Bank Lawyer's Blog

A Helping Hand

I can't stand to see a young associate (or is it a young law clerk?) flail around on my blog instead of seeking an intelligent source of information.  According to my site meter, someone from a well-known national law firm specializing in banking law is trying to explore OTS preemption principles relating to prepayment penalties, and looking for a short-cut through the quicksand of Bank Lawyer's Blog on the way to a place where there resides actual knowledge. Not the wisest course, as any regular reader can attest. Just goes to show that you really CAN fool some of the people all of the time.

Well, as long as you're here...

WARNING! THE FOLLOWING IS NOT...I REPEAT...NOT...LEGAL ADVICE! PROCEED AT YOUR OWN RISK!

If one were to casually stroll over to 12 CFR Section 560.2(b)(5), one might find an answer.

That's as specific as I can be.

Now, knock off and have martini for lunch. Or two.

Citigroup: Out of the Tunnel and Into the Light

"Educated" or not, the guess I made last week was apparently accurate.

Citigroup  is favorite to win a bid for Turkish financial group Finansbank , which has a market value of $5 billion...

U.S.-based Citigroup and National Bank of Greece  are expected to submit rival offers for Turkey's fifth-largest bank before a March 31 deadline, one of the sources in Istanbul said.

Apparently, the Federal Reserve Board believes that Citigroup's corporate governance deficiencies have been rectified, and the prohibition on acquisitions and mergers has been lifted. Now, it's time to get back to laying waste to the competition.

Fidelity Investments Loses a Laptop

More evidence that if personal data is lost (especially in unencrypted form), the consequences can be expensive.

A laptop computer belonging to Fidelity Investments and containing sensitive data on about 196,000 retirement-account customers was stolen last week, the company said.

The company, the nation's largest mutual fund manager, confirmed reports Thursday that the computer held information on participants in  Hewlett-Packard's pension and 401(k) plans and that it had alerted those affected, offering them free credit monitoring for 12 months.

The data included names, addresses, birth dates, Social Security numbers and other information.

There is no evidence that the data has been misused, a Fidelity spokeswoman, Anne Crowley, said. Fidelity, which is based in Boston, said it would reimburse account holders for any losses.

As I asserted last year, "I think that the 'free credit monitoring service' is a remedy that will come to be expected. I would not be surprised to see regulators impose it as a customary remedy in the event of security breaches (especially where the compromised data is not encrypted)."

Once again: if you're permitting employees to download the personal information of customers onto a laptop and to leave the premises with it, you're asking for trouble. At the very least, the data should be encrypted.

Anything You Can Do, I Can Do Better

I've often wondered whether some bank examiners, after years of watching some of the banks they examine stumble and trip over themselves, think: "Even I could run a bank better than these guys!"

Apparently, a couple of ex-bank examiners in Houston, Texas, think they can do just that.

A new local community bank led by a pair of onetime bank examiners plans to open later this year.

Bank of Texas awaits approval of a national banking charter. The bank could open as soon as late September or October in headquarters on the Sam Houston Tollway near the Sam Houston Race Park. Soon after the flagship debuts, a second Icon location is slated to open in the Clear Lake area.

Icon CEO Mark Reiley, 43, and President John Green, 40, will lead the new independent bank. They once worked as bank examiners with the Office of the Comptroller of the Currency, or OCC.

No surprise, then, that Icon has filed with the OCC for a national charter.

The bank is seeking to open with initial capital of roughly $10 million. Seed funding for the startup bank was provided by approximately 30 investors.

20% of the investor group consists of doctors. They might be anal retentive, but at least they shouldn't be as much of a pain in the keister for the CEO and President of the new bank as say, retired military officers, engineers, or...God forbid...lawyers.

It might be the case that when ex-examiners assume positions of executive oversight of a bank after they've left the regulatory fold, their former employer, in order to prove that it won't favor "its own," might be a little more "rigorous" in the early years of the bank's existence.  I'm not alleging that the OCC would be in this case, but it's always a possibility. If so, Mr. Reiley and Mr. Green should be well-equipped to ensure the bank meets the expectations of the regulators, and they should have the necessary foresight to anticipate the potential problem areas and address them.

Kid's Stuff

Yesterday, the Federal Reserve Board launched a "Kid's Page" on its web site to explain the role of the Federal Reserve System to young people. After reviewing it, I'd say that it would benefit the vast majority of adults in this country to read it, as well.

The web page has plenty of cartoons, too, which, in my opinion, means the Fed is portraying "reality" pretty accurately.

Wal-Mart and Banking: Some States Wage "Preemptive War"

The battle by Wal-Mart to secure a Utah Industrial Loan Company charter has generated a firestorm of opposition. No less than the National Association of Realtors has come out against it (although for purely selfish reasons; the NAR wants to use Wal-Mart as another lever in its never-ending effort to pry out of Congress a ban on banks entering the real estate brokerage business). The Salt Lake City Tribune discussed a new anti-Wal-Mart onslaught.

The latest attack against Wal-Mart is coming from a handful of state lawmakers in Michigan, Virginia, Maryland and Illinois. They have introduced legislation to bar the industrial bank from opening branch offices in their states should Utah regulators and the Federal Deposit Insurance Corp. give the go-ahead for the bank to organize.   
      
"All I'm trying to do is protect Michigan's small banks from unfair competition by Wal-Mart," said Democratic Rep. John Gleason, who last week introduced a bill to bar the giant retailer's bank from operating in that state. "If Utah is irresponsible enough to let them operate an ILC [industrial bank] in their state, that is their business - but we will not allow it here."

[...]

United in opposition: Labor unions, frustrated at their inability to organize Wal-Mart workers; federal regulators eager to protect their turf; and community activists upset about what they maintain are the giant retailer's substandard wages and poor heath care coverage for workers, have united to oppose the proposed Utah industrial bank.

Gleason's proposed legislation in Michigan was drafted with the help of the United Food and Commercial Workers Union in that state.

"One of our goals was to see if we couldn't cause a bit of consternation with Utah's banking commissioner so that maybe he would think twice about allowing Wal-Mart to organize an industrial bank," said John Schlinker, government relations director at the UFCW Local 951 in Michigan.

And he said UFCW union representatives in at least a dozen other states are working to get similar legislation introduced.
   
Utah's banking commissioner, G. Edward Leary, said the proposed legislation in Michigan and other states does cause him concern, although that uneasiness is only ancillary to the Wal-Mart question.

Leary is worried that the proposed laws in Michigan and other states, if adopted, could undermine a long-standing cooperative relationship among dozens of states that in essence says, "If you let my banks into your state then I'll let your banks into mine."

Such reciprocity agreements have been in place for more than a decade, Leary said. "This could really undermine the state banking system. We look upon our industrial banks as being the same as all others, so if those states eventually bar Utah banks, we'd have to consider barring theirs."

Labor unions, realtors, regulators and consumer activists, all in  prefect agreement. I don't care about Wal-Mart. All I want to know is this: is this the latest sign of The Apocalypse?

If Pat Robertson publicly announces next week that banking and commerce must be reunited and comes out in favor of Wal-Mart, I'm starting to worry.

Kentucky Enacts a State Law "Preemption" for State Banks

Kentucky's House of Representatives on Wednesday enacted a bill previously passed by the Kentucky Senate, that will exempt state banks from "most" Kentucky laws from which national banks are preempted.

According to press reports, the exemption does not extend to state usury and "pay day lending" laws. However, the exemption does extend to Kentucky's predatory lending law (the "High Cost Loan Act"). The problem with that law centered on credit insurance premium financing.

The High Cost Loan Act forbids state banks from financing the premium for credit insurance over the life of a second-mortgage loan, which can add thousands of dollars to a borrower's outlay. Such insurance pays off a loan in the event of death.

Since they can't finance the premium, state banks must collect it up front -- discouraging buyers who don't have the cash -- or charge a sometimes higher monthly premium. But national banks can finance the total premium, which lessens a borrower's upfront costs.

This move makes sense if state banks are to stay competitive with national banks in Kentucky. On the other hand, state banking advocates will see it as another example of the continued threat to the dual banking system posed by federal preemption principles, and consumer advocates will bemoan the failure of restrictive state law consumer protection laws to "gain traction" in the face of such principles.

Through A Glass Darkly

The Wall Street Journal (paid subscription required) accuses Federal Reserve Chairman Bernanke of "studied opacity." The editors obviously believe that Mr. Bernanke is following in the wake of the immortal "Master of Many Meanings," Alan Greenspan.

One thing the editors believe that Bernanke clearly stated ("as clearly as any central banker ever will") is that "there is a cost" to the economy "in lower economic growth and efficiency from higher taxes." They buttress this interpretation by citing the Chairman's reference to Milton Friedman's admonition about the "deadweight loss" and "extra burden" on economic growth of government (versus private) spending. The Journal is (Surprise!) not in favor of higher taxes (and it takes a shot at Robert Rubin and most of the rest of the financial press who apparently believe in lowering the deficit by raising taxes).

At its core, however, is another point acknowledged by Mr. Bernanke and the Journal: do you value the "goods and/or services" on which the government spends money enough to be willing to sacrifice some economic growth, if that is an additional cost of that spending? Ultimately, that's a political (and for many citizens, a moral) issue, or perhaps a mixed decision, rather than a purely economic one. I'm not sure that either Mr. Bernanke or The Wall Street Journal can help us much.

Enron: Another View

Houston lawyer Tom Kirkendall at Houston's Clear Thinkers has been doing some interesting blogging commentary on the ongoing criminal prosecutions of former Enron honchos Ken Lay and Jeff Skilling in Houston. Tom's perspective is that of a defense attorney (which suits me fine), so if you're looking for a typical MSM "evil capitalist thugs get their just deserts" version of events, you might want to look elsewhere. On the other hand, if you want an entertaining look at holes in the government's case from a seasoned local veteran's viewpoint, check it out.

Citigroup Sees Light at the End of the Tunnel

The Wall Street Journal (paid subscription required) reported this past weekend that Citigroup Inc. appears to be recovering after stumbling last year over its allegedly poor internal regulatory compliance controls, especially with respect to certain Japanese and European operations. The Federal Reserve Board prohibited Citigroup Inc. from making further "significant expansion" until these "deficiencies in compliance risk management" were satisfactorily addressed, although the FRB did approve the "relatively small" acquisition of First American Bank of Texas in March of last year (given Citigroup's size, "relatively small" is truly a "relative term").

According to the newspaper, a number of "corporate-governance rating companies relied on by institutional investors have concluded that in the past year, Citigroup has addressed significant weaknesses in its regulatory controls and taken a healthier attitude toward good corporate-governance practices. What remains uncertain is whether regulators or big investors will view Citigroup's progress as enough."

My uneducated guess is that before long, Citigroup will back on the acquisition trail, sucking the lifeblood out of its competition and consolidating banks, thrifts and other financial businesses of all sorts into the monolith it is well on its way to becoming, in its inevitable quest to become the only dispenser of financial services left standing. Then again, I could be wrong.

On a much smaller front, much has been made lately of the need for small community banks to have "regulatory relief" from the burden of compliance with a myriad of "crushing" laws and regulations that, in the words of OTS Director John Reich, "threatens the competitiveness of the banking industry and falls particularly hard on community banks." Obviously, it's not merely the little guys that find regulatory compliance a burden. Even the big boys have problems with compliance, albeit ones caused not so much by a lack of financial resources as by a occasional lack of internal focus.

Speaking of regulatory relief, Director Reich is not a lone voice in the wilderness. OCC Chief Counsel Julie Williams testified before the House Banking Committee earlier this month on regulatory relief initiatives by the OCC, and the need for additional Congressional action. Speaking at the same gathering of the Independent Banks of America in Las Vegas at which OTS Director Reich issued his call for relief, FRB Chairman Bernanke also supported legislative changes to provide regulatory relief, including extending the time between examinations for well-managed institutions with up to $500 million in assets from every 12 months to every 18 months.

Although the House passed a regulatory relief bill on March 8, no such legislation has been introduced in the Senate. On the other hand, at least one key Republican senator recently stated that he is "hopeful" that the Senate Banking Committee would have a mark-up of such a bill by mid-April.