Bank Lawyer's Blog

Targets of Opportunity

Following up on a post from last December comes this updated information from the Windy City: the record number of bank robberies in Chicago in 2005 was not 230, as previously reported, but actually 238. My Bad!

Going to the bank has never been easier, but the convenience of having a teller on virtually every street corner has also given potential robbers more choices to pick from.

Competition for customers is driving bank expansion throughout the country, fueling the push for extended and increasingly irregular banking hours. Many consumers can now apply for a home equity loan on a Sunday night at the same place where they buy their groceries.

[...]

And while holdups are not a new problem for the banking industry, enacting security changes to deter potential robbers can be challenging when consumers expect more access instead of less.

"Banks are kind of caught between a rock and a hard place," said J. Branch Walton, president of the National Association for Bank Security in Fort Lauder-dale, Fla. "As you make a business easier to access for customers, at the same time you could be making it easier for robbers."

Nationally, there were fewer bank robberies last year. But figures provided by the Chicago-area FBI office show that the number of holdups here have been on the rise for several years, which culminated with a record 238 in 2005.

The increase has coincided with a Chicago-area bank building boom that has outpaced the rest of the country, according to the Federal Deposit Insurance Corp.

"There's just more targets out there for bank robbers to hit," FBI spokesman Frank Bochte said.

You know: If you build it, they will come...and rob it.

Apparently, the security-versus-convenience balance is hard to maintain.

One high-tech deterrent, a vestibule that tellers can lock as an offender tries to escape, was disabled at a bank in a predominantly black neighborhood in Chicago after community activists protested the so-called "mantrap" doors in 2004, said Tom Kelly, a spokesman for J.P. Morgan Chase & Co.

Who doesn't hate a "mantrap"?  Obviously, public education is the way to go, right?

After several of its 33 branches were hit by the same ski-mask-wearing robber, West Suburban Bank installed signs asking customers to remove their hats, hoods and sunglasses. The Lombard, Ill.-based company says a similar program in Missouri reduced the number of robberies in participating banks by 40 percent.

"No hats, no hoods, no problem!" That's my bank's motto!

You'd think that might be a joke, and in one sense you'd be right and another sense you'd be wrong.


Chic chicks from the '60s would have been out of luck in  the "Show Me" state, eh?

                                       

  So would these two guys, even in Chicago.


Banking officials say most bank robbers usually net a few thousand dollars, at the most. The real harm comes in the form of reputational damage.

But not as much reputational damage as suffered by a bank using a "mantrap," apparently.

Being a banker has never been more perilous.

Woke Up This Morning, Got Myself A Pun

You have to hand it to organized crime: it's got chutzpah.

As reported in today's Washington Post, the Finance Minister of Hamas, Omar Abdel-Razek, mocked the manhood of international banks for being scared of the United States and for refusing to transfer to Hamas money raised "around the world" (the world consisting of U.S. "allies" Saudi Arabia, Qatar and Kuwait, as well as America's bete noire, Iran) out of fear that the U.S. will retaliate and deny those banks access to Wall Street (the root of all capitalist evil).

"We understand the sensitivities in which the banks are dealing," Abdel-Razeq said. But he added: "We expect the banks to shoulder their responsibilities and to take some risks."

Translated: "Youse is all a bunch of friggin' pansies!"

You have to love one of the world's premier terrorist organizations insurgent groups calling on the establishment to "take some risks" on their behalf.

This reminds me of the way members of The Sopranos crew, and some of their "associates" in the Mafia waste disposal business, were outraged this January when a U.S. government official referred to North Korea as a "Sopranos State."

"North Korea is the only government in the world today that can be identified as being actively involved in directing crime as a central part of its national economic strategy and foreign policy ... in essence North Korea has become the Sopranos state - a government guided by [Korean] Workers Party leaders, whose actions attitudes and affiliations increasingly resemble those of an organized-crime family more than a normal nation." The Sopranos is a popular US television series about an organized-crime family.

The Sopranos were offended, outraged, and, may I be imperfectly honest, a little hurt. According to unimpeachable sources, the crooks self-employed businessmen had this to say about that:

Tony Soprano: "I'm in the waste management business. Everybody immediately assumes you're mobbed up. It's a stereotype, and it's offensive. There is no Mafia."

Christopher Moltisanti: "Hesh is the world's sweetest guy, but I've heard his opinions on giving back pieces of Israel. I can only imagine what he's going to say about this s**t."

Johnny Sack: "For God’s sake, we bend more rules than the Catholic Church."

Tony Soprano: "I’m gonna say a few things, I’m gonna a say same bad words and you just gonna have to deal with it."

Tony Soprano: "Before it’s over, they will pin that Egypt air thing on me, and you f**king know it!

Carmela Soprano: "You know, Tony, it's a multiple choice thing with you. 'Cause I can't tell if you're old-fashioned, you're paranoid, or just a f***ing a**hole."

That last quote wasn't exactly Carmela addressing Tony; it was my wife addressing me.

As for North Korea's response, nothing was forthcoming other than the haunting echo of the lovely melody, "I'm So Ronrey."

Gulf Coast Banks Rebound, And Then Some

When Hurricanes Rita and Katrina wreaked havoc on the Gulf Coast last year, initial concern centered on the potential failure of some banks based in that region. Today, not only are banks surviving, they're prospering.

Bank earnings are soaring in the wake of Hurricane Katrina as people squirrel away money until they can start rebuilding.

Insurance settlements, FEMA checks and income tax refunds are being deposited in short-term savings accounts while homeowners and businesses figure out when and how to rebuild.

The parent companies of both The Peoples Bank and Hancock Bank reported big increases in assets for the first quarter of this year.

Hancock Holding Co.'s earnings of $22 million increased 43 percent from the same period a year ago. Deposits increased 31 percent for the quarter. Deposits in Hancock Bank are up $1.52 billion or 40 percent since Hurricane Katrina made landfall.

[...]

"What we do know from many of the senior people like Mr. Leo Seal (Hancock Holding president), who have been through storms like this in the past, is to expect a big influx of deposits that will stay," said Michael Achary, bank treasurer. "Sometime afterward, expect a loan demand. We're still waiting on the loan demand. That hasn't happened yet."

Other banks in the region have experienced some loan growth.

"Much of the large jump in deposits is due to the huge infusion of cash from insurance settlements and relief funds pouring into the Mississippi Gulf Coast economy," said Chevis C. Swetman, chairman and CEO of [Peoples Financial Corp., parent of The Peoples Bank]. "However, we're encouraged that our loan volume continues to grow, indicating that our local residents and businesses are rebuilding rapidly and in some cases expanding."

Lauri Wood, the chief financial officer for Peoples Financial Corp., said many people are waiting to learn what the required base elevations will be for new construction and trying to line up contractors.

"People are keeping their money local and keeping it short term so they can get to it quickly without any penalties," she said.

As people receive income tax rebates and Community Development Block Grants to rebuild their homes, deposit levels could increase more in the months to come, she said.

It's not unexpected that earnings will grow as loan volume increases. What's interesting is that even with loan volume less than it will become once impediments to rebuilding are removed, the net earnings of many of the region's banks are well above earnings from prior period before the hurricanes hit. That means that even with the relatively flat yield curve, banks are finding ways in addition to lending to deploy profitably the influx in short-term deposits.

The boom that follow the bust may be just around the corner. Perhaps it's already here.

Nevada Loves ILCs

According to Las Vegas Business Press, Industrial Loan Corporations have "flourished" in recent years, at least in some of the states that are permitted to establish them (Utah, California, Indiana, Hawaii, Minnesota, Colorado and Nevada). Utah and Nevada are prominent among those seven states, especially since California changed its law several years ago to forbid non-financial companies from owning ILCs.

"The benefit is the employment and economic activity they bring in," said Stephen Miller, the chair of UNLV's economics department. With relatively few ILCs (60), the boom in growth has been phenomenal, the professor added. The period between 1987 and 2004 saw ILCs jump from $3.8 billion in assets to $140 billion, according to the General Accounting Office.

All the talk currently concerns Wal-Mart's application to establish an ILC in Utah. However, as the Business Press points out, Toyota, Target, Merrill Lynch and Harley Davidson have had ILCs for years, and they have "stuck to their knitting," as Wal-Mart has claimed it will do. The ILCs generally serve the financing needs of their parent company and its customers. None has thus far reached out to establish a retail banking institution with lots of retail branches.

As University of Arkansas business professor Tim Yeager observes (notwithstanding fears of banks both big and small), Wal-Mart is never likely going to have the chance to compete with retail banks even if it does receive FDIC approval.

"They [big banks] are concerned that Wal-Mart will open up a lot of retail banks that will compete with community banks," said Yeager. "It's not in their business plan and Wal-Mart wouldn't be able to get retail banks for several years. If that happened, Congress would step in and change the law to prevent ILCs from branching."

There's also the fact that trying to establish a rival for commercial banks without the power to offer demand deposit accounts is problematic.

Industrial Loan Corporations can operate much the way traditional banks do, with a few exceptions. ILCs cannot accept demand deposits (includes checking accounts) if their assets exceed $100 million. The loan corporations normally choose to specialize in a niche, such as credit-card or auto-loan processing. Others may serve as "sweep" accounts for brokerage customers who need an interest-bearing vehicle for their excess money.

The article notes some interesting Texas connections to Nevada ILCs. Plano-based Beal Bank (owned by Texas entrepreneur and smack-talking Texas Hold-Em poker player, Andy Beal) formed Beal Savings Bank in late 2004, which now has $1.5 billion in capital. Former Beal executive Kelly Jones led a group of investors that purchased Security Savings Bank about the same time and has grown it from $50 million to $230 million. Security serves as an "overline" funding source for community banks.

Even without Wal-Mart in the mix, with Texans and big money involved, you simply know that ILCs are bound to be leading the pack in growth--and buzz.

Freddie Mac: The Wages of Sin

On the heels of Tuesday's announcement that the FEC had fined Freddie Mac a record $3.8 million dollars to settle charges that it had violated federal election laws (memo to Freddie: Next time, USE A PAC!) comes yesterday's good news that Freddie Mac has agreed to pay $410 million to settle shareholder lawsuits arising out of "accounting mistakes" that led it to restate three years of earnings. That's about 16% of last year's earnings of $2.5 billion. Chickenfeed!

Although Freddie Mac set the all-time record with the FEC fine, it managed only 17th place on the shareholder class-action settlement list, according to Bloomberg. It's tough to break into the top ten when you've got world-class champions like Enron ($7.11 billion) leading the pack.

Speaking of Enron, Houston attorney Tom Kirkendall continues his provocative commentary on the trials of Skilling and Lay. Whether you've personally "convicted" the defendants or not, if you're a bank lawyer or executive Tom's perspective on the practice of federal and state governments to "criminalize bad business judgments" is worth reading. Anyone who lived with the banking industry in the Southwest (and California) during the 1980s and early 1990s will understand where Tom is coming from.

Ravi Does Not "Heart" Alan Greenspan

Ravi Batra is not an Alan Greenspan fan. That's like saying that Osama bin-Laden is not a George Bush fan. Batra's an SMU professor of economics, a commentator on CNN, and the author of the book Greenspan's Fraud.

Gee, wonder what the book's about?

In an interview in yesterday's The Dallas Morning News (free registration required), business writer Danielle DiMartino asked Professor Batra about some of his hot opinions concerning the former Fed Chairman.  Among other rants, Batra blames Greenspan for snookering Baby Boomers into relying on Social Security and funding it with higher payroll taxes, knowing all the time there wouldn't be sufficient money to support it, and then eventually turning against it and urging cuts in benefits. He also blames Greenspan, not globalization, for creating today's huge trade deficit.

Of particular interest to U.S. financial institutions, Batra believes the "tipping point" toward a crisis in the trade deficit will be "the bursting of the housing bubble."

Much of the housing bubble has been financed by foreign purchases of mortgage-backed securities. The problem is, many of these loans have been backed by a fraud of their own – unqualified buyers have been given loans by the mortgage industry because the lenders then pass along the risk into the mortgage-backed securities market.

Sounds like warnings that have echoed through these pages for some time now. If you say it, it will (eventually) come. I hear the tell-tale mooing of frightened mortgage banking cattle beginning in the background. Let's hope there's not a stampede.

Sorry, no "soft landings" for Professor Batra.

Bubble cycles can last seven to eight years, with the unraveling typically beginning in the fifth year. The housing bubble started in 2001 when Greenspan panicked and started slashing interest rates at a fast pace. Five years from then is 2006, and what are we seeing today? A slowdown, which is starting right on schedule.

Next year, we'll have bigger problems as house prices fall, especially in the hot markets. Finally, in 2008, the real housing crunch will come, with price declines in much of the nation.

The worst implication is that foreign investors in mortgage-backed securities will be spooked for fear they'll lose their principal. It's one of my biggest fears.

Gee, that 7/1 ARM I refinanced into in 2003 might not work out after all.

So, what's a confused banker to do? Is there light at the end of this bleak tunnel?

There is, and it's consistent with free trade. I would propose a dual exchange rate system like those in Japan and China. If we could fix our export exchange rate, our exports would rise sharply as the prices of our goods fell overseas. We would let all international transactions continue to occur at the free-market dollar rate.

It is a system that would have to be managed by the Fed. China, for one, would be happy, as it would take pressure off them to revalue their currency and avoid the prices of their goods rising in America. Meanwhile, the prices of American goods in China would fall dramatically. This would not only rebuild our manufacturing base, it would reduce the trade deficit sharply.

We have to bear in mind that every empire, from the Romans to the British, has fallen because of a huge trade deficit.

I wonder: what are the odds that the Bush Administration will support a dual exchange rate system?

Look: Pigs Flying!

Scattershooting

With Dick Cheney out of sight at the moment, it's left to Bank Lawyer's Blog to fire wildly at random targets.

From actual search engine referrals to this blog over the past 24 hours, as revealed by my server logs:

1.    "Are banks required to report embezzlement by bank officers?" Only if the bank also wants to avoid jail time.

2.    "How do you pronounce phising?" Just like it's spelled.

3.   "Bank charters: na vs fsb." My money's on "na" by a technical knockout in the third round.

4.    "Does passmark satisfy ffiec requirements?" Yes, at 5'10", 130 lbs., with blue eyes and blond hair, and measuring 38-26-35, passmark makes ffiec very happy.

5.    "Diana Taylor?" Yes, in a heartbeat.

6.    "Originate loan and subprime and securitize." You sound like the kind of man who wants to have his cake and eat it, too, am I right?

7.   "Lloopholes banks don't tell you about mortgages." Pssst....Don't tell anyone, but you really DO have to make your mortgage payments on time or the bank will foreclose your sorry a**. I said, don't tell anyone, you "Lloon"!

8.   "Hacking identityguard."I sent your IP address and other data to the New Zealand national police, your ISP and Identityguard. Have a nice day. :-)

9.   "Attorney blog."  This blog must have been SUCH a bitter disappointment for you.

10.   "Anything you can do i can do better." Can you hum "Flight of the Bumblebee" on a comb and tissue paper while simultaneously spinning like a top? I didn't think so.

And so it goes...

The Worm Within

Canadian attorney David Fraser of The Canadian Privacy Law Blog has this post about a bank employee, with no prior criminal record, who accessed customers' personal information and used it to harass them, primarily women.

The man, 39-year-old Marco Antonio Munoz, is no longer working for the institution but his alleged trail of identity theft could span the Midwest and hundreds, if not thousands, of bank customers.

“We don't know what we have here yet,” said Det. Sgt. Jeff Herweyer, who handled the case on behalf of the Michigan State Police Cadillac Post.

What police do have is 73 pages of names that Munoz accessed over the last four years, with the most activity in the last two.

Munoz passed the bank's screening process. Had he had a criminal background in the past, he would not have been hired, Janei said.

Many of the comments of the bank's spokesperson are obviously designed to defend the bank by pointing out that the bank has policies and procedures to prevent this type of abuse from occurring, but that this is something that is not run-of-the-mill. I think that the comments of the FBI agent and bankers in the article quoted in David's post would indicate that this is not the type of information theft that a bank would expect to occur. Stealing data to steal money is something that a bank might expect. Stealing to harass women is out of the ordinary.

From personal experience as in-house and outside counsel to financial institutions, I think that the most difficult type of employee-criminal to detect is the bad apple who doesn't appear to be one and who has no "track record" that would give management a clue that he or she might be one. Embezzlement and theft by trusted employees often goes undetected for long periods of time.  As the bank pointed out, if the gentlemen in question had had a criminal record, that fact would have been detected during routine pre-employment background checks that banks usually (and always should) obtain in screening job applicants. He didn't have a record.

This "hole" in the pre-employment screening process is one reason that many businesses are also turning to the use of personality testing services (such as IntegriView and others) in an attempt to detect issues with an applicant's integrity. As we pointed out last September, the U.S. Seventh Circuit held that the use of  "personality tests" to identify such personality traits as "honesty, preferences and habits" does not violate the Americans With Disabilities Act (but that the use of "medical examinations" designed to weed out psychological disorders is prohibited by the ADA). Obviously, no such test is going to be fool-proof; however, the use of such "personality tests" will, if nothing else, aid a bank/employer's argument that its hiring of someone, who later turns out to be a criminal, was not negligent.

As David's article also notes, banks should have in place internal controls that raise "red flags" if an employee without the need for access to sensitive information, accesses such information, particularly on more than one occasion. There was no indication in the article whether the individual in this case had a need for such access, or whether such a pattern was detected and the individual apprehended because of those controls. If the controls were in place, and if the suspect was not authorized to access the information, the system certainly did not work as efficiently as it might have been expected to work. Seventy-three pages worth of names, purloined over four years, is quite a haul.

Bank of America: Security? We Don't Need No Stinkin' Security!

Further support for my thought expressed last Tuesday that what primarily influences consumer behavior when banking online is not information privacy, but information security, comes from these studies conducted by ComScore Networks,  Entrust and RSA Security.

Fewer bank customers are adopting Web for their business and a desire for better security may be one of the reasons, recent surveys find.

The growth of bank customers performing transactions online grew by only 3.1 percent in the fourth quarter of 2005, the lowest sequential growth in three years, according to a study from consumer behavior researcher ComScore Networks.

[...]

In the ComScore study, 23 percent said that increased security was their prime reason for switching to online banking, but free offers and products were the chief reason for 33 percent of the respondents to do so.

[...]

Another study conducted by financial security firm Entrust found that 18 percent of respondents polled had moved away from online banking as a result of fears of fraud and identity theft.

[...]

A survey conducted by the RSA Security firm that found 60 percent of respondents wanted their banks to notify them when irregularities popped up on their accounts, and 90 percent wanted their banks to monitor their online banking transactions as closely as they do credit card purchases.

The Entrust study also found that 81% of customers do not want to pay for extra security. That's consistent with the results of previous surveys. Customers want to be secure. Like breathing clean air, they don't expect to pay for it.

Bank of America seems to confound the article's initial conclusions, however. The article's author recites a number of highly-publicized instances in which the bank "experienced many egregious security breaches and data thefts in 2005." Yet, the article notes that Bank of America "topped the list, with 5.1 million customers using its online bill paying system in the fourth quarter of 2005, nearly half of all customers using online payment systems with their banks. Bank of America also topped the charts for overall online banking growth in 2005, with 15 million subscribers. Cardweb.com reported the Charlotte, NC-based banking behemoth experienced a 69% increase in signups and sales through its Web site..."

If consumers are avoiding online banking because of security risks and Bank of America had many "egregious" data security breaches and thefts, how do you explain a 69% increase in online banking activity? Perhaps Bank of America customers don't read the newspapers or news magazines, watch television, listen to radio, surf the Internet, or otherwise obtain any any news whatsoever, online or offline. Perhaps the old saw is correct: "Ignorance is bliss."

Or, perhaps, we need more studies, surveys, polls and reports.

In The Jungle, The Mighty Jungle, Wal-Mart Sleeps Tonight

No surprises came out of the two days of public hearings held by the FDIC on Wal-Mart's application to charter an FDIC-insured ILC.

On Monday, Wal-Mart floated a proposal to have the FDIC condition its approval with a "no branching" restriction (or, at least, to require public hearings for any branching proposal). On Tuesday, the FDIC asked various opponents what they thought about that approach ("assuming we could impose such a restriction" qualified FDIC COO John Bovenzi). Not surprisingly, Wal-Mart's opponents were underwhelmed.

"Wal-Mart never gets into something halfway," said Camden Fine, president of Independent Community Bankers of America. "When they get into something, they go all the way."

Fine also said that Wal-Mart might not attempt to broaden its banking powers until there were new board members at the FDIC, who might not see bank branching as a substantive change.

In other words, once Wal-Mart gets a foot in the door, it won't be long before it kicks the door wide open, runs in, sacks the place, rapes-then-kills the inhabitants, and consumes all the ice-cold Shiner Bock in the fridge. That's just the Wal-Mart way, say its opponents.

Ya' know, they may be right. I remember when my pet tiger got loose from the back yard. He started eating villagers, and we had to call in the Great White Hunter to track him down and put a bullet in his head. Once a predator gets a taste for human blood, gnu just won't do.