Bank Lawyer's Blog

Terrorism As Opportunity

Leaving aside the subprime mortgage "crisis" for a few days, let's look at a story that's been lurking under most people's radar. It's the story about ABN Amro, the big Dutch bank that currently is in play, with Barclays in "exclusive" hot pursuit at the moment, but with a large shareholder urging the breakup of the holding company and/or the entry of other suitors into the race for a merger with or acquisition of the bank.

According to an article in last Friday's The Wall Street Journal (paid subscription required), five former employees of the bank, all U.S. citizens, are suing the bank for wrongful termination. The ex-employees allege that they are being made scapegoats for a practice that is widespread among European banks: helping terrorists and their sponsors ignore and evade U.S. restrictions.

Lawyers for the plaintiffs in the New York case claim to have unearthed an internal ABN Amro memo describing how European banks evade U.S. sanctions on Iran. "The Central Bank of Iran is faced with difficulties for USD denominated clearing transactions due to sanctions imposed by the U.S.," the alleged memo states. "The Swiss and other European Banks have worked out a solution for this. The payment instructions are sent directly to the beneficiary's bank and cover payment is made to the beneficiary bank's U.S. Correspondent as inter-bank payments." In other words, the banks simply remove any reference to Iran from the documentation accompanying the wire transfers.

This practice was dictated by the Iranians, the ex-employees claim. "The Central Bank of Iran had communicated to the Central Bank Desk of ABN AMRO Bank, Amsterdam, the procedure to be followed for repayment of USD deposits to their accounts with European Banks in London. This procedure stipulated that payment messages sent to U.S. clearing Banks for payment of USD funds to the Central Bank of Iran should not contain any reference to the Central Bank of Iran or any other reference relating to Iran."

In one internal 2003 email cited in the suit, a senior ABN Amro executive allegedly discussed the merits of the technique for avoiding detection in New York. "There is no way the payment will get stopped as all NY ever sees is a bank to bank instruction," the executive is alleged to have written.

Another alleged 2003 email by an ABN executive appeared to justify evasion of the U.S. sanctions enforced by the U.S. Treasury's Office of Foreign Assets Control (OFAC).

"Twenty four years of U.S. sanctions and OFAC listing and Iran continues to sell oil and gas in USD. And it imports and pays in USD as well. All of this is clearly done through accounts in Europe and elsewhere," the executive allegedly wrote. "There is a very good case to be made for getting an overall acceptance that when issues are purely US we should not be a part of it. In fact, we should see it as an opportunity."

The WSJ notes that in 2005 ABN Amro agreed to pay U.S. bank regulators $80 million "to settle charges that it improperly disguised billions of dollars in transfers through New York for both Iran and Libya in order to avoid U.S. regulations restricting such transactions."

As the lawsuits by victims of terrorism against European banks have demonstrated, and as these memos confirm, large European banks view the war on Islamist terrorist organizations and the states that fund and otherwise support them as a U.S. problem. Bombs that rip apart Spanish and British passenger trains, the illegal seizure of British soldiers and holding them hostage, riots in the streets over cartoons, death threats and actual murders of artists and politicians who criticize militant Islam, none of it seems to impede taking your enemy's cash for services rendered, even if that enemy has clearly and unabashedly announced that it intends to breed you out of existence, if you won't simply capitulate of your own deracinated decrepitude in advance of the inevitability of dhimmitude.

It's not their problem. "In fact, we should see it as an opportunity."

With "friends" like these....

Payday Lending Still Not Peachy In Georgia

Like Generalissimo Francisco Franco, payday lending in Georgia is still dead.

State lawmakers decided Tuesday that Georgia does not need payday lending.

A hard-fought battle to legalize the short-term, high-interest loans ended when the state House voted 82-77 for the measure. The bill needed 91 favorable votes — a majority of the House membership — to move on to the Senate.

Tuesday's vote represented a second attempt by the bill's sponsors to clear the House. The measure failed last week with a tie vote of 84 to 84.

The vote was a victory for consumer advocates, who had strongly opposed the measure.

The defeat "is going to save Georgians hundreds of millions of dollars a year in high interest rates and fees," said Danny Orrock, legislative coordinator for Georgia Watch, a statewide consumer organization.

[...]

Georgia law has prohibited payday lending for more than 100 years, but the state was not successful in shutting down the industry until 2004. That's when the General Assembly made payday lending a felony, allowed for racketeering charges and permitted potentially costly class-action lawsuits.

The 2004 bill passed after commanders at Georgia's military bases lobbied in favor of it, arguing that military families were being trapped in a cycle of debt after taking out payday loans in Georgia.

Making payday lending a felony, mixing in a little state civil RICO action, and turning class-action plaintiffs lawyers loose. Man, that's a trifecta that could stop almost any business enterprise. Maybe we should try that approach against al-Quaeda.

Of course, criminalization of addictive drugs hasn't stopped drug dealers. That's true of loan sharking, as well. Apparently, however, it's worked against payday lenders. So far, at least.

Payday lenders aren't finished with Georgia, however. Like The Governator, "They'll Be Back."

"We're sorry we lost, but we feel pretty excited that a majority of legislators voted to bring back payday lending," said Jabo Covert, an executive with a Tennessee-based payday lending chain, who has been lobbying for the bill in Georgia.

Covert said that his industry would return to the General Assembly.

"The consumer demand for the product is not going to go away and our interest in meeting that demand is not going to go away," Covert said.

Not that consumer advocates are backing down.

If the industry does return to the General Assembly next year, "we'll just keeping fighting them," said Allison Wall, executive director of Georgia Watch.

With APRs in the 390% to %400 range, payday lenders have plenty of incentive to get back in the ring next year, and consumer advocates have plenty of incentive to climb back in with them. Buy your tickets early. It ought to be a hell of a fight.

Tone Deaf

Banks continue to receive a hard time from critics of illegal immigration in the wake of recent announcements by Bank of America and Wells Fargo that they intend to step up efforts to market credit cards to people without social security cards or proof of citizenship. The banks insist that they are not specifically targeting illegal immigrants, but only those without social security numbers or other documentation that proves that they are U.S. citizens or legal residents. Everyone understands that most of those targeted are illegal immigrants, so such insistence rings hollow to the banks' critics.

From Loren Steffy, business columnist of The Houston Chronicle, to illegal immigration foe U.S. congressman  Elton  Gallegly, who in a commentary column in this past Sunday's The Washington Times, accuses Bank of America and Wells Fargo of "aiding and abetting" the violation of immigration law, everyone with an axe to grind against banks and/or illegal immigrants is jumping on their soapbox and letting the rants fly. The counter-arguments by banks, including that nothing that they are doing is illegal (which is certainly true), and that they aren't encouraging illegal immigration, but are merely providing a service that law enforcement authorities favor (crime against illegal immigrants deceases when they put their money in bank accounts rather than carrying wads of cash in their pockets or stuffing it under a mattress) are not impressing the banks' critics. They continue to be enraged by the actions of banks and beat their drums incessantly.

Nevertheless, bank mouthpieces appear to be tone deaf to the tune they sing, and how that song sounds to a very large chunk of the U.S. populace. Take the recent example of the American Bankers Association's director of housing and economic development, James Ballentine. In commenting on the ABA's opposition to a bill introduced early in March by U.S. Representative Marsha Blackburn of Tennessee, that would stop banks from accepting the "matricula" consular cards or other foreign identification documents to verify a customer's identity when opening an account, Mr. Ballentine was quoted in the American Banker (paid subscription required) as follows: "It's a strange world that we live in where we're actually trying to get folks not to put money into a financial institution."

Actually, it's not such a strange world. We don't encourage dope dealers or terrorists to launder money through banks or to finance their illegal activities through banks. That's one of the purposes of the "know your customer" rules. While I realize that the customer identification rules do not require the banks to obtain proof of citizenship, most Americans don't make such fine distinctions. Many of them don't get it, and they believe that banks are out for the almighty buck regardless of the social consequences. Whether or not that perception is correct, it exists. Pour onto the fire the gasoline manufactured by recent congressional hearings about what greedy weasels credit card lenders are and how subprime lending vultures are "doing a bunch of junk" to poor unsuspecting "citizens," and you've got yourselves the start of a real "we hate banks" conflagration in the making.

It must be an inside-the-beltway mind set. You'd think that you could oppose such legislation as Ms. Blackburn's without making statements to the press that sound like the purpose of laws should never be to discourage people from putting money in banks. There are various groups of people who many Americans would just as soon see never be allowed to put their money in American banks. Publicly sticking your finger in the eyes of those Americans simply can't be good for banks, regardless of where you come down on the underlying issues. 

Perspective

Some people think Ben Stein's an idiot. Others think he's a genius. A small cadre of folks, including me, think of Stein primarily in terms of three words: "Bueller?...Bueller?...Bueller?"

Stein often has something pithy to say about business topics. Subprime lending is not exception. A couple of weeks ago, he gave brief comments on this "crisis" on the CBS news magazine show "Sunday Morning," and they bear repeating, if only because I agree with Stein on this topic. That makes Stein a genius, of course.

Stein notes that the recent shock to the stock market was purportedly motivated by the failure of subprime mortgage lenders. After recognizing the fact that "a large number" of subprime mortgages are in default and that the companies that made those loans "are in real trouble," Stein puts this so-called "crisis" in perspective.

But here is where perspective comes in, and is such a lovely thing: The U.S. mortgage market is immensely large, spectacularly large. Total foreclosures are a large amount in dollar terms, but a tiny amount in percentage terms. Foreclosures are now about 1 percent of loans. The lenders will sell the houses and recover at least fifty per cent of the value. That means the total loss may be about ½ of one percent of the mortgages made and probably less, and a lot of it is insured. This is an absolutely trivial number in the context of a $14 trillion economy with net wealth in the realm of $60 trillion.

This whole subprime mortgage mess is just an excuse for the gunslingers and river boat gamblers on Wall Street to use their tricks to move markets and make money. The economy is still very strong. The most cagey players on Wall Street like Goldman Sachs are now trying to buy — not sell — as much distressed merchandise in the mortgage area as they can. This is a good clue about where the smart money is going.

You can panic if you enjoy being panicky. But this will all blow over and the people who buy now, in due time, will be glad they did.

Perspective is of no use to a politician who's attempting to manufacture a crisis for political gains. That's the difference between politicians and businessmen. That fact was duly noted this past Sunday in a letter to the editor of The Dallas Morning News (free registration required) by Keith Reed, an employee of a subprime mortgage lender that is not failing.

I work for subprime lender in Addison. Fortunately for me, my company (due to a solid management team) is performing far above industry expectations, in spite of the subprime market "meltdown."

I had opportunity yesterday to catch the U.S. Senate Committee Banking hearing on the state of the subprime mortgage industry. There were two sessions: a morning session with federal regulators and an afternoon session with industry representatives from some of the major subprime industry lenders.

Most of the committee members attended the morning session. The senators took full advantage of the morning session to get face time, make their opening statements and engage the regulators in some hardball Q&A – "Who's responsible for this mess?"

Yet when presented with a real opportunity to engage in "meaningful dialogue" with industry players, only two of the approximately 15 members were present at the afternoon session – and one of them was the chairman, Sen. Christopher Dodd, D-Conn.

Ever been invited to a party only to be stood up by the host? Today's politicians have little concern about real problem-solving. They are interested primarily in public adoration, political power and lifelong pensions.

This is responsible representative government?

No, Keith, it's government by men and women who "are interested primarily in public adoration, political power and lifelong pensions." Men like Rep. Dennis ("Moonbat") Kucinich of Ohio, who in a House hearing last week (paid subscription required):

...attempted to rebut claims that many subprime loans originate outside the banking system, and cited a report on seven of the largest financial institutions, "Paying More for the American Dream."

Rep. Kucinich said the report, published this month by several consumer groups, including the California Reinvestment Coalition, "found that Citigroup, Countrywide, GMAC, HSBC, JPMorgan, Washington Mutual, and Wells Fargo all originated a substantial volume of both higher-cost subprime and lower-cost prime loans."

Unfortunately for Representative Moonbat, the same day that his remarks were reported, a well-researched article by reporters Greg Ip and Damian Paletta appeared in The Wall Street Journal (paid subscription required) that shows clearly that Moonbat and those "consumer advocates" (who need to create a crisis to prove that they have a reason to exist) upon whom he relies are full of Moonbat guano.

The well-publicized woes in the business of subprime mortgages -- a surge in foreclosures, turmoil in the stock market -- are raising a big question: Are regulators partly to blame?

Federal regulators over the past decade issued rules to tighten standards for making loans to borrowers with blemished credit or low incomes. Yet standards still declined and the volume of loans surged in the past two years.

One reason: Changes in the lending business and financial markets have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators. In 2005, 52% of subprime mortgages were originated by companies with no federal supervision, primarily mortgage brokers and stand-alone finance companies. Another 25% were made by finance companies that are units of bank-holding companies and thus indirectly supervised by the Federal Reserve; and 23% by regulated banks and thrifts.

"What is really frustrating about this is [federal regulators] don't have enforcement authority to do anything with these state-licensed, stand-alone mortgage lenders," says Fed Reserve Governor Susan Bies.

The article does repeat the oft-heard allegation that the federal banking regulators have been slow to clamp down on risky lending practices. Yet, even if true, the fact remains that a majority of these loans having been made by entities outside of the banking system, and only 23% were made by banks. None of the failed subprime lenders, by the way, are banks or subsidiaries of bank holding companies.

In other words, while the regulators might have acted sooner, their actions would not have affected a majority of the subprime loans made and, apparently, many of the ones that were made to borrowers who have defaulted. This fact makes no difference to hacks like Rep. Moonbat or Senator Dolt Dodd of Connecticut, who are cynically exploiting the subprime mortgage market correction to practice politics as usual.

I've said this before: if you want to prevent lenders from making these types of loans, then pass laws to outlaw the loans. No disclosures will ever be made simple enough so that the uneducated and/or unsophisticated borrowers who allegedly are being "abused" by these loans will ever be able to make a justifiable decision to the assume risks. In fact, according to politicians, such borrowers should never take those risks, so how could their decision to obtain such a loan ever be justifiable? Be done with it, and outlaw these loans altogether. Apparently, federal banking regulators agree. Sort of.

Recent events have prompted regulators to join the industry in calling for national laws to oversee the mortgage market.

"Congress needs to seriously consider a national antipredatory lending law that would apply to all mortgage lenders," said [FDIC Chairperson Sheila] Bair.

[FRB Director Susan] Bies shares that view, but also warns enforcement powers are needed. "If a federal statute is put out there with little inspection, it's only going to fall on the regulated entities. At the unregulated entities, where there's a problem, there will be little enforcement."

No one ever mentions the fact that the regulators (including the FTC as to all non-bank lenders) already have sweeping powers to hammer lenders who "deceive" borrowers as to the nature of their obligations. Obviously, it's not clear disclosures that politicians are after, it's the loans themselves. Poor people are considered too stupid to evaluate risk and assume it, and too fragile to live with the consequences.

Obviously, everyone knows the ultimate outcome of all this angst, don't they? Several years down the line, consumer advocates will scream that the poor are being excluded from home ownership, and that lenders need to be more creative and loosen their underwriting standards to qualify more of people with poor credit for home ownership.

You live through enough business cycles, and the repeated patterns of dysfunctional behavior repeat themselves, over and over.

Pick Your Victims With Care

It's tough being a bank regulator when the chairman of the Senate Banking Committee is running for President.

Last week, representatives of the federal financial institution regulatory agencies, especially the Federal Reserve Board, had to sit silently, biting their tongues, as Connecticut Senator Christopher Dolt Dodd made headlines for himself by attempting to blame the regulators (paid subscription required) for the current so-called "crisis" in subprime mortgage loan borrower defaults and lender failures.

Outlining what he described as a "chronology of regulatory neglect," Mr. Dodd, a Connecticut Democrat who is running for president, said regulators were aware of deteriorating credit standards in the subprime market as far back as 2003 but were slow to address concerns.

After a hearing yesterday [March 22, 2007], where the committee heard from regulators as well as borrowers who contended they were duped into bad loans, Mr. Dodd leveled his strongest criticism yet at the Federal Reserve, which he said hasn't exercised its full authority under law to stop abuses.

"The fact that they haven't acted really angers me," said Mr. Dodd. He said he will convene a summit of stakeholders in the subprime market, including regulators, lenders and consumer advocates, to seek relief for at-risk homeowners. "We need to deal with the problem of the millions of homeowners who may face foreclosure after being hit with the payment shocks built into their mortgages," he said.

Yes, millions of adjustable interest rate loans will have their interest rates adjust, right like it says in the loan documents and in the disclosure documents. What could be more profoundly unjust?

A Federal Reserve Board representative appeared to make a concession, but merely stated the obvious.

Under fire from Senators, Roger Cole, the Fed's director of banking supervision, conceded that the central bank could have done a better job. "Given what we know now, yes, we could have done more sooner," he said.

Like knowing what she does now, Hillary Clinton wouldn't have voted to go into Iraq. Unfortunately, the way the real world operates (as opposed to the catatonic schizophrenic interior of a professional politician's "brain"), we make decisions based upon the facts that are known to us at a given point in time, and are (or should be) judged accordingly. Knowing what you know now about what a self-serving, cynical nitwit Chris Dolt Dodd is today, would you, Connecticut banker, have voted for him in the past? These exercises in "what if" are meaningless, especially, as we pointed out a few days ago, in light of the fact that the set of circumstances that have allowed a "prefect storm" of negative factors to combine to increase the pain inflicting many participants in the subprime mortgage market have not previously occurred in tandem and are not likely to do so in the future. Thus, Senator Dolt's Dodd's purported anger is like a T-Rex being irate that mammals hadn't figured out that a massive comet would strike the Earth, wiping out his species.

Stuff happens. It's called "life."

Unfortunately for Dolt Dodd, he then went a "bridge too far," and laid into Alan Greenspan. According to The American Banker (paid subscription required), while Dolt's Dodd's attack on "The Guru" initially generated the headlines he craved, Greenspan's giant-brained rebuttal put Dolt's Dodd's gerbil-brained analysis in perspective. Greenspan used the deadliest argument possible when dealing with a politician: a recitation of facts.

Pushing beyond his previous, more general criticism of regulators, Sen. Dodd said the Fed has long had the power to write rules governing all mortgage lenders - not just banks - that could have curbed abuses. The central bank's failure to take action, and former Fed Chairman Alan Greenspan's encouragement of alternative mortgages three years ago, helped spur the subprime crisis, Sen. Dodd said.

"These actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today," he said. "The obvious question here is why hasn't the Fed acted."...

In an interview after the hearing, Mr. Greenspan took issue with Sen. Dodd's characterization of comments made several years ago on the subject of adjustable-rate mortgages.

"To generalize the way the senator does is really doing violence to what I said and certainly what I had in mind," the former Fed chairman said.

[...]

"I was referring to an exceptionally small segment of the mortgage market which would have scarcely any effect on what what is going on today," Mr. Greenspan said.

Sen. Dodd also released a six-page document on the chronology of ARM growth, tying it back to a February 2004 speech by Mr. Greenspan, then the Fed chairman, in which he said, "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

The Fed then raised interest rates, further harming consumers, Sen. Dodd said.

"By the spring of 2004 the regulators had started to document the fact that lending standards were easing. At the same time, the Fed was encouraging lenders to develop and market alternative adjustable-rate products, just as it was embarking on a long series of hikes in short-term rates," he said.

On Thursday, Mr. Greenspan said he intended his remarks only for certain kinds of consumers, such as people who intend to live in their homes for only a short period and thus would gain little from a 30-year fixed mortgage.

"There was a Fed staff study that indicated a small number of consumers could do better in the mortgage market by taking out something other than the 30-year mortgage," he said. "I viewed it as a very small segment of the market. Clearly for the vast majority of borrowers, the 30-year fixed-rate mortgage was the ideal vehicle. … I've always taken out a 30-year mortgage."

He also said, "The notion that my remarks were arguing in favor of the adjustable-rate mortgage, and therefore immediately following the remarks we engaged in a series of long interest rate increases, is just factually false." 

"Just Factually False." Let's make that Senator Dolt's Dodd's campaign slogan, shall we?

Memo to Chrissy: Stick to bank regulators who currently are in office and have to sit there blank-faced and take your guff while allowing their internal disdain for your cynical twisting of the "facts" to flash only momentarily in their eyes. They know that the existence of jacktards like you is why God gave man the gift of single malt Scotch. Just stay away from a guy like Greenspan, who's retired and possessed of an intellect that you aren't even bright enough to dream about. To take him on is like sticking your appendages in a woodchipper.

On the other hand, you're so slow that you'll likely have to lose eight fingers and five toes before you learn your lesson.

UPDATE 3/26/07: After reading this post, a regular reader sent me this quote: Suppose you were an idiot and suppose you were a member of Congress. But I repeat myself. -- Mark Twain

Business Professors Say Subprime "Bailouts" A Bad Idea

Senator Chris Dodd has been "mulling" over the need for legislation to rescue borrowers who may have been "victims" of predatory lending practices and now, thanks to the fact that their adjustable rate loans are adjusting, risk default and foreclosure. Forbearance by legislative fiat may be in order, according to Dodd. He's not in favor of bailing out the bad-boy lenders, however. They can stew in their own juices.

According to a recent article in Knowledge@Wharton, Dodd's proposal, and similar forbearance and borrower relief measures being floated by Sen. Hillary Clinton and consumer advocacy groups, are unsound. In fact, in the opinion of professors at the Wharton School of the University of Pennsylvania, the bailout of any of the participants in this "risky business" is a bad idea.

Not so fast, say Wharton faculty who have studied the mortgage market and past government bailouts. "I think that for the moment, they should probably leave it alone," says Joseph Gyourko, professor of real estate and finance at Wharton, warning that bailouts can make people more reckless in the future. "We don't want to introduce moral hazard .... We don't understand this very well right now, so any regulation is probably going to be wrong or imprecise."

In fact, he says, the market is already correcting the problem. Lenders have dramatically cut their offerings of the most hazardous products --such as loans that require no down payment or proof of the borrower's income, or those which allow borrowers to decide for themselves how much to pay each month.

Ken Thomas, a lecturer on finance at Wharton, argues that people and institutions that make risky choices are usually best left to suffer the consequences. "When we had the last big financial meltdown with stocks in 2001, did we consider bailing out those who lost money in the dot-com crash?" he asks. "We try to have markets regulate, not the government. Markets do a much better job."

The Wharton wonks also point out that the economic factors that have led to the current subprime mortgage lending sector woes are not likely to be repeated.

Wharton real estate professor Todd Sinai describes the situation as a "perfect storm," given that three things had to happen for the subprime market to tank: Borrowers' incomes had to drop, interest rates had to rise and housing prices had to fall. "It is extremely rare that all three things happen," he says.

[...]

But is the situation really bad enough to demand government intervention? "We just don't know," says Sinai. "Delinquency is a long way from default," he notes, arguing that many troubled borrowers may eventually get caught up without government help. In the past, he adds, lenders have typically preferred to help borrowers avoid foreclosure, often by re-negotiating loan terms. It is not certain that will happen this time, because over the past decade increasing numbers of loans have been passed to investors in mortgage-backed securities, potentially making lender-backed workouts more difficult. "I think a wait-and-see attitude is appropriate," he says.

The professors also take on a false analogy that has been irritating me since I first heard it several weeks ago: that if the government can spend billions to bailout savings and loan depositors, it can bail out victims of predatory lenders.

In that case, the government worried about the ripple effects on the economy and the millions of innocent depositors. Unlike the subprime borrowers, though, the S&L depositors had not chosen to make risky bets: They had merely put their money in the bank.

"I don't think they are comparable at all," Gyourko says, comparing the S&L crisis to the subprime meltdown. So far, only about 20 subprime lenders have failed. And because subprime loans are packed into mortgaged-backed securities and traded on the secondary market, losses will be diluted among investors worldwide rather than concentrated in the institutions that originated the loans.

"You certainly do not want to bail out the lenders," Gyourko says, arguing that the marketplace will curb risky behavior on its own. "The markets are telling lenders, 'You know, if you issue loans like those again, it's going to be very, very costly.'"

Agreed.

Ken Thomas points out a delicious irony in the current clamor by consumer advocacy groups for a clamp down on subprime lenders.

"The fact is that some of these same groups that are pushing [for restrictions on issuance of subprime loans] are the same groups that pushed banks to make more loans" to the poor, Thomas says.

Harking back to the S&L bailout, I recall sitting in the audience at the California Savings and Loan League's Annual Convention in 1983 when the General Counsel of the Federal Home Loan Bank Board stood at a lectern and berated S&L executives for being a pack of wimps. "You need to take more risk to earn greater income. You need to make more acquisition, development and construction loans. You've got the power. Use it!"

Well, they used it. Five years later the FHLBB officials suffered severe amnesia about their prior cheerleading-for-risk-taking bloviations.

The Wharton professors sum up with some fundamental lessons.

The main lesson to be learned from the subprime crisis may be that borrowers need to know more about the risky products they are offered. "One of the things that's wrong here is the issue of full information," Summers says, adding that "every subprime lender should be required to have a statement of the particular terms that is unambiguous."

Thomas agrees: "I'm always in favor of better disclosure." Gyourko notes that "if there's any case for regulation, it's for better information for borrowers." New regulations, for example, could require that loan applicants be told in clearer terms exactly how their monthly payments will rise if prevailing interest rates go up.

Subprime lenders knew they faced risks with products such as interest-only mortgages, Sinai says. With a standard mortgage, part of every monthly payment reduces principal. As the loan balance shrinks and housing prices rise, the lender has a growing assurance the property can be sold in foreclosure for enough to cover the debt. But that is not the case when the borrower pays only interest.

Subprime lenders knew the risks they were taking, as did investors, such as hedge funds, that bought securities based on subprime loans, according to Sinai. Lenders' and investors' willingness to take on these risks was good for borrowers who might otherwise not have been able to get mortgages. But, he argues, there's no reason for government to bail out businesses that lost money on bets they took willingly.

Spoken like true free market advocates. My only problem with "full disclosure" as a modus operandi is my oft-repeated question as to how do you dumb down the disclosures enough to make the borrowers understand the risks "sufficiently"? Certainly, it's not by having lawyers draft the disclosures. Moreover, where is the line crossed between "good salesmanship" and "fraud" when the borrower is viewed as being a dolt needing special governmental protection? Are these loans ever appropriate for borrowers with below-average incomes and education? Can a mortage loan originator ever sell one of these loans to an applicant of below-average income, education or intelligence?

What about a "suitability" standard, imposed by law? The Wharton professors are less than impressed.

Some consumer groups are pushing for new rules requiring that lenders match borrowers only to those products that are suitable for them. A borrower with an income that is not likely to rise would thus not be given a loan that could require much larger monthly payments a couple of years down the road. This would be similar to the suitability standardsfor stock brokers and financial advisors. A broker, for example, can be suspended or barred from the business for pushing a retiree on a small fixed income to speculate in stock options or other high-risk investments.

But this might not work as well in the mortgage industry, says Jack Guttentag, emeritus professor of finance at Wharton. In a March 17 guest column in The Washington Post, he wrote: "What has made the suitability standard workable in the securities industry is that the short-term interest of brokers in selling unsuitable securities is usually overruled by their long-term interest in maintaining a roster of satisfied clients.... In the mortgage market, in contrast, client-oriented loan providers are the minority group." Most providers do not have long-term relationships with borrowers or count on repeat business, he wrote.

In addition, as we've asked in the past, does Congress really expect that a loan officer could also perform competently as a borrower's financial adviser? If it does, order me a round of whatever those boys and girls are drinking.

Night of the Living Dead

In January, we thought that Illinois' HB 4050 had been effectively killed. It appears that a radioactive asteroid has exploded in the sky over Springfield, Illinois, turning dead legislation into night-of-the-living-dead legislation. Blogger Dan Green reported on rumors of this speakable horror yesterday.

I received a tip today [yesterday, March 20] that Secretary Dean Martinez of the IDFPR is part of a plan to reinstate Illinois House Bill 4050, the Predatory Lending Database Pilot Program Act.

This time, though, instead of focusing on 10 zip codes in Cook County, the reincarnation of HB 4050 will apply to all of Cook County.

According to the advance (and not-yet-confirmed) notice I received, the plan is for HB 4050 to apply to the following classes of people in all of Cook County:

• First-time home buyers
• Home buyers that have not bought a home in the last three years
• All refinance borrowers

If a borrower is in one of the above "classes", then he/she is HB 4050-susceptible.  For these borrowers, if the selected loan product meets any of the following criteria, HB 4050 counseling will be required:

• The home loan has a prepayment penalty
• The home loan can negatively amortize
• The home loan carries an interest only feature
• The home loan has fees in excess of 5% of its size
• The home loan is a "stated income" loan (i.e. income is not verified)
• The home loan(s) are for 100% of the home's value
• The home loan is an ARM that adjusts in fewer than 5 years.

Dan's "rumors" were confirmed today by the Illinois Governor's Office. As Dan points out, the original application of HB 4050 to the initially affected zip codes caused lenders to pull out of those zip codes and home sales to plummet. I'm sure that all of the rest of Cook County is looking forward to similar beneficial effects.

In another example of spreading the agony of consumer protection legislation to the previously uninfected, Martha Bridegam is happy to give us a "heads up" about the Community Reinvestment Modernization Act, recently introduced in the U.S. House of Representatives by Texas' own Eddie Bernice Johnson. Among other painful consequences, it would extend the application of the CRA way beyond the banks who have suffered under it lo these many decades. Now, all sorts of lenders would get to know about CRA compliance "up close and personal." That's good news for banking lawyers, who can educate a new category of clients to the wonders of community activists demonstrating in their waiting rooms, while television cameras record stammering lender spokespersons attempting to explain why they've been oppressing these chanting disadvantaged poor folk all these years. Ah, there's nothing like extorting a little contribution to an activist's "non-profit community development fund" from a lender who just wants to open an office or buy a competitor and didn't realize that he was a redlining capitalist exploiter of the downtrodden.

Yes, the CRA has done many good things for community development since 1977. However, as with all social engineering laws born of good intentions, it has also been used and abused in ways that make a cynical bank lawyer even more cynical, if that's possible. On the other hand Martha, being the long-time consumer advocate that she is, is likely swooning with joy at the prospect of Rep. Johnson's bill not only casting a wider net to reel in more fish, but, as Martha puts it, "repealing a lot of the Bush-era regulations that weakened Community Reinvestment Act (CRA) enforcement for lenders with less than $1 billion in assets."

Those d****d community bankers and their redlining ways!

This change of power in Congress is off to a rip-roaring start, isn't it? The Democrats haven't yet shown that they can actually pass any legislation, since they have more important fish to fry, such as attempting, and failing, to pass unenforceable resolutions concerning "The Surge" and creating a major political crisis they're bound to lose over the issue of executive privilege. Therefore, while such legislation may generate sweet dreams for consumer advocates and nightmares for lenders, it's a long way from enactment.

When You're Subprime, Nobody Knows (Or Wants) Your Name

The news from the subprime mortgage sector just keeps getting grimmer by the day. Last week, ACC Capital Holdings Corp., the parent company of subprime lenders Ameriquest  Mortgage Co. and Argent Mortgage Co. announced "large but unspecified layoffs," rumored to be as high as 3,200, or half of the work force. That came on top of a 3,800 cut last May. Anonymous postings to the Orange County Register's web site from purportedly "riffed" employees of those companies have turned the web site into "an impromptu message board." Typical of the postings was this sad note:

We have had so many layoffs it was really depressing, the people leaving always seemed happier than the people staying.

This reminds me of the bloodbath of the 1980s in the banking and savings and loan sector in the Southwest. In that turmoil, however, the "Southwest Plan," by bundling and selling insolvent institutions with government assistance actually preserved quite a few lower-to-mid-level jobs that would have been lost in a meltdown like this one, where the companies are in the process of imploding and shutting down. Unlike that meltdown, in this one it appears that the senior officers will be the last ones, not the first ones, out the door. Remember to turn out the lights and lock the doors, boys and girls.

As if financial body blows weren't enough, last year the Texas Rangers told Ameriquest that the club wanted Ameriquest's name off its ballpark, and yesterday they announced that they'd accomplished that goal.

Good-bye, Ameriquest Field -- hello, Rangers Ballpark in Arlington.

The troubled mortgage broker agreed to terminate its naming-rights deal with the Texas Rangers, after 14 months of talks with the Rangers, which sought to reclaim the name as part of a rebranding campaign.

"Mr. Hicks sent me out to Orange County, and said I want the name back," said Rangers President Jeff Cogen. "They didn't want to give it back, and over 14 months, we negotiated." Tom Hicks is owner of the Texas Rangers.

Cogen declined to reveal the terms of the agreement to terminate the naming-rights deal, but he did say that "the conversation took on a greater significance over the last couple months."

Yeah, I'll bet they did. According to the Los Angeles Times, Ameriquest will save tens of millions of dollars.

The company had signed a 30-year, $75-million deal in 2004 to have the stadium named Ameriquest Field. No financial details were released Monday, but by returning the naming rights, Ameriquest presumably will no longer have to make payments on that agreement, and the Texas Rangers can stamp their brand on the stadium for now and resell the rights to another company.

So, while it might appear to be pouring salt on an open wound, it makes sense for both parties. Tom Hicks, the Rangers owner, is very savvy. I assume that he saw the handwriting on the wall last year, and wondered whether those boys in Orange County were good for the life of the contract. Perhaps the Rangers really were motivated by "rebranding," but that's a lot of money to leave on the table. Then again, you never know what role ego plays in these transactions and Texas does not lack for ego.

By the way, for those of you who are not major league baseball fans, and those living on either coast or on a desert island, the Texas Rangers that we are discussing here are not the legendary lawmen like Walker, Texas Ranger, but the much less deadly yet much more highly paid baseball players like the late, great Alex Rodriguez, God rest his soul. Whatever happened to that guy, anyway? He left Texas, went to New York City, and was never heard from again. Isn't that always the case? 

Kick 'Em While They're Down

"Man is the only animal that laughs and has a state legislature."
–- Samuel Butler

Community banks believe that Wal-Mart's recent retreat from the wonderful world of industrial loan companies is nothing more than a head fake in the course of a touchdown run to the retail banking end zone. Community banks are out to tackle Wal-Mart and make sure that it stays down on the ground. As a banker told me today, "With a blood sucker like Wal-Mart, you have to drive a stake through its heart, lop off its head, set the body on fire, then expose it to daylight." Apparently, no precautions are off the table when it comes to Wal-Mart, no matter how extreme or seemingly unnecessary. Paging Buffy, The Vampire Slayer! Ms. Slayer, please pick up a white courtesy telephone.

Thus, it should surprise no one that state legislatures continue to enact anti-Wal-Mart legislation, whether or not Wal-Mart, today, presents an imminent danger to community banks. The latest is a state near and dear to me, Colorado. The two bills I first discussed in January were passed last week by the state legislature and by this time may already have been signed by the Governor.

State lawmakers recently passed two bills to limit commercial businesses from opening industrial loan companies (ILCs), bank-like institutions that can be owned by commercial companies and are allowed to offer nearly the same services as banks. At press time, the two measures were awaiting signature by Gov. Bill Ritter.

Colorado likely will be the first state this year to enact anti-ILC legislation, but it probably won't be the last, according to the American Bankers Association (ABA) in Washington, D.C.

Twelve other states are considering similar bills, including Illinois, Kansas, North Dakota, Tennessee, Texas and Washington, an ABA spokesman said. Five states -- Iowa, Maryland, Virginia, Oklahoma and Missouri -- passed anti-ILC bills in 2006.

It's true that these bills were passed shortly before Wal-Mart's announcement of last Friday that it was giving up the ghost of a chance it had to acquire an ILC. However, it's also true that the announcement would likely not have made a bit of difference to the opponents of the evil empire in their desire to push these bills forward to enactment. "Better safe than sorry" seems to be their catch phrase, and, frankly, who can blame them? Home Depot still lurks on the horizon, and Wal-Mart, though licking its wounds, is still an ambulatory T-Rex actively hunting prey.

Texas is working through its own version of anti-ILC legislation, H.B. 944. As of late February, the Texas Bankers Association notified its members that H.B. 944 was "the highest on our list of legislative priorities." Even if no longer the highest priority, I suspect that it is near the top. Expect Texas to join Colorado this year as one of the states that slams the door in the face of commercial enterprises who might try to exploit the ILC "loophole."

Wal-Mart Finally Pulls The Trigger

Tiring of the gun held to its head for the last 20 months, Wal-Mart last week reached over and pulled the trigger: it withdrew its applications for an FDIC-insured, Utah-chartered industrial loan company (ILC). Statements by Wal-Mart, its opponents, and the FDIC were boringly predicatble.

We previously reported on the public relations ineptitude of Wal-Mart, which repeatedly insisted that it had no intention of expanding the ILC's activities into retail banking services, while its actions, such as commencing retail banking operations in Mexico, spoke otherwise. The latest PR faux pas occurred this past week (paid subscription required) when a Wal-Mart opponent, Ohio Representative Paul Gillmor, announced the latest example of "overreaching" by Wal-Mart. It appears that Wal-Mart has been in the process of modifying its leases with in-store third-party banks to allow Wal-Mart to offer financial services and products.

"The only reasonable explanation of Wal-Mart's recent plan to revise its leases is that it plans to enter into full-scale banking," Rep. Gillmor said. "This really helps us because when they lose their credibility it enhances the chances of us passing legislation.

"They continually do what they say they are not doing," he said, "and they continually give us dishonest and deceptive statements, and I don't think that's right."

Wal-Mart claimed that it was merely updating old leases, and that the same language had been in leases executed within the last five years. Why that explanation might have been expected to mollify its opponents, who fear that Wal-Mart has embarked on a plan to expand into retail banking, is beyond me. The fact that it put these provisions into leases starting five years ago is entirely consistent, as are its attempts to acquire a federal savings bank and ILC over the last decade, with actions to further such a plan.

Wal-Mart claimed that the timing of Rep. Gillmor's and Wal-Mart's public statements was a mere coincidence. Nevertheless, the decision to finally put yourself out of your misery is a sound one. The ILC charter--in fact, any U.S. financial institution's charter--is not in the cards for Wal-Mart. Even a blind man could see this. Banking gadfly Bert Ely certainly could.

"This is the fourth time they have struck out since 1998 in trying to get into the deposit-taking business," Mr. Ely said. "They clearly could have played the game better."

Indeed. It appears that Wal-Mart will have to parse the nuances and find another way to play.

"We don’t plan to do this again," said Jane Thompson, Wal-Mart’s president for financial services. "The bank is behind us. We will use our partners to roll out new products."

Partners are nice, but they require you to split the income, and besides, you have all those messy fiduciary duties to one another to worry about. Don't be shocked if one or more foreign bank charters are someday used by Wal-Mart to get it where it wants to be in the retail banking world without the use of "partners" or a U.S. bank charter.

In the meantine, the FDIC wiped the flop sweat from its fevered brow.

"Wal-Mart made a wise choice [said FDIC Chairperson Sheila Bair]. This decision will remove the controversy surrounding their intentions. They don't need an ILC to play an important role in expanding access to financial services, they can do so by partnering with banks and others. We look forward to working with Wal-Mart in meeting the need for low-cost financial services across all populations."

Yes, they made a "wise choice" for you, Sheila, since your concern is purely bureaucratic. You don't want the FDIC in the line of fire, even though, under current law, you should have ruled on the application one way or the other long ago. Instead, you took the easy way out by stalling until either Congress made moot your need to act or Wal-Mart got tired of waiting, which is what happened. "No guts, no glory." Of course, no criticism, either. As a former high-level federal bank regulatory agency official once explained to me, "We regulators are like cockroaches. We scurry about in the darkness. When you shine a light on us, we freeze, paralyzed, unable to move. Once the light passes on, we  resume our scurrying." Who am I to argue with that expression of self-love?

I wonder what it must be like, going through life with your primary purpose being to attempt to avoid any mistakes? At least, any for which you can't shift the blame.

Wal-Mart's opponents were predictably ecstatic.

"We're popping champagne corks around here," said Cam Fine, president of the Independent Community Bankers of America, which represented small banks that led the opposition to Wal-Mart's application. "We have worked very, very hard for the 18 months to achieve this result."

Don't let one of those corks bounce off a wall and put your eye out, Cam. If by "working very hard" you mean making an ass out of yourself, then mission accomplished. At least your hyperbolic bloviations were consistently laugh-worthy. I include within that group your supposed "rebuttal" to former Citigroup credit card operations counsel Duncan MacDonald in the March 2, 2007 edition of the American Banker (paid subscription required), which for unadulterated low-brow appeal, was unparalleled. It was also deliciously cringe-inducing, and I say that as an expert in the genre. I'll give you the benefit of the doubt, and call you wonderfully cynical. If you were serious with your analogy of community bankers versus Wal-Mart as George Baily versus Mr. Potter from "It's A Wonderful Life," then you need to get a ghost writer. I'd recommend Clifford Irving.   

Then, again, you "won" didn't you? Inside the Beltway, that's all that counts: "victory" by whatever special interest group you're shilling for. To hell with the broader implications.

Speaking of Congress, there was immediate speculation that this action would leak the hot air out of Barney's and Paul's balloon. Those Congressmen have introduced legislation to close the ILC "loophole" in federal law's ban on mixing commerce and commercial banking. No such luck. Wal-Mart's younger brother, Home Depot said on Friday that it is still in the hunt. According to the Wall Street Journal, so is Congress.

In Congress, the chairman of the House Financial Services Committee, Rep. Barney Frank (D., Mass.), said he still intends to close a regulatory loophole that allows commercial firms to own banks.

As previously discussed, Utah Senator Robert Bennett has publicly opposed such efforts and has vowed to kill such legislation in the Senate. Home Depot may have a long wait.

Nevertheless, although we may not have Wal-Mart to kick around this particular field anymore, there's plenty of game left.