meauring the political wind's speed and direction. Ask a TARP bank that's tried to negotiate a "haircut" on repayment of TARP stock in connection with a merger or acquisition transaction how political considerations (i.e., how Treasury can insulate itself from being criticized during the period starting now and ending with The Rapture) trump common business sense. If you have a savvy private equity investor owning your stock, you might ultimately be screwed, but at least you'll have a chance of understanding why.

Opponents of the original TARP will never admit that they might have been wrong about the need for the program to save the economy from ruin. The fact that the Treasury has already made a profit on its original TARP investments ($20 billion so far, according to the linked article) is meaningless to them. I guess they wanted to let the "creative destructive" forces of a "pure market system" work their magic on all of us, and if we ended in standing in bread lines, they'd say that was a hard lesson learned and that we're all the better for it. I don't have the energy to tell them that not only is God dead, but so is Ayn Rand.

So, if I take pot shots from the peanut gallery at the administrators of TARP, I still think that it was a good idea, albeit one that could have been executed a heck of a lot better than it was.

Kanas & Co Cashing Out?

Two years ago, when BankUnited announced an IPO and private equity haters were screaming "cash out," I said it was too early to tell. When the IPO was later completed and the major private equity players retained an ownership stake, which was worth a heck of a lot of moola, I said that both critics and supporters of private equity had fodder to support their opposing positions. Last week, Kanas and Company announced that they may very well be looking to cash out, so those who hate the fact that private investors make money on failed bank deals can finally legitimately point their fingers at the principals and proclaim "J'accuse!"

The accusers are bent out of shape because the lowest cost bid for BankUnited was one in which private investors, in effect, recapitalized a failed bank (although they legally started a new bank that acquired most of the failed bank's deposits and assets), received a generous loss-sharing arrangement from the FDIC on the failed bank's assets, and, because they were one of the first PE horses out of the gate, negotiated a better deal than did most of those who subsequently tried to run the same race. In fact, it might be said that the negative publicity generated by this deal and a few others (the IndyMac transaction being another) soured the FDIC on private equity deals altogether. As the Wall Street Journal reported yesterday:

The deal was one of the few in which regulators allowed private-equity firms to take control of a failed institution on terms that are now considered to be lucrative. Since the deal took place, regulators have offered less rich terms to private-equity firms that are seeking to buy banks.The buyers paid $945 million for BankUnited. The FDIC gave them $2.2 billion in cash and agreed to reimburse as much as $10.5 billion in future loan losses.

As we've said previously:

Much of the prejudice against private equity appears to be based on the fact that it desires to make money on its investments. Isn't that what investors in any bank seek to do? The critical issue in the BankUnited deal isn't that the private equity investors might make money from an FDIC-assisted transaction, but whether the loss to the FDIC insurance fund will be less with the deal that was done than it would have been without that deal. I'm going to assume that the loss will be less, and therefore, that the FDIC was right to do the deal in the first place.

I still think that's the case. Moreover, the investment preserved jobs and the viability of a resuscitated financial institution that has grown in size and expanded into new markets under the current ownership and management. That sounds like a win-win, except for the fact that the stockholders made money on the deal. As we all know, in the current political climate, "profits" and "banks" are a deadly combination.

Well, we don't need to worry about a repeat of this "travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham." As those of us who represent private investors in the banking business well know, the FDIC will never again make such a "mistake."

'Tis The Season To Be Jolly

The unmentioned back story to the recent scary prospect that The Care Bair might come out of hibernation long enough to plague the nation's largest loan servicers (a rumour that was later quashed by Ms. Bair) was that there was a valid reason for Citigroup being the only large banking organization to oppose Sheila as "Servicing Czar". That reason revolved around Bair's role several years ago in "screwing" Citigroup out of its deal to buy Wamu and instead selling it to Chase. Although in hindsight Citigroup dodged a bullet and Chase thinks that it may have been stuck with a lemon  by Sheila and her gang, at the time it seemed like the FDIC had simply reneged on a commitment to Citigroup and sold Citi down a river.

To compound that offense, Sheila then got into a face-slapping-fest with Citi's senior management, including CEO Vikram Pandit. It got personal and it got nasty and it left a lot of hard feelings, the same thing that apparently occurs every time one of Taylor Swift's boyfriends dumps her for a girl with looser morals. As I said at the time:

Oh, my: intemperate language directed at the FDIC generally and Ms. Bair specifically, followed by lawsuits, then the silent treatment, then a reach out to make it all better again. That sounds like the various steps of the grieving process gone terribly, terribly wrong. No wonder Ms. Bair and her coven are looking to stir up a witches brew of payback and whoop-ass on Pandit and his crew. They were mean to Sheila and then, after a lot of time went by, they begged for forgiveness and asked Sheila to take them back. Anyone who's ever witnessed puppy love gone sour knows that the girl will NEVER take the boy back until she makes him suffer like the gnarly, cruel, hateful, and really, like, SPASTIC bully he is. Or until he apologizes sweetly, buys her a Kobe Bryant-like 6-carat rock for her ring finger, and, like, promises never to do it again, cross his heart and hope to die.

So,the elephant-like institutional memory at Citigroup simply refuses to let bygones be bygones, at least where Sheila Bair is concerned. I guess this means she won't be receiving one of those prized Citibank Festivus fruitcakes next week.

UPDATE: 12.16.11: Alert readers are correct: The FDIC backed out of its deal to sell Citigroup Wachovia, not Wamu, and sold it instead to Wells Fargo. My bad! Regardless, no Festivus fruitcake for Sheila.

UPDATE #2 12.16.11: TO ANSWER OTHER READERS' CRITICISMS OF THIS POST: (1) No, I didn't start in on the Shiner Bock until after I finished the post. The errors were due to a brain freeze unaided by alcohol, hops, or barley. (2) You may think that Chase's purchase of Wamu was a home run for Chase, but Jamie Dimon thinks it was "a bad experience."

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.

State Bank Regulators Speaking Up

In February of this year, we noted that state bank regulators were starting to come out of their shells of political correctness that usually hamper their desire to bash their federal counterparts. The trend has not abated.

Newly appointed director of New Mexico's Financial Institutions Division recently came out of her corner swinging haymakers at Dodd-Frank (free trial subscription required).

Cynthia Richards, who was appointed in July, finds many of the provisions of new federal banking reform laws, known as Dodd-Frank, to be “onerous” and says their effect is largely to protect banks that are too big to fail. It’s a category that none of the state-chartered banks and credit unions she oversees falls into.

“When we see this act fully implemented we’re going to see across the nation the effect on competitiveness and the profound effect on the economy, and not for the good,” Richards said.

The major problem she sees with new federal laws is that they are designed for Goldman Sachs and not for the small, rural banks that constitute many of the 37 state-chartered banks the state Financial Institutions Division is responsible for regulating.

Some regulations are going to be difficult to implement, costly and confusing, Richards said. Others will cost banks some revenue.

“I get numerous phone calls from bankers just wanting to talk about it,” Richards said. “I’m overwhelmed with the concern smaller banks have with this act.”

"Concern" is too mild a word. "Angst" would be more appropriate.

In neighboring Colorado, Banking and Securities Commissioner Fred Joseph refused to sign off on a request to put a Colorado community bank into an FDIC receivership (paid subscription required), so the Federal Reserve was forced to use a rarely (if ever) used provision of federal law and do the dirty work. Joseph disagreed with the FDIC's judgment that squelching a deal that the bank had cut with another bank to sell less than all of its branches was a worse deal for the FDIC than taking the bank down and selling the whole kit-and-kaboodle to the same bank with a loss-sharing agreement. The branch sale had been approved not only by Joseph's office, but by the same Federal Reserve that turned around and put the bank into an FDIC receivership. Who says there's no honor among thieves?

"I believe what was best for the bank was the sale of the branches," Joseph said Sunday. "We looked at the bank and thought it was best for the consumers and the state of Colorado to let the deal go through."

The failure was not only historic — in that the Fed instead of the state regulator played the role of executioner — but it also revealed a rare instance of state and federal regulators disagreeing over when to the pull the plug.

Joseph called the case of Greenwood-based Community Banks "a very unique situation."

Community Banks had agreed to sell 16 of its 40 branches to Boston company NBH Holdings Corp. (The Kansas City institution, MidWest Bank, that ultimately bought Community's operations from the FDIC is also owned by NBH.)

Joseph said the branch sale would have increased the bank's status to "adequately capitalized", making its condition less dire, and given it more time to deal with its losses. A heavy dose of construction loans had left the bank with a high amount of assets in nonaccrual status. At June 30, its leverage ratio was a meager 1.92%.

"They still would have to retain the poor assets that they had and had to work through them, but they would have more capital and more time to do it," Joseph said.

But federal regulators blocked the branch sale. Joseph said the FDIC, which becomes involved whenever a bank is "critically undercapitalized", objected to the deal because it would not meet the so-called "least cost" resolution test. The FDIC is bound by law to pursue resolution options for failing or failed institutions that result in the least cost to the Deposit Insurance Fund.

"They did the least cost analysis and they don't explain to anybody how they do it," Joseph said.

Why would the FDIC reveal the cost analysis and subject itself to scads of laughing children who would gleefully point out that the emperor is naked? This way, the FDIC can justify its "least cost" analysis the old fashioned way: "Because I said so!" Hey, it worked for your mother, didn't it?

The last time around this broken horn, back in the late 1980s and early 1990s, I don't recall these types of disagreements between state and federal regulators hitting the newspapers. Then again, in those days, we had twice the number of banks we have today. An industry whose very existence is imperilled tends to garner support from every stakeholder, much of it vocal. That includes state regulators who see their constituency being whittled away, one too-small-to-save community bank at a time.

UPDATE 11.03.11: An article in today's American Banker (paid subscription required) states that the Fed never approved the branch sale by Community Banks to MidWest Bank, but that the acquirer's primary federal regulator, the OCC, did approve it. The article also alleges that "the FDIC was apparently very involved in supervisory discussions in the bank's final days, and helped reject the bank branch deal that would have at least delayed the institution's failure." Whether the Fed agreed with the FDIC about the substance of the transaction and then changed its mind, or whether it agreed with the FDIC all along that the branch sale was not a good deal, the fact remains that there was a basic disagreement about the benefits of the transaction among the federal and state regulators, and rather than opt for preserving a charter, the regulators with the ultimate power of life and death decided to eliminate it. It's also clear that the FDIC, once again, played an important role in culling the herd.

Just Put On A Happy Face

Last Wednesday, I was on a panel with Joseph Lynyak of Pillsbury Winsthrop Shaw Pittman LLP and Dr. Marsha Courchane of Charles River Associates, at the biennial conference of the Harland Financial Solutions Network of  State & Federal Counsel. The topic of the panel's discussion was "Putting It All Together: A Forward Looking Discussion." Dr. Courchane gave us some distressing statistics concerning community banks, including (1) the top five banks' share of total industry assets has leapt from 33.8% at the end of 2005 to 42.6% at the end of 2010, and (2) in 2008, banks with less than $1 billion in assets had increased small business lending by $4.2 billion and single family residential lending by $17 billion, while in 2010, the same category of banks saw small business loan holdings fall by $8.9 billion and residential loan holdings fall by $19.5 billion. After she finished, I got a chance to give my view of the pressures I see on community banks and where I see the the industry headed. I'll give you the "CliffsNotes" version of my rant:

• According to the FDIC, community banks (banks with assets of $1billion and less) hold only 11% of the industry's assets, but make 40% of the small business loans. Since small businesses have traditionally accounted for the majority of new job growth, that's not great news for the economy.
• Since 2008, nearly 75% of the banks that have failed (309 out of 415 through October 21, 2011) have been community banks.
• Even prior to the creation of the Dodd-Frankenstein monster, there was a campaign by certain federal regualtors to reduce the size of the banking business. Over twenty years ago, then-Comptroller of the Currency Bob Clake was calling for the reduction of the size of the banking business, complaining that there were simply too many banks for the business to be profitable. We halved the number of banks since then. We're down from a peak of 13,000 independent banks in 1960 to around 6400 today. In the current crisis, certain voices within the federal banking agencies are again calling (soto voce this time around) for further reductions in numbers. How many is too may? Is 4000 the magic figure, or do we shoot for the Canadian Model and keep rolling until we're down to a handful?
• While current complaints about Dodd-Frank focus on its compliance costs and "diversion of human resources" costs, Dodd-Frank (and the feared CFPB it birthed) are only two negative factors that are beating down community banks. Others include:

Overly conservative examiners, zealously fighting the last war while simultaneously hindering new lending and the resolution of existing problem credits, and, in a number of cases, rendering problematic the survival of institutions;

Dwindling traditional sources of interest income, since (a) CRE is anathema; (b) quality small business borrowers are few and far between; (c) big banks are starting to poach small business borrowers they formerly disdained in order to deploy the cash that would otherwise stand idle; (d) historically low interest rates are expected to stay low for at least the next two years; and (e) net interest margins have shruken to the size of that portion of Charlie Sheen's brain that controls judgment.

Restrictions on fee income, including (a) debit card interchange fees, thanks to the Durbin Amendment (and no community banker I've spoken with thinks the exemption for smaller banks will "stick" in the market place over the long haul); (b) restrictions on overdraft fee income through regulatory "guidance" and class action litigation; and (c) the prospect of the president, in league with the CFPB, using the threat of "unfair" and/or "abusive" scare tactics to beat back unpopular fees like the recently proposed monthly debit card fees that the big banks tried to "float."

In other words, for the little guys, it's hard to make a buck, and where's the light at the end of the tunnel? Oh, yeah there it is. Unfortunately, it's the headlight on a locomotive with the throttle full open and headed our way.

What's the prospect? What all the pundits have been predicting: consolidation. The big-and-rich will get bigger and richer while the number of smaller independent banks will continue to shrink. I don't see the United States ever getting to the point where the only banks that exist are The Big Five, and there will still be niches where community banks will survive. However, unless circumstances change (and that's always a possibility), the future looks bleak to me.

After my little rant finished, Joe Lynyak commented that it was obvious that "Kevin's a glass-half-full kind of guy." I had to agree that I'm a cockeyed optimist. The audience's laughter was akin to that of troops in the trenches after a long siege. And we're only part-way through this particular war.