Bank Lawyer's Blog

A Race To The Bottom

This back-and-forth on foreclosures statistics is wearing me down. Some say "total foreclosures" are the appropriate measure of how bad things are in a given state. Others say it's the "foreclosure rate" that is most telling. Others scream "less filling," while others shout "tastes great." We won't even venture down the side alley of "boxers" versus "briefs."

Whatever the most appropriate fragrance on the "smell-o-meter" might be, things stink to high heaven in both Colorado and Texas.

Texas has the third-highest number of home foreclosures in the country, according to a new report by RealtyTrac Inc.

For the first six months of 2007, the Lone Star State reported 69,471 foreclosure filings, according to Irvine, Calif.-based Realty Trac. That amounts to an average of one filing for every 130 homes. The company will release individual market data in about a week.

Unfortunately for those ready to post a home for foreclosure wearing nothing but a pair of chaps, a 10-gallon hat, a pair of Justin boots, and a big ol' smile, Big Tex still takes a back seat to a surfer dude and a game fish with a hook in its mouth.

There were two other states that had a higher number of foreclosure filings than Texas.

For the first six months of 2007, RealtyTrac reports that California led the nation in the number of foreclosures, with a total of 189,560 filings -- an average of one foreclosure filing for every 69 households. Florida took second place, with a total of 102,213 filings. That amounts to an average of one foreclosure for every 81 households.

We Texans need to jump on this immigration reform bandwagon, pronto, and back Bank of America's play to rope the undocumented guest worker into the dream of American home ownership, along with a taste of life in a non-judicial foreclosure state. Until we get our act together, however, we'll be eating the dust kicked up by California raisins and Sunshine State blue hairs when it comes to gross foreclosure numbers. Those boys and girls really know how to beat down the average homeowner in ways that leave we Texans in our favorite attitude: slack-jawed.

Colorado, on the other hand, may have a much smaller population base than states like Texas, California and Florida, but what it lacks in size, it makes up in sheer effort.

Colorado's foreclosure rate was the second-highest in the nation during the first six months of this year, according to data released Monday by RealtyTrac Inc., a California-based private marketer of foreclosure properties.

Colorado came in behind Nevada, and was followed by California, Michigan, Florida, Ohio, Georgia, Arizona, Connecticut and Indiana.

Colorado reported one foreclosure filing for every 60 households during the January-to-June period, according to RealtyTrac. The state reported a total of 34,287 foreclosure filings on 19,411 properties, up 15 percent from the previous six-month period and up 38 percent from the same period in 2006.

This just shows you how high you can rise with a "can-do" spirit, a run-away housing market, loose lending standards, and a culture of "Don't Bogart that joint, brother." I'd be giving "Colorful Colorado" a shout-out of "You Go, Girl" right this very instant if I wasn't driven to my knees with anguish over the fact that a scant six months ago, Colorado had regained the top spot from Nevada. It looks like these two Western desperadoes are going to fight it out on a line if it takes all summer, or even beyond, until we know who is the undisputed champion of the foreclosure rate world. If I was a betting man, I'd lay the odds on Colorado, 5-2. Colorado is eighth in total foreclosures, and Nevada didn't make the top ten. Thank my lucky stars I never gamble.

We await with quivering anticipation the individual market data to be released next week. In January, we were concerned about Greeley-Ft. Worth-Detroit troika's stability, and whether some other metropolitan arriviste might attempt to horn in on the foreclosure action. It's nice to know that liquor can dull your anxiety while you wait in silent dread for the world that subprime lending has wrought to continue to unfold.

Power Grope

Chairman Mao's Frank's mid-June meltdown continues to ooze hot stuff that seeps through the cracks of the floorboards of Congress and drips, like Chinese water torture, onto the heads of the Federal Reserve Board (paid subscription required).

A month after House Financial Services Committee Chairman Barney Frank told the Federal Reserve Board to use or lose its power to ban unfair and deceptive banking practices, the Massachusetts Democrat said he wants to hand that power to two other agencies.

At a hearing Wednesday, Rep. Frank said the Federal Trade Commission Act should be amended to give not just the Fed but also the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. the power to police lending practices.

The Office of Thrift Supervision has similar authority, he said, but for reasons for which "no rational explanation is even conceivable, much less likely," lawmakers have denied the OCC and the FDIC the same right.

"My strong view now is that something should be done legislatively to correct that," Rep. Frank said.

Last month, he threatened to give the OTS "The Powah." Now, he's decided that the Lilliputians already "got them some," so he's edging closer to his secret love, Sheila Bair. Did I mention previously that Sheila Bair won the 1989 American Natural Bodybuilding Conference Women's Championship? I did? Not the same Sheila Bair? Well,then, never mind.

A talking head from the land of bankers tried to misdirect Chairman Frank, but he was having none of it. NONE OF IT, I SAID!

Testifying on behalf of the American Bankers Association, Arthur Johnson, the chairman and chief executive of United Bank of Michigan in Grand Rapids, said he would support such a move, but only if the agencies issued uniform rules.

"It would be anomalous — and harmful — for the five federal agencies … to adopt different standards of what is an unfair or deceptive act or practice," Mr. Johnson said.

But Rep. Frank said lawmakers learned from their experience with the Fair and Accurate Credit Transactions Act of 2003 that giving seven regulators the shared task of writing rules proved to be a disaster. The law is still not fully in effect, because regulators have not finalized the implementing rules.

That many regulators are "incapable of action," he said. "So that one doesn't work to me."

Unfortunately, instead of merely beating down the Fed and pumping up Ms. Bair's biceps, Barney Rubble had to smack down our favorite tool of capitalist oppression and imperialist power-projection: federal preemption.

Barney's got a point. While waiting for the final FACTA regulations to be issued, I plan to sell the last of my carbon offsets to Al Gore and board a starship to the Shoulder of Orion immediately prior to (1) the Northern Hemisphere being lashed (FINALLY!!!) by those hurricanes Jesus has been telling Pat Robertson for years will ("This year, Pat, I swear on the heads of the Father and the Holy Spirit") batter the Sodom and Gomorrah known as "America," and (2) the Southern Hemisphere freezing into the gigantic rink so long yearned for by those of us eager to ice skate in Hell. [Editors side note: as a devout Roman Catholic, I always get a kick out of the way the Lord wools Pat around every year about the upcoming hurricane season. Then again, in Pat's eyes, inasmuch as I am a devout Roman Catholic, the Big Guy's coming back to vaporize me, the rabbi next door, every crank and crack dealer, and "all those gays on Broadway."]

Rep. Frank tried to bolster his argument for reform by saying the current federal regulatory regime does not protect consumers adequately, because preemption has undercut state laws.

"The current set of tools and resources that the federal banking regulators have were configured in an era where the assumption was there was a lot of state consumer regulation going on," he said. "There is now, for national banks, virtually no state consumer regulation, certainly none that is specific to banks."

The preemption issue "is not going away," he said.

Rep. Frank said he is still weighing how best to use state supervisors and attorneys general to enforce rules and laws against unfair and deceptive practices.

I understand that after the hearing, he told reporters "off the record," that he'd like to dress some of the state supervisors and attorneys general up in tuxedo shirts and surfer jammies, and take them clubbing. How that addresses federal preemption is beyond me, but it sure does sound like a whole bushel and a peck of fun, doesn't it?

Frank's Republican counterpart on the Committee weighed in on the issue as only a member of that out-of-power party can.

The committee's ranking Republican, Rep. Spencer Bachus of Alabama, missed the hearing...

That might have been a tad unfair, since he had someone else read a written statement at the hearing, but as I recall, it only addressed wool tariffs in Botswana.

Consumer advocates also had their say, which would be expected at any hearing chaired by Barney.

Travis Plunkett, the legislative director for the Consumer Federation of America, who testified on behalf of six consumer organizations, said banking regulators have enough power to stop unfair practices but have chosen not to use it. He said the FTC should be able to take enforcement actions against depository institutions and to ban specific bank practices.

"The key to addressing these root problems is to make the regulatory process more independent of the financial institutions that are regulated," he said.

Yeah, make sure the regulators aren't familiar with financial institutions, so that they have little idea how their enforcement actions, policies and regulations affect them. Someone like: Travis Plunkett.

There was more "blah, blah, blah," but we've hit the highlights, or at least those we've been able to hit before our lithium kicked in.

 

The Downside: You Actually Have To Be An Auditor

What any banker could tell you:

Some folks familiar with the world of regulatory compliance have joked: Those who can, do. Those who can't, audit. Perhaps they should add, "and make gobs of money."

By "gobs" they mean "a whole lot."

An entire industry has evolved to help companies comply with the Sarbanes-Oxley Act of 2002, the largest change to corporate governance since the 1930s. Vying for those audit-consulting contracts is a high-stakes, high-value competition.

By the end of 2008, U.S. public companies will have spent $32 billion on compliance with Sarbanes-Oxley, with more than half of that on outside consulting, AMR Research reports. A recent Seattle P-I investigation detailing compliance challenges at The Boeing Co., the region's largest employer, found that the aerospace giant has spent more than $165 million in three years on the effort.

[...]

"If there's a clear winner here, it's the auditors themselves," said John Hagerty, vice president and analyst at Boston-based AMR Research, which tracks compliance spending.

Of course, where's there's money, there are greed heads, and as Grace Slick used to advise us, "Feed Your Head."

While billions of dollars are being spent on compliance, some question whether audit firms have gone overboard and remained ethical in their implementation of the law.

In the audit realm, landing Sarbanes-Oxley work can drive careers and fortunes, said Francine McKenna, consultant and president of McKenna Partners LLC in Chicago. She said that some firms have used their interpretation of the law "as a club against their clients."

[...]

Because the law took away an external audit firm's right to provide internal consulting for the same client, it contained an implicit deal to make up for that lost business, said George Washington University law professor Lawrence Cunningham. Those accounting firms "wield considerable political power," he said.

"They took a reduction in revenues from non-tax consulting work -- SOx banned them from doing this for their own clients -- in exchange for an increase in revenues from internal control work -- the SOx 404 audits," Cunningham said. "Such implicit deals may be common in political legislation, but they can come at a considerable cost."

Under this scenario, large firms can provide external audit work for some companies and internal compliance consulting for others. Thus, accounting firms sometimes share clients, alternately providing internal and external audit work.

"You've got to ask the question: Should they even be doing that? Is there a conflict of interest?" said Christopher Fox, a technology audit consultant who has co-wrote industry guidelines on Sarbanes-Oxley and international banking standards. "The problem is, if you're not careful, both sides get in bed with each other. The same people deliver the same teams from engagement to engagement. After a while you get to know each other."

Maybe I'm too old school, but I might have written that phrase as "who has co-written industry guidelines." Then again, I'm not an editor by trade. Moreover, the point is valid: "wink-wink, nudge-nudge" is always a potential problem in this arena, especially in light of the fact that business pressures, litigation and ill-advised government "crackdowns" have reduced the number of the largest accounting firms to a fruitful few; a fruitful few who, like the lawyers you love to hate, live their lives in tenths of a billable hour.

Also, because the law is unclear, audit firms often disagree with each other, Hagerty said. While audit firms duke out their differences, they bill hours to the client, but the concerns rarely rise to a level that requires public disclosure.

The result: Lots of money is spent, but firms are hesitant to publicly tattle on the practices of the other.

The linked article provides a case study of Boeing, with which a number of banks, particularly the large ones, might empathize. In her usual fashion, Francine McKenna of "re: The Auditors" fame (and a woman not afraid to give her blistering opinions to Bank Lawyer's Blog when she disagrees with its snark), delivers a hot observation about why auditors are reluctant to criticize one another's work.

However, if auditors are raising issues and "creating havoc" within a firm, McKenna said, "they still won't do anything to make each other look bad in the public eye. Anything they do to make each other look bad is going to make them all look bad."

Auditors tend to be guarded about their reputations and leery about violating non-disclosure agreements, McKenna said. It's difficult for auditors to openly discuss their concerns about industry practices, she said.

As fans of irony, we loved the article's concluding paragraphs.

Most experts seem to agree that Sarbanes-Oxley's goals are pure. But the jury is still out on whether its costs have justified its benefits.

"It's sort of ironic that it's the accounting firms -- they dropped the ball -- and they end up being the primary beneficiaries of this," [Morningstar Inc. equity analyst Brett] Horn said. "All of this happened in the wake of some bad things. The real question is, 'Does Sarbanes really materially help to stop those situations?' "

That's a question that lawmakers, the Securities and Exchange Commission and corporations are still trying to answer.

Other than making its lawyers wealthy, there's nothing a bank enjoys more than the thought that each of  its auditors will be be able to add a second Jaguar to the family garage.

WSJ Gnaws On The Bones of Eliot Mess

Occasionally, the mouth piece of Big Business gets things right, notwithstanding its official position that it never met an investment banker it didn't like. In the case of New York Governor Eliot ("Spits") Spitzer, yesterday's editorial "The Spitzer Method," The Wall Street Journal nailed the hammerhead in Albany with a perfect shot, and also took a gratuitous shot at the liberal "Main Stream Media" that courts the favor of the demagogue in the state house.

The media are doing their best Claude Rains act over the revelation that the office of New York Governor Eliot Spitzer orchestrated a smear campaign against State Senate Majority Leader Joe Bruno. But far from being a unique, out of character event, the episode is a classic example of the Spitzer political method: nasty and exaggerated accusations fed by selective, politically motivated news leaks. The difference is that this time his targets could fight back.

On Monday, the office of Democratic Attorney General Andrew Cuomo released a 54-page report on Mr. Bruno's use of state helicopters, allegedly for personal political purposes. The investigation had been prompted by the Governor's office after Mr. Spitzer's communications aide and hatchet man, Darren Dopp, saw to it that allegations of impropriety against Mr. Bruno had found their way into the hands of gullible, pliant reporters.

Only now it is Mr. Dopp who is in hot water, having been suspended without pay for his role in ginning up a non-scandal about the Republican Majority Leader. The AG cleared Mr. Bruno of any wrongdoing, but in the process uncovered Mr. Dopp's unseemly little scheme to plant the story and then use that as a pretext to call for the investigation.

In dry, clinical language, the AG's report details how Mr. Dopp arranged the collection of detailed travel information about Mr. Bruno and fed that information to the Albany Times-Union. When questioned about it, Mr. Dopp told two different, contradictory stories to explain why the State Police started tracking Mr. Bruno's movements, both of which, as the report details, were false.

The WSJ details other, similar reprehensible behavior by Spitzer toady Dopp, and by Dopp's controller, Governor Punk-Boy.

The difference this time is that Mr. Spitzer faced a political opponent who isn't as vulnerable to intimidation as the private companies and executives he preyed upon as Attorney General. He also ran into journalists at the New York Post who decided to dig beneath the spin coming out of Mr. Spitzer's office and broke the story. In the past, the press corps refused to challenge Mr. Spitzer's claims for fear of incurring Mr. Dopp's wrath and being cut off from future leaks. This is how the modern political-journalism game too often works.

So now Albany knows how Mr. Spitzer's past victims feel, and Mr. Dopp's thuggish tactics have received a long-overdue public airing -- from a Democratic Attorney General, no less. But what we don't yet know is, to borrow a phrase, what Mr. Spitzer knew and when he knew it. The AG's report is silent on the question, and Mr. Spitzer's current spin is that Mr. Dopp was running this opposition-research operation on his own.

At a minimum, however, it seems implausible that Mr. Dopp, the Governor's close adviser and communications director, would undertake a campaign to destroy the leader of the political opposition without his boss's tacit support. Mr. Spitzer's role needs to be more fully investigated and aired, and, who knows, maybe even reporters other than those at the New York Post will follow the story.

There's no question that BLB has a visceral dislike for Eliot Mess. We think that dislike further evidence of this blog's unerring good taste and sophisticated discernment. It might also be evidence of a pathological dislike of bullies of any stripe, and a compulsion to hunt them down under whatever rock they might be hiding.

As to the rest of the press, it seems they're catching up to the WSJ and The New York Post. Why, just this very day The Buffalo News broke this startling tidbit:

Gov. Eliot Spitzer this morning repeatedly refused to say whether it was inappropriate for two of his top aides to rebuke investigators' requests to be interviewed under oath about the dirty tricks scandal plaguing the administration.

The governor also would not answer a question about whether counsels in the governor's office advised the top senior aides … Richard Baum and Darren Dopp … not to provide interviews with Attorney General Andrew Cuomo's investigators.

We'll have to rename "Spits" "Stonewall Spits."

Even more important is the question posed by New York gossip site Gawker.com:  "How screwed is Eliot Spitzer?" Gawker.com then, in salty language that BLB does not endorse, but that makes our mammoth bellies shake like bowls of jelly, answers:

The governor is currently claiming to have known nothing about any of this, which would be slightly more credible if he weren't bragging all the time about his attention to detail and if he didn't advertise the fact that he was a self-righteous prick who would roll over his enemies to enact his agenda as some kind of selling point.

[...]

If we were Spitzer, we'd be more worried about Andrew Cuomo, who has a ton of cash in the bank and who—with this report—has somehow burnished his reputation as an independent politician who will go where the facts take him no matter what damage they do to his party. Looking back now at the endless Spitzer-Cuomo-Clinton tag-team extravaganza during last year's election, during which the three politicians criss-crossed Westchester and Long Island and points north (with the some-time tag-along of Bill Clinton), Cuomo look less like a Democratic party tool and junior of the bunch that he was then and more like the future Governor that he's been desperate to be since 1994.

[...]

So the only winner here is Andy Cuomo. He wins if he hurts Spitzer—and also wins if Hillary does. As comforting as it is to see Spitzer's arrogant mug forced to apologize for anything, for now we're right back where we were two years ago, with three men in a room cutting deals that do nothing for the health of the state.

All of this couldn't be happening to a nicer guy.

A Lack Of Class (Action)

Frequent readers of this blog know how much Bank Lawyer's Blog loves class action plaintiffs' attorneys. We like them best marinated in chile sauce and slow cooked in a crock pot for eight to ten hours.

The most recent example of the hurl-inducing nature of much class action litigation involves Bank of America. While B of A has taken in lumps from time to time on this blog, in this instance we feel its pain.

Bank of America is offering an $18 million settlement to a long-running privacy lawsuit that could be approved by a court hearing in San Francisco this fall. At least $10.75 million will be made available to 35 million bank customers nationwide, on a first-come, first-served basis.

The customers don't get cash. Rather, they get lowered costs on Bank of America products. The bank's negotiators were able to negotiate much of their settlement into the form of marketing. The biggest chunk of cash payment in the settlement is earmarked for the attorneys who filed the case eight years ago.

The 35 million bank customers -- almost equal to California's population of 36.5 million -- include current and former credit-card holders and personal checking and savings account customers from between 1995 to May 31.

The class action dates to a suit filed on behalf of Bank of America customers in 1999 by the San Diego law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP.

The case alleged that Bank of America improperly disclosed information to third parties, something the bank still vehemently denies, said Shirley Norton, Bank of America spokeswoman.

The proposed settlement would pay the plaintiff's attorneys up to $4 million, to be paid at the discretion of the court.

As the attorneys who file these suits count on, the cost of settlement is less than the cost of fighting these lawsuits, especially after they've dragged on for a while. Although the bank "vehemently denies" that there is a basis for the lawsuit, shareholders expect the board of directors and senior management  to approach such litigation with a dispassionate cost/benefit analysis. Continuing to spend the bank's money because bank officers are put out that the complaint is "without merit" is not likely to be a long-term game plan for job security. Instead, the negotiators try to determine how much cash the lawyers want out of the settlement, then negotiate a pittance for the plaintiffs.

Yeah, I know the counterargument: class action lawsuits often cause defendants to change their behavior for the betterment of consumers. Even if that's correct (and we don't concede the point), the fact remains that with respect to the damages, the lawyers are the only people getting rich.

Rocky Mountain Hijinks

"All's well that ends well," or so they say. As to who "they" are and where I might find "them," I haven't a clue, but if I ever do stumble across "them," I promise to slap them like Hillary slaps Bill, if for no other reason than for inventing inane aphorisms.

Moving along, the aphorism in question suits the situation of Colorado-based Horizon Banks. As faithless readers know well, big, bad bully-boy First Horizon National Corp. entered Colorado and almost immediately started kicking around poor, little Horizon Banks for using the word "Horizon" in its name. After vowing to go the distance with the larger (much larger) bank, the little guy decided that discretion is the better part of valor (again with these aphorisms!) and agreed to change its name to something different, something that doesn't use the word "Horizon." Rejecting my favorite suggestion (Tyra Banks), the branding gurus advising the bank settled upon "Mile High Banks."

"We decided on Mile High Banks because it reflects who we are, where we do business, and where we live," Horizon Banks CEO Daniel Allen said in a statement. "We've been extending our reach along the Front Range, so it made sense to have a name that most people identify with this area."

Lucky for Dan, the bank's not located in Climax, Colorado. 

I now suggest that through the magic of computer-generated imaging, Mile High Banks revivify the body of John Denver and make him their spokesperson. They recently did it with Elvis, who sang a duet with Celine Dion on American Idol. Celine's not actually dead, although her facial contortions while wailing out a tune do remind viewers of "Night of the Living Dead." My guess is that Celine is up for another warble with a reanimated corpse, this time singing "Rocky Mountain High (Colorado)" for the greater glory of Mile High Banks.

No, you don't need to pay me for these ideas. I'm just giving back all the goodwill generated by a lifetime spent serving the greater good of the financial services biz.

While I'm at it, here's another freebie for Mile High Banks: register your name and logo. That way, you can sue Mile High Wetland Bank, even though it's a bank of a different color.

Statement on BSA Enforcement

A few preliminary thoughts on the Statement on Enforcement of Bank Secrecy Act/Anti-Money Laundering Requirements that was issued last week by the federal banking agencies, while I was engaged in more serious matters:

• When the agencies state that they'll issue a cease and desist order against an institution that fails to correct any problem that the agency has previously raised with the institution, they are not kidding. They're required to do it by law, and (to quote Hans and Franz): "Hear me now and believe me later" that this will happen. If your bank is criticized for a specific BSA deficiency in a report of examination, senior management and the Board had better take it seriously, because if the examiners find at the next examination that it hasn't been corrected, a C&D will be issued. You'd think that such basic compliance procedures as this would be a problem for a bank, especially in an area that has received so much attention in the last six years, but in some cases it still takes a rap up the side of the head to get the attention of some banks' senior management. Your bank lawyer will defend you, but he'll be shaking his head while he does it.

• Over the past few months, I've received two anonymous communications from different sources, located in different parts of the country, that ask a similar question: Have I seen instances where [insert name of federal bank regulator here] examiners have criticized the qualifications of a BSA officer (one of the grounds for enforcement action), suggested replacing that officer with someone "more qualified" and, when asked for suggestions, suggested a former [insert name of same federal bank regulator here] employee. I can't say that I, personally, have encountered anything quite that brazen, although I have seen instances of criticism of bank officers by examiners that I believed, but could not prove (not being possessed of mind-reading capabilities), were motivated by personal animosity rather than reasoned judgment. It never ceases to sadden me that people with so much power are sometimes incapable of rising above personal pettiness and realizing that when a bank regulator criticizes a bank officer's competence, the consequences for the bank officer can be devastating. You're dealing with someone's livelihood, and that of his or her family. Some sadists and pusillanimous punks enjoy exercising that kind of power, inasmuch as it helps make up for other shortcomings in their personal makeup, but most people who operate within a normal range of human behavior don't want to ruin another person's life unless they're certain that their judgment is correct and that the criticism is not only serious enough to merit the criticism, but that the criticism will be justifiable to an impartial observer. You never know when such action will get a bank's back up and it will appeal it all the way up the line, where a cold eye in D.C., without any skin in the game, is going to ask himself or herself whether there's any basis for spending the agency's resources to fight this further. That said, I've not seen or heard (other than by way of the indirect implications raised in these e-mails) of bank examiners acting as de facto head hunters for their "out-placed" brethren who are in need of gainful private sector employment, and certainly not perverting the examination process to find a buddy a job. Of course, as I've confessed previously: I don't get out as much as I used to.

• The agencies again emphasize how important it is to file those SARs. You know, those Suspicious Activity Reports that are fast-loaded onto a slow boat to Nowhereville. To finish the Statement with that warning is just rubbing salt into the wounds of bankers everywhere. It may be required by the law, but bankers know that for the most part, it's just a waste of time.

Not that I'm cynical.

Another (Industrial) Bank Bites The Dust

In the never-ending saga of the unintended consequences that ensue when any group of legislators decides to improve the lot of mankind,  and with a subplot that demonstrates the ingenuity of businesses in adapting to reality, we have the latest chapter written in Colorado.

Colorado banking regulators on Thursday approved a plan by First Data Corp. to convert its industrial bank to a non-depository trust, in anticipation of its pending acquisition by Kohlberg Kravis Roberts & Co. (KKR).

Under a Colorado law passed this spring, only a financial holding company can own an industrial bank. The new rule was intended to thwart the aspirations of giant retailers, such as Wal-Mart, to own their own banks.

But it also rules out private equity firm KKR, which is expected to close its proposed leveraged buyout of Greenwood Village-based First Data (NYSE: FDC) by the end of September. The buyout will cost approximately $29 billion.

First Data wants to continue to perform the services it has been conducting through the industrial bank, including its Money Network payroll card business, which supplies payroll cards that let companies pay employees without issuing paper checks.

The Colorado State Bank Board agreed to a four-part transaction that will effectively convert First Data's industrial bank, First Financial Bank, into a non-depository trust called First Data Trust Co. LLC. The new trust company will be run from the same Greenwood Village location as the industrial bank.

Before beginning the conversion, First Financial Bank will transfer its deposits to MetaBank, a federally chartered savings bank. It then will convert momentarily into a state-chartered commercial bank called First Financial Interim Bank before merging into First Data Trust Co. Control of the entity will shift to New Omaha Holdings, an affiliate of KKR.

The industrial bank will surrender its state charter, leaving only three remaining industrial banks in Colorado, state banking Commissioner Richard Fulkerson said.

The FDIC loses its status as the primary federal regulator, as an OTS-regulated institution assumes the insured deposits. As far as the Colorado Banking Commissioner and Banking Board are concerned, it's a change of regulated charter, not a net loss of an institution, at least at this point. The same state regulator regulates the new non-depositary trust company, as it did the industrial bank. This is a smart way to get the deal done on schedule, and with KKR involved, money buys smart baning lawyers.

Also, it's not as if Colorado had a thriving industrial bank industry to protect. As the article notes, there were only four remaining industrial banks left in Colorado.

I don't know the details of the funding arrangements that will replace the insured deposits that have moved to the OTS-regulated affiliate. First Data obviously found funding costs lower through the use of FDIC-insured deposits as opposed to the alternatives. I expect that any alternative funding source, even an affiliate, will be more expensive for the new trust company. In addition, regardless of cost, if an affiliate is providing funding, it will add a layer of complication to the arrangements.

Given state and federal prohibition on non-financial companies owning commercial banks and thrifts, and the FDIC's stiff-arming moratorium on the approval of the acquisition of industrial banks by non-financial holding companies, I doubt that KKR had a choice to do anything other than what it did. Nevertheless, if the industrial bank legislation passed by the House this year continues to be stymied in the Senate through the end of the current session, and the FDIC eventually tires of licking the boots of the Democratic leadership of Congress that is firmly anti-industrial bank charter (at least, as long as Wal-Mart is on the prowl for one) and lifts the moratorium, then First data would have to seriously consider moving the whole "kit and caboodle" to a state like Utah or Nevada, where an industrial bank charter could again be used to employ FDIC-insured deposits to fund the financial activities. 

Duty Calls

I'll be traveling and won't be posting for the rest the week. I leave you with supplementary material to several recent posts. First, here's a link to a follow up column by Pamela Yip on the practice of "piggybacking" of good credit scores by "authorized users" with lousy credit scores that I recently discussed. As Ms. Yip notes, "lenders are screaming bloody murder," yet there are going to be "innocent victims" of counter moves by Fair Isaac and other credit scorers, who will squeeze shut this "loophole." Ms. Yip thinks it's a "classic case of a few bad apples really spoiling things for the whole bunch." Personally, I'm not sold on that viewpoint. I think there are more than "a few" bad apples in the bunch.

Touching the third rail of American politics, illegal immigration, I'm posting videos that give opposing viewpoints on Bank of America's solicitation of illegal immigrants undocumented guest workers as credit card customers. The first is from a local (Fort Worth) Fox news program that features immigrant advocate Michael Ysasaga of the Fort Worth Hispanic Chamber of Commerce, who gives a slick, soft-spoken, hard sell on why Bank of America's program is the right thing for America. The video quality isn't the best, but it's good enough to make Michael's lopsided grin give his articulate presentation the right amount of goofiness, given his refusal to address the tough questions head on. The second is of CNN's Lou Dobbs (with a set-up by aging crank Jack Cafferty), a virulent anti-immigration reform advocate whose rather large head fits perfectly with his bloviating bombast, ranting about the perfidy of Bank of America. He notes scornfully that B of A CEO Ken Lewis refused to appear on the program. I'm sure that if Lewis wants to be called an "idiot" and a "moron," he can get that done at home, and doesn't need the "slice of life" that Dobbs carves.

 

See you next week.

Colorado Banks Cry Havoc At Wal-Mart's Latest Foray Into Financial Services

At least they haven't "let slip the dogs of war." Not yet, anyway

A few weeks ago, I blathered about how community banks would get themselves worked up over Wal-Mart's foray into prepaid Visa debit card and the nationwide expansion of its in-store Money Centers. It didn't take Colorado bankers long to start yelping.

It's a move that some are calling an end run around regulators and U.S. lawmakers, who still are weighing federal regulation that would prevent retailers such as Wal-Mart from operating banks.

"I didn't think there was anything Wal-Mart could do to re-inflame community bank passions against it," said Barbara Walker, executive officer of Independent Bankers of Colorado. "But certainly their announcement to sell prepaid debit cards and dramatically expand in-store financial services has inflamed the community banking effort to oppose Wal-Mart and their attempt to do everything conceivable to get into the financial services arena."

One of the most galling aspects of the move is that there's not a darn thing bankers can do to stop it.

Walker, whose group drove one of the two bills passed in the 2007 Colorado legislative session, said that the latest Wal-Mart move likely can't be fought through legislation.

"That cat is out of the bag," Walker said. "There are a lot of nonfinancial entities that offer those kinds of debit cards -- retailers all over the country do."

Yes, but will they do it as well, and as cheaply, as Wal-Mart can do it?

Many fear that Wal-Mart's push into financial services will drive smaller providers, such as banks and check-cashing outlets, out of business, similar to the way Wal-Mart has come to dominate the grocery and toy-store industries. Others say that Wal-Mart's expanded financial presence would be good for consumers, driving down prices for low-income folks, many of whom who don't have bank accounts.

Those are the same arguments for and against Wal-Mart's business model and its impact since Wal-Mart first began to drive small-town businesses out of business.

For Colorado's economy, the net effect might actually be positive, at least over the short run. As the story notes, Wal-Mart has only two Money Centers in Colorado. Of course, there's nothing to prevent Wal-Mart from expanding that number. On the other hand, there are other businesses in Colorado that stand to benefit from Wal-Mart's prepaid debit card business.

Minneapolis-based MoneyGram International Inc., which provides Wal-Mart's money transfer services, has a processing center in Lakewood that employs more than 500 people -- a number that could increase along with business volume.

"We're a long-term part of their financial services strategy, so we have to regard this as a very positive move," said Cathy Rebuffoni, a MoneyGram spokeswoman. "Making financial services a more high-profile service in Wal-Mart is bound to have an impact on increasing volume."

Greenwood Village-based First Data Corp. counts Wal-Mart as a client, one of the retailers for which it provides payment processing services. That suggests that Wal-Mart's MoneyCenter expansion could benefit First Data, while its obtaining its own ILC -- which would eliminate the need for a third-party payments processor -- would not. First Data spokesman Colin Wheeler declined to comment.

Colorado-based Western Union stands to lose money-transfer business, especially to illegal immigrants undocumented guest workers from South of the Rio Grande River.

Western Union, the Centennial-based global money transmitter, seems likely to lose out if Wal-Mart moves aggressively into the market. According to their respective Web sites, sending $100 from Colorado to Mexico costs $9.99 via MoneyGram, compared with $16.99 at Western Union.

That's the kind of price disparity that keeps community bankers tossing and turning in their beds at night. It also keeps them motivated, regardless of what they've accomplished at the state level, to keep pressing Congress for federal legislation to make certain that as many avenues as possible are closed to Wal-Mart's rush to dominate the world of consumer financial services.