Bank Lawyer's Blog

TARP Paybacks Continue To Roll In

Although I’ve beaten this drum for the last four years, I’m going to continue to rip flamadiddles on the same theme until my hinged wrists get tired. TARP, when it stuck to its intended purpose (before it became a slush fund to bail out the auto unions), not only saved many deserving community banks, it has ended up making a net profit for the US government. One more example is a recent auction of TARP preferred stock of a "saved" Texas community bank.

The U.S. Treasury said Friday it expects to recoup $19.8 million in proceeds from the public auction of FC Holdings Inc.’s Troubled Asset Relief Program debt.

The Treasury priced 21,042 TARP shares of the Sugar Land-based bank holding company’s TARP at $897 per share, which would ring up at $18.8 million. Another 1,052 TARP shares are expected to be sold for $955 per share, totaling $1 million, according to the Treasury.

FC Holdings, the bank holding company for Sugar Land-based First Community Bank, originally received $21 million in TARP in 2009. The Treasury said it has gotten back about $268 billion from its TARP investment in the U.S. banking industry, which was $245 billion.

Unfortunately, the hard-core critics of TARP will never admit that there might have been some good done for some banks, along with all the evil visited upon pure free market principles. The facts keep rolling in like waves onto the shore, and many refuse to acknowledge the error of their ideological ways. It's tough to prove a negative, namely, the proposition that if TARP had not been created, the economy would have tanked a lot worse than it did in 2008-2009.

It's a question of judgment. On this matter, I choose to trust my own. Of course, I'm leaving AIG out of the calculations. That organization wasn't among the "banks" TARP was originally designed to bail out. Nor, for that matter, was Chrysler.

A Deal Is A Deal

AIG's moment of temporary insanity has passed. It's decided not to join a shareholder lawsuit filed by a company controlled by former AIG CEO Hank Greenberg against the US Government for bailing AIG out in 2008. Actually, Hank's company didn't allege that fact of the bailout was itself wrongful, just that the bailout terms set by the government were wrongful. Everyone understands that when you're going down like a torpedoed garbage scow, you always sue the guys who threw you a life preserver because they didn't reel you in quickly enough and you caught a nasty cold.

AIG's board of directors was apparently worried about reputational risk. Given the bad taste left in the collective mouth of the American public by the Wall Street bailouts, that's probably a justified worry. Politicians of all stripes were publicly uttering variations on the theme of "WTF?" on a daily basis. On the other hand, David Boies (yes, THAT David Boies), the attorney for Greenberg's company (which is the plaintiff in the litigation), thinks that the board's decision was not in the best interests of the shareholders. I assume that's a vague threat of a lawsuit against the directors of AIG. It seems to me that if Greenberg goes that route, he'll first have to win the lawsuit against the government in order to prevail against the directors. I'd think he'd have his hands full on with the suit against the government, without taking on the additional defendants. Then again, I don't swim in that specific shark tank, so I assume my rube-like perceptions and opinions are of little interest to the masters of the universe.

There were some other interesting, and even amusing, observations on AIG's board's decision. The Cato Institute's Mark Calabria astutely observed that big financial institutions rarely sue the federal government "because if they did, the government might not bail them out next time." Rim Shot!

On the other hand, AIG's CEO Robert Benmosche told CNCB that AIG believed that "a deal is a deal." Really, Bob? You danced with the bear and you still said that to a reporter without cracking yourself up? "A deal is a deal" as long as you're not the US government, which believes in honoring its deals unless it's politically expedient to renege on them, in which case it just litigates the resulting lawsuits for a decade or more until the public's interest in the outcome has been long since diverted to one or more other shiny baubles.

I understand the public relations downside as a reason to back off suing the US government. However, the "a deal's a deal" rationale simply doesn't hold water, based upon the nature of the devil with whom the deal was made.

TARP Profits Continue To Grow

Back in February, I noted that TARP had yielded a profit for the US Treasury of $20 billion. Notwithstanding the fact that the program is now down to the "harder-to-exit" smaller banks that might not be as attractive to potential purchasers of the preferred stock that the Treasury still holds, the profit figure is now up to $23 billion. While that's a drop in an ocean of federal debt, it's nothing to sneeze at. What I said earlier, I'll say again:

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 up 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.

Even if the remaining $8 billion is written off (it won't be), the program still ends up in the black. Not bad for a much-maligned "bailout."

Of course, the Treasury may have a problem getting potential investors to pay as much as they might have in future TARP stock auctions now that one bank has stiffed an investor on TARP stock dividends (paid subscription required). The fact that those dividends are noncumulative makes it risky when small banks decide that, while it was their patriotic to pay the US Treasury, it's perfectly fine not to pay investors who bought their TARP stock from the Treasury Department.

"This is a good lesson as to what risks buyers need to be aware of with small banks," said Doug Faucette, a lawyer at Locke Lord. "That's why they call it stock."

I think that's an astute observation. However, I wish that bank the best of luck if it ever finds itself in need of capital from private equity investors in the future. PE hates it when Main Street starts acting just like Wall Street.

No Longer Troubled Waters

Late last week, Maine Waters beat the rap, to the surprise of none of us who consistently smell the rancid atmosphere permeating the the hallowed halls of Congress.

California Democratic Rep. Maxine Waters won't be charged with ethics violations following allegations she steered a $12 million federal bailout to a bank where her husband owns stock.

House Ethics Committee members said Friday at a hearing their investigation found no violation by Waters, a senior member of the House Financial Services Committee. She could become the panel's senior Democrat next year, or the chairwoman, if Democrats win control of the House.

A well-connected D.C. based lawyer emailed me late Friday, "This decision proves that morality and ethics do not exist in the nation's capitol." To me, that was always a self-evident truth, but I'll accept his assertion that it's further "proof" of the lack of both qualities in Congress.

Last year, when I last looked seriously into this "investigation," I discounted the assertions of some observers that the hiring of Billy Martin might be bad news for Maxine.

I doubt Maxine is losing any sleep over Mr. Martin's investigation. After all, even if he finds that the process hasn't been so soiled that the investigation should be dismissed, the House Ethics Committee still has to proceed forward. They haven't been able to do that so far and there's no reason to suspect that Mr. Martin's scrutiny will prod them to overcome their bitter partisan gridlock.

Martin determined that the process did not violate due process, but then went on to determine that he could not conclude that Ms. Waters violated House ethics rules. Technically, gridlock was eventually broken, but it still appears that a member of the House who sits on a financial services panel can intervene with bank regulatory officials to benefit a bank in which her husband has invested, and walk away without a scratch.

On matters like this one, I hate being right. There's a smidgen of an optimist that remains buried in me, eternally hoping that the cynical me is wrong.

As a silver lining in this dark cloud, Waters' Chief of Staff was recommended for a tap on the wrist.

However, the ethics panel said that Waters' chief of staff, Mikael Moore, did take actions in Congress in an attempt to help the bank and that he violated House standards of conduct. Moore, who is also Waters' grandson, likely will receive a letter admonishing him for his conduct but will not face more severe punishment, such as a reprimand, by the full House.

Moore complained that Martin and the Ethics Committee were holding him to an "impossible standard." When you have moral vision akin to Stevie Wonder's ocular vision, I guess you can never set the ethic's bar high enough to be able to limbo under.

So, the final version of the "truth" is that when Waters set up a meeting between the Treasury Department and officials of OneUnited, a savings bank in which her husband had a material investment, she thought she was helping a coalition of minority-owned institutions, not OneUnited, even though the only bank officials who showed up at that meeting were OneUnited officials and the only matter discussed was OneUnited getting a healthy portion of that yummy TARP pie (which it subsequently obtained). However, her grandson and Chief of Staff helped OneUnited specifically, without Waters knowledge or approval, and, therefore, he gets a letter or reprimand in his personnel file, or something like that. 

This is all very believable, don't you think?

"Congressional ethics" is as much of an oxymoron as "honest lawyer."

There's one more perversely nice aspect of this turn of events. With the retirement of Barney Frank, Waters will be the ranking Democrat on the House Financial Services Committee. If the Democrats manage to retake control of the House, she'll be chair of the committee. Either way, every time she opens her mouth and spews forth her inanities, she'll be providing reams of blog fodder.

Schooling The Novices

Several blog readers have "bugged" me about the recent articles concerning the eyebrow-raising expenditures of the CFPB that were recently lambasted by the conservative watchdog group Judicial Watch. MarketWatch ran a story last week on the group's findings and CNNMoney (and some of the trade press) picked up on the kerfuffle this week. When I say "bugged," I mean asked me to engage in grave and heinous snarkbaggery on the CFPB, in a fashion they've come to expect. However, after carefully considering the matter and giving the CFPB the benefit of the doubt, I've decided to be not only judicious in my comments, but generous, as well.

Who am I kidding?

Among the more amusing findings was the expenditure by the CFPB of $4,500 in tuition to send six CFPB lawyers to a basic banking law class. While the CFPB claimed that these expenses were merely to pay for ongoing continuing legal education requirements imposed by the various state (and DC) bars in order to retain a license to practice law, the choice of the basic course overflows with irony.

In pursuing the invitation to enroll, Enforcement Attorney Christina Coll emailed Acting Litigation Deputy Deborah Morris on May 4, 2011, saying: "This looks like an awesome agenda for a banking world novice like me." While Ms. Coll's salary is unknown, according to records previously uncovered by Judicial Watch, other Enforcement Attorneys received starting salaries as high as $173,000 per year.

The fact that CFPB paid to train its attorneys in banking law fundamentals at taxpayer expense appears to contradict congressional testimony from then-interim CFPB head, and current Massachusetts Senate candidate, Elizabeth Warren in 2011 regarding the experience level of the agency's highly paid attorneys.

During a May 24, 2011 hearing, U.S. Rep. Ann Marie Buerkle asked why starting salaries at the agency exceeded Office of Personnel Management (OPM) standards by up to 90%: "How do you justify that kind of a disparity in salaries between a government worker and the folks that are going to be hired by your regulatory agency?" asked Rep. Buerkle. Warren defended the salaries, saying the consumer bureau is competing with the financial services industry for talent and "we'll never be able to pay like the financial services industry pays."

I, too, have to obtain CLE credits each year. I do so by teaching, writing, and speaking on an area of the law related to "banking." That's one of the reasons that this blog title contains the words "bank lawyer." I'm living proof of the theory that if you sit a monkey at a typewriter for decades, he'll eventually bang out something readable. On the other hand, to claim that you need to pay high salaries to attract hired guns with the necessary banking law expertise who then need to attend a basic course on banking law that's taught buy outside "experts" because the hired guns are "novices" on the law of the industry they're supposed to be experts on, strikes some as odd, others as downright laughable.

Warren might have a point regarding the private sector salaries if we were discussing people possessed of the degree of expertise that Ms. Warren implied the Bureau was seeking. If you're hiring a banking novice for $173,000 a year, you're overpaying, whether you're comparing the CFPB to the private sector or to a government agency. Moreover, twenty-one starting salaries of $225,000 and more does seem a bit steep, even for the most powerful, lightly supervised federal bureaucracy ever created.

The criticism of $465,000 in expenditures for sign language services might have an explanation. I expect that this contract originated when Cherokee Princess Liz ("Fauxcahontas") Warren was expected to lead the charge. She likely wanted to ensure that she could fully protect her "peeps" from the depredations of predatory lenders and the lawyers who love them. I get that. In addition, the CFPB has only used $54,000 of the $465,000 thus far. Unfortunately, an anonymous source claims that this amount was not used to assist an actual person with disabilities, but to train the CFPB's pet orangutan Koko to sign "I Love Liz," "Banks Are Bad," and "Workers Of The World Unite! You Have Nothing To Lose But Your Chains!" Unfortunately, I cannot verify that claim.

One of my correspondents claimed that their favorite part of the CNNMoney article was the "clarification" at the end.

Clarification: While Judicial Watch criticized the CFPB for using taxpayer dollars on these expenses, the CFPB says it does not use taxpayer money since it is funded by the Federal Reserve.

Yes, the CFPB is funded by the Federal Reserve, which is required by law to turn over its annual net income, after paying dividends to its member banks and making certain other deductions, to the US Treasury. Therefore, every dollar wasted by the CFPB is one less dollar saved for the US taxpayer. That makes the "clarification" contention by the CFPB disingenuous, at best. However, let's give the CFPB the benefit of the doubt. They wouldn't know that the Federal Reserve pays tens of billions of dollars a year into the US Treasury unless they had a basic understanding of the way the US banking system works, and, as we've seen, their employees are "novices" when it comes to such matters.

CFPB delenda est!

Stop Me If You've Heard This One Before

It's not merely the fact that former Wells Fargo CEO Dick Kovacevich complained publicly and loudly in 2008 that Hank Paulsen made him a TARP offer he didn't want but couldn't refuse, it's that, nearly four years later, he..won't...stop...ranting...about...it, that leaves some listeners amazed, others stupified, and still others screaming for someone to stick a knife in their neck in order to end the pain. Moreover, he's gone from "I didn't want it or need it but they threatened me" line to "TARP is likely to cause the end of life on Earth, at least as we know it."

Former Wells Fargo Chairman and CEO Dick Kovacevich says the federal government's bank bailout during the depths of the financial crisis was an "unmitigated disaster" and laid much of the blame for the financial crisis on "ineffective regulators."

"The decision by the U.S. Treasury and the Federal Reserve in October 2008 to make banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," Kovacevich told about 100 people attending a Stanford Institute for Economic Policy Research event Tuesday evening.

Kovacevich then offered a roster of reasons fueling his criticism of the government's Troubled Asset Relief Program, including "spooking the financial markets," damaging the reputation of financial institutions who did nothing wrong, and institutionalizing the concept that some institutions are too big to fail.

Kovacevich also cites TARP as the genesis of Dodd-Frank, the Ebola and AIDS viruses, as well as the horror now known as "Charlie Sheen."

Dick claims that any pundit who argues that TARP saved the financial system from a China Syndrome-like meltdown is a mere government apologist and spinmeister. In fact, Dick declares that TARP caused the financial meltdown and stock market collapse by stampeding the markets, as if the pre-TARP failure of Lehman Brothers was nothing more than a minor blip on the radar screen. He didn't say this exactly, but I think Dick also suspects that TARP is the reason that supermodel Linda Evangelista has repeatedly spurned his offers of concubinage. As a parting shot, he also blames most of the failed banks on "poor regulation."

This is what we call the "Dick-Cheney-Scattergun-To-The-Face" approach to criticism. If you load up on Double-O buckshot and blast away at close range, you're bound to hit something. If you're really lucky, like the other Dick, you'll bag a lawyer.

Out One Pocket, Into Another

The always provocative Junior Deputy Accountant points the way to another amusing statistic (courtesy of the always Fair-and-Balanced Fox News).

The Government Accountability Office says in a new report that banks that have repaid the Treasury Department's TARP bailout program did so with funds they received from other federal rescue programs.

Robbing Pedro to pay Pablo is a time-honored practice in our nation's capital, so the Treasury Department wasn't exactly thrown for a loop when this issue was raised.

A Treasury spokesman said that Congress specifically required that banks who participate in TARP could also participate in the Small Business Lending Fund. He also noted past comments from Assistant Secretary for Financial Stability Tim Massad, who said “we will continue to work to wind down the program in a way that ensures financial stability and protects the interest of taxpayers.”

The GAO adds that this issue of round-tripping federal bailout money arises with small banks, as the government essentially replaced their TARP funding with the new federal Small Business Lending Fund enacted in 2010, which GOP Congressmen have dubbed “TARP 2.0.”

Yes, that great small business lending fund that did so little for so few, at least provided a way for Treasury to make it seem like it was getting a load of TARP capital paid back for the American taxpayer when all it was doing was providing an opportunity for some TARP-takers to jump from one tar(p)-pit into another.

"Look! Over here! See this shiny object? Don't look away while my minions short-sheet your bed."

And just how are those "small banks" who still have government capital sitting on the books looking these days?

The GAO adds that, as of November 30, 2011, the number of banks and companies “that had missed their quarterly payments rose to 158, a marked increase from 8 in February 2009,” even though the TARP program “had fewer participants.”

And the GAO found that the number of companies in the program “designated as problem banks — that is, demonstrating financial, operational, or managerial weaknesses that threatened their continued financial viability — also rose from 47 in December 2009 to 130 in December 2011.”

The GAO warns: “Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their CPP investments.”

Oh, so, everything's just fine, then. Move along now. Nothing to see here.

For those squirrels who just can't seem to get enough TARP acorns to munch, you can access the entire GAO report here.

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.

Gumming Up The Mortgage Market

The partisan gridlock currently paralyzing the US Congress is apparently loosening only enough to promote especially bad ideas that appeal to both sides of the aisle. One of the latest of those bad ideas is the one that would fund loss tax revenues due to an extension of payroll tax cuts by increasing "guarantee fees" charged by Freddie Mac and Fannie Mae to lenders who sell them mortgage loans, and redirecting the increased income the US Treasury. That would raise the cost of most conventional residential mortgage loans at a time when the residential real estate market doesn't need another impediment thrown in its path.

The Mortgage Bankers Association, the National Association of Realtors, and the National Association of Homebuilders told lawmakers that redirecting revenue from Fannie and Freddie for purposes unrelated to the health of the housing finance system is counterproductive.

Reacting to the proposal, MBA CEO David Stevens Saturday tweeted, "payroll tax should not be paid for with GSE fees. That is a slippery slope."

That's "slippery" as in one foot in the grave and the other on a banana peel.

Is there some evil savant who sits up all night thinking of ways that the national legislature can screw the economy even worse than it is already screwed? Or is this just the case of one more bad idea seeming like a good one to clowns without a clue? Either way, it deserves to be fed to the shredder.

The Big Dog Always Gets The Bone

Proving once again that when it comes to the federal government, Too Big To Fail banks get a backrub while Too Small To Save banks get a backside paddling. Yesterday, we discussed how so many of the community banks who received a TARP investment a few years ago are stuck with TARP with no way out. On the other hand, according to TARP's special inspector general, the biggest 17 TARP banks were coddled by Congress and the regulators, including by special interest legislation and relaxed requirements by the banking regulators, and allowed to exit the program before the IG thinks they should.

The quick exit was motivated in part by the executive compensation restrictions that Congress enacted after the banks were already in the TARP, so you can't blame the banks for wanting to back out of a program where Congress changes the rules ex post facto. Also, the Fed and the OCC have pushed back hard against the IG's criticism, claiming that the government wanted the early exit as much as the banks, and that the banks were able to raise Tier 1 capital through private sources more easily with the loosened restrictions. Certainly, none of the banks that exited was unstable without the TARP capital.

Nevertheless, it's galling that special action was taken at the highest levels to accommodate the fat cats, while providing any TARP for the little guys was at first an afterthought, and that now that many of the small banks took that capital, no one in Congress or the federal banking agencies is falling all over themselves to relax any rules (e.g., amortization of CRE losses) to help them exist before the dividend rates rise.