Bank Lawyer's Blog

Happiness Cut Short By Reality

There's always a nay-sayer in every crowd. You know the type: the know-it-all in black-rimmed eyeglasses with a strip of athletic tape holding the nose bridge together; wears nerdy chinos, white socks and brown tassled Bass penny loafers; laughs through his nose and makes a sound like a goose that swallowed a bull frog.

You know, the kind of kill-joy who pours cold water on the year's largest IPO.

Earlier this month, MasterCard announced that it was pricing its shares at between $40 and $43 in order to raise an expected $2.8 billion for a 46% stake in the company. In the IPO last Wednesday, shares initially sold for $39 per share, which still raised $2.39 billion. In addition, the share price jumped to $46 by the close last Thursday, and settled at $44.80 on Friday, making investors who participated in the IPO very, very happy. They all did a little dance, made a little love, got down that night.

Then, along come the human Quaaludes at consumeraffairs.com to point out that the glass is half empty.

But investors should think carefully before putting too much of their money into shares of MasterCard, as the company's move is designed primarily to respond to the series of lawsuits launched by merchants over the high "interchange fees" MasterCard and card-issuing banks charge to process plastic transactions.

By the company's own admission, the principal effects of the IPO will be to "redeem" shares of MasterCard held by the 1,400 member banks that issue its card, reducing their liability in the event that the merchant lawsuits are successful.

MasterCard plans to use $650 million of the funds raised by the IPO to add to its "war chest" in order to defend against the regulatory challenges from the lawsuits.

Investors who buy up shares of MasterCard hoping to turn a quick profit from the company's massive public profile may be left holding the bag. Analyst Howard Bernstein told Fortune magazine on May 17th that the cost of the merchant lawsuit litigation could exceed $1 billion dollars easily.

They just couldn't let us have one more stinkin' day of self-delusional giddiness, could they?

I bet that none of those do-gooders at consumeraffairs.com has had a "date" since Monica Lewinski left D.C.

Coming In At The Top

The first thought that occurred to me when I read that President Bush had appointed Goldman Sachs CEO Henry Paulson to replace John Snow as Secretary of the Treasury was that when you arrive at the crest of a wave and plan to ride it for awhile, you'd better hope that you're a ways from the shore. All that wave can do is peter out, unless it's a tsunami; then, it'll make a big splash when it breaks, wiping out all in its path. I'd doubt that Paulson would like that much. I know the rest of us wouldn't.

President Bush: "The American economy is powerful, productive and prosperous, and I look forward to working with Hank Paulson to keep it that way." Reading between the lines: "Don't screw up the economy, Hank. It's the only thing I got going for me at the moment."

One of Paulson's predecessors at Goldman Sachs, Richard Rubin, was the longest serving Secretary under William Jefferson Clinton. Still, he was "in and out" (so to speak) while the economy continued to grow. You remember the Internet bubble, don't you? I thought so. Yet, Mr. Rubin emerged unscathed, perhaps in no small part because he refused to "smoke cigars" with interns.

One report did contain the disturbing news that Paulson met with Senator Charles Schumer of New York, and that Chuck blessed him.

Sen. Chuck Schumer, D-N.Y., a member of the Senate Finance Committee, gave Paulson his backing after talking to him Tuesday.

"His experience, intelligence and deep understanding of national and global economic issues make him the best pick America could have hoped for," Schumer said.

That's either an indication of bi-partisan support or the kiss of death. Time will tell.

The issues that bedeviled Snow (the trade deficit, particularly with China, social security reform, the "simplification" of the federal tax code, and "strong dollar-weak dollar" balancing act) are waiting for Paulson. Good luck with all that, Secretary Paulson.

Net Neutrality Gains Momentum

It appears that "net neutrality" is gaining momentum in Congress, although the infighting among Republicans over "turf battles" doesn't bode well. As I've suggested previously, it's time (actually, past time) that banks "got in the game" and told their legislators how they feel about the issue.

By a 20-13 vote Thursday that partially followed party lines, the House Judiciary Committee approved a bill that would require broadband providers to abide by strict Net neutrality principles, meaning that their networks must be operated in a "nondiscriminatory" manner.

All 14 Democrats on the committee (joined by six Republicans) supported the measure, while 13 Republicans opposed it.

[...]

In an unusual twist, many members of the committee said they were voting for the legislation not because of strong concerns over Net neutrality--but instead because of a turf battle. They said they were worried that a competing proposal already approved by a different committee last month would diminish their own influence in the future.

That other bill, called the Communications Opportunity, Promotion and Enhancement, or COPE, Act, says the Federal Communications Commission "shall have exclusive authority" to investigate violations of Net neutrality principles. It's backed by Rep. Joe Barton, a Texas Republican who heads the House Energy and Commerce Committee, and does not include strict Net neutrality mandates.

Because the FCC is overseen by Barton's committee, that proposal would effectively cut off Judiciary Committee members from being able to hold hearings on Net neutrality antitrust violations, give speeches about corporate malfeasance and solicit campaign cash from affected companies--the lifeblood of modern Washington politics.

[...]

Rep. Anthony Weiner, a New York Democrat, said he also disagreed with the "regulatory scheme" proposed by the bill's sponsors but wasn't about to let the rival committee's proposal win. "The way the Energy and Commerce bill is written is to deny this committee--and, frankly, citizens--a right to remedy," he said.

Well, as long as everyone's voting based strictly upon their conscience, and what's best for their constituents, that's all that counts.

"There are two things that you never want to see being made: legislation and sausage." Otto Von Bismark.

The linked article contains a chart as to the status of the various bills that address the issue.

The proponents of net neutrality received a boost last week from Tim Berners-Lee, sometimes credited as the inventor of the World Wide Web (I know, you all thought that it was Al Gore, but he invented the Internet). Speaking last week at a conference in Edinburgh, Berners-Lee came out strongly in support of net neutrality. Interestingly, he characterized the issue as a US-only issue.  "In Europe, Net neutrality is the rule," he said.

As if further incentive was necessary, U.S. banks could face yet another competitive disadvantage vis-a-vis their European counterparts.

 

Slicing and Dicing the Data on ILCs

Christopher Smith of iBanknet has posted on his site some data concerning ILCs. As Chris observes in an e-mail to me,

I find it interesting to look at the capital ratios and the breakdown of their lending.  You can quickly see which ILC's are moving toward a retail bank and the ILC's that are sticking to their original purpose.

Indeed. Target seems to be towing the line. Why do Wal-Mart's opponents presume it wouldn't do the same? Nobody seems to fear the "Target Dog" pit bull, which has been gnawing on the ILC bone for awhile, yet many pale at the thought of the approach of the angry rottweiler that is Wal-Mart. Why is that? If either one latches onto your leg...well...you kind of just have to "go with it," if you know what I mean.

The list compiled by iBanknet certainly includes some big industrial giants, like Toyota and BMW, and the ROAs and ROEs are all over the board, which makes for some interesting reading (if you have nothing else to do over a holiday weekend). For example, you have to love Pitney Bowes Bank's ROE of 186.93%. Who knew it was so profitable to finance postage meters?

Credit Card Banks: Not A Dry Eye In The House

According to a page 1 article in yesteday's The Wall Street Journal (paid subscription required), credit card issuers are being poleaxed by a diabolical trend: each month, consumers are paying off their credit balances in full. No "revolver," no interest, no late payment fee, no over-limit fee. That means lower income.

Much lower income.

For card issuers, which profit by collecting interest on unpaid balances, that's bad news. In the past, when interest rates crept up, as they are doing now, fewer cardholders could afford to pay down balances.

"Normally at this point in the economic cycle, you start to see payment rates decline. But that's not happening," says Richard Srednicki, who runs the credit-card business at J.P. Morgan Chase & Co., the nation's second-largest card issuer. "It is a tougher business if payment rates continue to stay up and consumers continue to pay off more. It's something we've got to understand and work at."

Although consumers are using plastic for more of their daily purchases, they are giving card issuers fits by juggling their debts more shrewdly. When cardholders are hit with high interest rates on one card, they routinely transfer balances to new cards at lower rates. And in recent years, as real-estate values soared and mortgage rates fell sharply, more consumers wiped out credit-card debts altogether by borrowing against their homes.

To make matters worse for card issuers, federal bank regulators issued new guidelines in 2003 meant to ensure that cardholders pay off more each month than just the fees and interest charges that have accumulated. To comply with the rules, many banks have raised minimum-payment requirements, bumping up the payment rate further.

[...]

Last year, banks notched pretax profits of $30.6 billion on credit-card operations, down 3% from the year-earlier period, the first such decline since 1998, according to CardWeb.com, a closely held firm that tracks the industry. The after-tax return on average assets -- one measure of industry profitability -- was 1.21% at year-end, down from 1.48% a year earlier, CardWeb reports.

[...]

The payment guidelines issued by federal regulators in 2003 were intended to discourage banks from carrying credit-card customers who are unable or unwilling to pay off any of their principal balances. Many banks raised minimum-payment requirements, with some doubling them to 4% of unpaid balances.

Some banks are worried the new rules will pinch profits. J.P. Morgan has estimated they will reduce credit-card profits by $500 million in the second half of 2006. The bank attributed the expected reduction to higher payment rates, higher delinquency rates and the cost of providing credit counseling to financially struggling cardholders.

Once again, the law of unintended consequences applies. The 2003 guidelines cited in the article were adopted to address safety and soundness concerns of the regulators and to reduce risk to banks, by lessening the risk of default by credit card holders. Well, they worked. There's little danger of default when the borrower pays the entire balance off each month. Of course, the effect of the guidelines has been to substantially reduce income to credit card banks. That, In turn, could increase the risk that those banks, in order to replace the lost income, will implement other riskier practices. It certainly will make life less pleasant for those consumers who continue to use their credit cards as revolving lines of credit. As the article notes, banks are raising fees on those borrowers.

The fun never ends.

The Hosers Are Coming!

It looks like foreign banks are lusting after U.S. banks. It also looks like the Canadians may have an edge over their competitors.

Canadian, European and eventually Asian banks are likely to feature prominently in mergers and acquisitions in the United States in the coming years, according to John Chrin, head of financial institution M&A at J.P. Morgan.

Domestic bank mergers are not currently allowed in Canada,  so financial firms there need to look south to the U.S. for  deals.

"Over the next decade, foreign institutions should play an increasingly active role in consolidation in the United States," Chrin said in a recent interview.

"Canadians, Europeans, and I venture to say ... it is not going to be long before we see Japanese institutions start reevaluating the United States and one might argue even some of the Korean institutions."

[...]

"The Canadian banks have muscle and size and as important, they also have a good trading multiple in terms of their price to earnings ratio," said Chrin.

"They trade at multiples that are at or above their U.S. competitors, which is different from the Europeans who typically trade at or below the U.S. entities. So it gives them a little bit of an advantage."

And do you know what the "beauty part" of that prospect might be? Closings that feature Molsons, Moosehead and Labatts "on ice." Nobody ices down a bucket of brew quite like Canadian bankers.

They're polite, too. I vividly recall a $150 million loan workout I did a little over 20 years ago in Denver for one of the giant Canadian banks mentioned in the article. The big boys from Toronto were amusing, always courteous, yet tough as nails. Didn't hear one "eh" out of them, though (much less, a "hoser"). Moreover, although at the end of the day, the borrower (also a Canadian) might have felt "hosed," I never heard a cross word pass his lips. Frankly, it was unlike any American workout I'd ever been through, or subsequently experienced. With the Yanks, you always got plenty of posturing, hard-boiled tough-guy talk, and, inevitably, "size comparison." You'd swear that both sides listened to the Four Season's "Walk Like A Man" for hours before entering the negotiating room.

So, "C'mon Down" my Northern Brothers! You bring the beer. I'll supply the ice.

The Devil's in the Details

Buried on pages 19 and 20 of testimony that OCC Chief Counsel Julie Williams gave before the Senate Banking Committee this March is a good idea in theory that might turn out to be a bad idea in practice.

Stung by court decisions that limited the ability of the OCC (and other federal banking regulators) to enforce written agreements between individuals and the regulator, or conditions imposed by the agency in connection with the approval of applications, other than in situations where the individual was "unjustly enriched" at the expense of institution with whom the individual was affiliated, the OCC has succeeded in having inserted in regulatory relief legislation a provision that, as Ms. Williams puts it, "would expressly authorize the Federal banking agencies to enforce written agreements and conditions imposed in writing in connection with an application or when the agency imposes conditions as part of its decision not to disapprove a notice, e.g., a Change in Bank Control Act (CBCA) notice."

See, for example, Section 405 of the Financial Services Regulatory Relief Act of 2005.

Concern has been raised in the trade press that bank regulators will use this power to impose a condition upon (or require a written agreement with) directors of banks, including outside directors, that requires the directors to be personally responsible to recapitalize the bank in the event the bank falls below its minimum capital requirements. Although some regulators allege that the agencies will not routinely require such agreements or impose such conditions, the possibility of their imposition is enough to discourage me from ever recommending that a person serve as an outside member of a regulated financial institution's board of directors without a financial incentive to do so that outweighs the risk that all personal assets (other than exempt assets) will be at the mercy of bank regulators if the bank falls on hard times. As if the experiences of the 1980s and 1990s weren't enough to make bank boards a risky business.

While Ms. Williams may assert that such a power will enhance the safety and soundness of banks, I disagree. Even talking about the possibility of imposing such a condition or requiring such an agreement is going to have a "chilling effect" on the willingness of good people to serve on the board of directors of a bank. The smarter and better advised potential directors will wisely pass on the opportunity to serve. The banks (and, eventually, the regulators) will be left with the inept, the insane, the ignorant, the stupid and the venal. Just the kind of people that you don't want to serve as outside directors of an insured depository institution.

It Ought To Be A Crime?

Rep. Jim Sensenbrenner just "can't get no respect. No respect at all."*

He thinks that he's carrying water for the White House by introducing a tough immigration bill, then the President appears on national television and backs off of a hard line that Sensenbrenner thought Bush had supported. Egg-on-the-face!

A couple of weeks ago, Sensenbrenner introduced in the House a bill (the Cyber-Security Enhancement and Consumer Data Protection Act of 2006) that would, among other things, make it a federal crime not to report "major data security breaches" to the FBI and the Secret Service within 14 days of the date of the breach, and prior to reporting the breach to any affected individuals.

The Republican-backed bill would require "whoever owns or possesses data in electronic form" that contains personally identifiable information--such as a person's name, Social Security number or date of birth--to inform the U.S. Secret Service or the FBI within two weeks of discovering a "major breach."

Those law enforcement agencies could then decide to delay notification to consumers by as much as 30 days, if they determine that disclosure would harm criminal investigations or national security.

The bill defines "major breach" as any incident that involves the personal information of 10,000 or more individuals, databases owned by the federal government or personal data about federal employees or contractors involved in "national security matters or law enforcement."

Refusing to comply with the rules could result in up to five years in prison or fines of $50,000 for each day that the intrusion is not reported--an idea endorsed by the Justice Department.

Actually, I think that the penalty is less fearsome than it might appear at first blush. The operative section would impose jail time only in the event that the owner or possessor of the data, with knowledge of the breach, "knowingly fails to provide notice of such breach to the United States Secret Service or Federal Bureau of Investigation, with the intent to prevent, obstruct, or impede a lawful investigation of such breach, and if such breach causes a significant risk of identity theft." If a bank or other business intends to obstruct an investigation, then it ought to hammered. On the other hand, simple negligence or ignorance doesn't seem to trigger a penalty.

Also, another portion of the bill gives the owner of the data immunity from any cause of action based on the fact that it notified the FBI and Secret Service prior to notifying the affected individuals. That's a positive provision for businesses. No sense being caught between a rock and a hard place without paper protection.

I question the need for the bill. However, I don't think it is cause for undue alarm.

*"I get no respect. The way my luck is running, if I was a politician I would be honest."
---Rodney Dangerfield

A Crook Who Kept Banker's Hours

I believe that they may have to do just a wee bit more rehabilitation on this guy.

I'll bet his parole officer was pretty pleased that his charge showed up each week for his regular meeting. Little did he know it was because the parole office was so conveniently located near a Fifth Third branch.

I suppose that a few more years in the pokey will at least impress upon the fellow that when you rob the same bank at the same time each week, the cops might figure out there's a pattern.

I hear the Dixie Chicks need a tambourine player for their upcoming tour. He sounds dumb enough for that group. Obviously, he's "not ready to make nice," either.

Wal-Mart's PR Woes

While it's hard not to chuckle at some of the labored breathing of Independent Community Bankers of America's president Camden Fine over every misstep by Wal-Mart in its quest to start an ILC in Utah, the man certainly has been given plenty of ammunition over the past couple of weeks.

First came word that Wal-Mart had "lied" ("LIED, I tell ya'! BALD-FACED LIES!") in testimony before the FDIC. Wal-Mart's representative had tesified that Wal-Mart's in-store bank branch leases with community banks are long-term and can't be terminated by Wal-Mart. Apparently, some of those leases have "only" 5 year-year terms (in the retail and commercial worlds, five years IS long-term, but never mind) and Wal-Mart has an ability to terminate (or at least "not to renew"). According to an American Banker article (paid subscription required), the total percentage of such leases about which Wal-Mart misspoke LIED is 5% of the total. Heck, a 95% accuracy rate is the absolute unvarnished truth for a Congressperson or Senator, right? Well, not if the Solon in question is a Wal-Mart hater.

Congresswoman Stephanie Tubbs Jones (that middle name is not a nickname, I'm told, unlike Roscoe "Fatty" Arbuckle) issued a press release in which she threw acid in the face of the Whore of Babylon Bentonville.

"While Wal-Mart continues to claim their testimony was truthful, these recent findings have begun to pull the thread on their intricately woven web of misleading testimony. Simply put, Wal-Mart is increasingly looking like a wolf in sheep's clothing attempting to fool both the FDIC and the American people into thinking that their intentions with this bank are honorable."

Being called "less than truthful" by a Congresswoman is akin to being called "a terrorist" by Osama bin-Laden. I'd say "it takes one to know one," but it would be tough to make the "in sheep's clothing" part of the accusation sound plausible.

Mr. Fine was front and center, of course.

"If this surfaced, what else could surface?" asked Camden Fine, president and chief executive officer of the Independent Community Bankers of America, a trade group.

Fine was hoping that the next "surfacing" would involve pictures of any member of the Walton family with a transvestite hooker, but he got the next best thing: an unfortunately worded employment ad.

Wal-Mart Stores Inc. confirmed Thursday it is seeking a senior manager to oversee "new strategic initiatives" in the mortgage business, but said the move does not signal an expansion into retail banking.          

Some bankers, lawmakers and Wall Street analysts disagreed, saying the executive search suggests the retail giant is planning to move into full-service banking, despite promises to the contrary to federal regulators.

You're a reporter on a Wal-Mart banking story. You need a breathless quote. Who you gonna' call? Ghost Busters? Naaaa...

"This is the smoking gun. What more do you need?" asked Camden Fine, chief executive of the Independent Community Bankers of America. The trade group for small banks is fighting Wal-Mart's application to the Federal Deposit Insurance Corp. for permission to launch a small, special-purpose bank.

The horror! The horror!

Wal-Mart spokesman Martin Heires said interpreting the company's executive search as proof of a move into commercial banking is "absolutely off-base."

He said the search is related to an employee benefit program to help Wal-Mart workers in 43 states obtain relatively cheap home mortgages. By partnering with Nationwide Advantage Mortgage Co., Wal-Mart already offers its employees lower closing costs, reduced paperwork and quicker decisions on loans, Heires said.          

The new executive would help expand that program, as well as improve programs offering customers simple financial services such as money orders, money transfers and credit cards through banking partners, he said.

Maybe so. Maybe not so. We'll never really know. Rational discussion does not appear to be part of the game plan by Wal-Mart's opponents.

On the other hand, these public relation missteps would cause a friend's 11 year-old daughter to roll her eyes and use her favorite exclamation: AWKWARD!

Maybe Wal-Mart's hired this guy to coordinate its PR effort on the FDIC application.