Five years ago, we told you about Thomas Depping, a Texas banker who'd run afoul of the bank regulators because he insisted on doing what he did best: making commercial loans. To the bank regulators, "concentration" is a four-letter word. Depping turned in his charter, found private investors and funding sources, and decided to see if he could make money without leveraging insured bank deposits.
Last year, we reported that Depping was not only making money, he was making it hand-over-fist. We also noted that a one-size-fits-all approach to asset concentration might not always be the best solution for all banks.
Nevertheless, single-minded discouragement of asset concentration fails to account for the fact that some management teams not only can "concentrate" on a line of business and manage their risks appropriately, but their laser-like focus and degree of sophistication on a specific area could very well mean that an attempt to "diversify" into other areas might increase, not decrease, the risk.
Yes, we understand that such thinking assumes that the regulators might consider acquiring an in-depth, nuanced understanding of actual risks and risk-mitigation techniques in the real world. We apologize for that ill-founded speculation. As a defense, we offer up the fact that in the four years we have been attempting to assist Colorado banks who want to serve the "legal" pot industry, we must have inhaled too much second-hand smoke. From now on, we'll stick to edibles.
Last month, we read yet another article on Mr. Depping (paid subscription required) in which he announced that he had agreed to sell a controlling interest in his non-bank company to Warburg Pincus for an amount that some published reports put as high as $300 million. He's rolling his entire equity stake into the new business, and is "looking forward to the next five years." Making even more profits for himself and his investors, no doubt.
Liquidating Main Street "was clearly one of the best decisions I ever made," Depping said Wednesday.
$300 million can make a person feel very good about their decision-making. Just ask Bill and Hillary Clinton about their pay-to-play-foundation-and-speech-making business model, or The Orange Man about having Dad loan you millions in seed money that you parlayed, through the clever use of US bankruptcy laws and reality television, to the very threshold of becoming our Groper-in-Chief.
While I've spent over four decades representing FDIC-insured financial institutions, I think that Depping may be the point person for a trend that will gain steam. I wondered about that five years ago, and I still wonder about it. As the article notes, the funding advantage of insured deposits is attractive. On the other hand, the regulatory burden that has been created in response to the 2008 economic collapse, not only the laws and regulations enacted, but the attitudes of the regulators toward "de-risking" (not withstanding their fork-tongued pronouncements meant to assuage their Congressional critics), may create, or have created, a tipping point, where both economically and emotionally, it is preferable to attempt undertaking activities like commercial lending outside of a banking charter. For old-time bankers nearing retirement, this state affairs may more likely provide an additional incentive to sell out and go fishing. For those with more gas left in the tank, however, it might be worth serious consideration to determine if a non-bank business structure is the way to roll. The pain of everyday existence may no longer be worth the funding advantage, especially if your business plan is to concentrate on such incredibly risky things as making an actual profit.