Bank Lawyer's Blog

The Private Practice of Law: Mankind's Greatest Achievement

One of my favorite lawyer profiles is that of Vito Mandolini, the managing partner of Anonymous Law Firm's Criminal division.

His Hobbies:

In his own words, "I feel that it is important to achieve a sense of balance in life. Accordingly, I have developed many hobbies that I can enjoy in the privacy of my office, including fine wine and cigars, coffee, cigarettes, scotch, prescription amphetamines and young Asian she-male prostitutes."

His best experience:

"When I started out in this field, the stress, fast pace, 16-hour days and complete lack of contact with anyone who was capable of human emotions was very difficult. However, after my third heart attack, when I was pronounced clinically dead for ten minutes, a part of me stayed dead. Thereafter, this profession all made sense when I realized that life, in fact, has no meaning. In my next case, I was able to get four nun-beaters off on a technicality. It was my proudest moment."

His advice to law students:

"Make sure that you network and develop marketing skills. If you bring enough money into the firm, they will dispose of a body for you if you ask them to do so. This is actually more important than it appears because there is no statute of limitations for murder."

It's one of many profiles that can brighten up an otherwise gloomy day. Peruse them all at Anonymous Law Firm.

BSA: The School Of Hard Knocks Continues To Grind Out The Lessons

As I observed this past March, "I would expect that being a BSA Officer would be as much fun these days as being a jihadist caught in an open field in Iraq under a full moon with an Apache attack helicopter hovering over your right shoulder." Add a Texas bank to the list of testifiers to that truth.

T Bank’s failure to meet regulators’ standards for keeping watch for suspicious transactions has landed it more scrutiny and a higher capital requirement.

In response, the 3-year-old North Dallas bank plans to raise an additional $8 million and beef up its audit procedures. The bank already has cut ties with several customers due to concerns raised by the Office of the Comptroller of the Currency/p>

Bank President Patrick Adams declined to comment. But in securities filings, the bank stated it had ended relationships with “customers who were primarily engaged in Internet product sales and a merchant processor who processed payments for those customers.”

[...]

Bank industry groups have complained that requirements under the USA Patriot Act and Bank Secrecy Act are too onerous, and hold the same expectations for billion-dollar institutions and small community banks.

Yes, they do, especially for "small community banks" that service businesses that who process payments for customers around the world. That sort of client requires greater scrutiny than the local John Deere dealer. On the other hand, the complaint's valid, because it requires a big investment in time, technology and money to act as the right arm of law enforcement in stopping money laundering and other nefarious financial crimes. It's an especially galling task when the Feds refuse to act on the vast majority of the suspicious activities that are reported.

The article's author claims that T Bank is "the sole Dallas-Fort Worth bank so far this year to become the subject of a regulatory order from the Comptroller’s Office." That may be true as to formal enforcement actions, but it's "highly doubtful" that there are no other Dallas-Fort Worth national banks who have not been criticized with respect to BSA and anti-money laundering compliance. BSA compliance is a thorn in the side of almost every bank.

We said last week, things are getting hinky with the regulators, and T Bank's problems are further evidence of it.

“They’re tightening up, there’s no doubt about it,” said Chris Kelly, a litigation consultant and former banker with Hill Schwartz Spilker Keller LLC in Dallas.

Smaller banks are an especially likely target, he says.

Yet another nightmare to keep community bankers sleepless. As if they needed any more of those.

Another Great Leap Forward

Hard on the heels of its recent successful stint as the host of the Summer Olympic Games (at least, we understand that they were successful; we never watched anything other than women's beach volleyball), China offers further proof of its rise in the world, this time the world of international banking: it's being sued by Israeli victims of radical Muslim terrorists.

A lawsuit filed in Los Angeles Superior Court claims that one of China's biggest banks transferred millions of dollars for terrorist groups bent on attacking Israel, ignoring demands by Israeli counterterrorism officials to halt the practice.

The lawsuit, against Bank of China Ltd., was brought on behalf of more than 100 victims of terrorism in Israel and alleges that the money was transferred for the militant groups Hamas and Palestinian Islamic Jihad in Iran and Syria, and processed through Bank of China's branches in the U.S. and China. Bank of China, which is one of China's Big Four banks and is listed in both Hong Kong and Shanghai, has the widest overseas network of the nation's banks.

The suit alleges that the money helped fund attacks between 2004 and 2007, and calls on the bank to stop transferring money for terrorist groups. It claims that in April 2005, Israeli counterterrorism officials informed officials of China's public security ministry and its central bank, the People's Bank of China, of their concerns over the wire transfers.

"Most of the banks of the world are not doing business with terrorist organizations," said Federico Castelan Sayre, an attorney representing the plaintiffs. "They chose to do so willingly."

Naturally, the Chinese deny holding talks with any Israeli counterterrorism officials. They also make the implausible assertion that the Bank of China "always complies with the United Nations' anti-money-laundering regulations. Also, our New York branch and related representative offices always follow U.S. banking regulations." Unlike U.S. and European banks, when it comes to compliance with bank regulations, Chinese banks are, like the Pope when acting in concert with the bishops on matters of the Roman Catholic faith, infallible. They "always comply" with the law, never failing, even inadvertently, to hit it on the sweet spot.

On one level, you have to admire the utter cynicism of "The Big Lie." If you're going to tell a lie, at least make it laugh-worthy. US and European compliance officers are bent over double at that one.

However, don't expect the Israelis to find that assertion to be amusing. They tend to treat these matters with the utmost gravity. The Bank of China has now earned a place in the dock alongside such Western counterparts as Credit Lyonnais and NatWest, who have been in the crosshairs of the Israelis for the past few years, and not enjoying it one bit.

Congratulations, and welcome to the First World of Banking, B  of C!

Creative Coercion

One of the principal lessons of our tragic century, which has seen so many innocent lives sacrificed in schemes to improve the lot of humanity, is -- beware intellectuals.
---Paul Johnson, Intellectuals

An attorney in the Buffalo, New York City Attorney's office is trying to put half-baked ideas concocted for her doctoral dissertation into practice. In the process, she's making a mockery of the law and of her public office. But, golly, she sure is clever, isn't she?

On Dec. 17 in a windowless Buffalo courtroom, Cindy T. Cooper, a prosecutor for the city, buzzes among a dozen men in suits, cutting deals. "You've got to unboard [the house], go in, and clean it out," she tells one. "If all the repairs are done quickly, I wouldn't ask for any fines." To another, she says, "the gutters weren't done right," and asks to see receipts for the work. It's "Bank Day" in Judge Henry J. Nowak's housing courtroom, more typically a venue where landlords and tenants duke it out over evictions and back rent. Instead, Cooper is asking lawyers for CitiFinancial, JPMorgan Chase, and Countrywide Financial to fix problems like peeling paint, broken masonry, and overgrown or trash-filled yards at houses the city says the banks are responsible for maintaining. It may be surprising to find these financial-services giants hauled before this obscure local tribunal. In fact, Cooper and Nowak are at the forefront of a pioneering effort to deal with a vexing problem: the surging number of vacant and abandoned homes resulting from the mortgage market meltdown. The vacancies occur when lenders bring foreclosure suits against delinquent borrowers. Mere notice that such an action might be filed often sends residents packing. In Buffalo and other Rust Belt cities, the problem has been particularly acute, because in many cases banks are abandoning the houses, too, after determining that their value is so low that it's not worth laying claim to them. When city officials try to hold someone responsible for dilapidated properties, they often find the homeowner and bank pointing fingers at each other. Indeed, the houses fall into a kind of legal limbo that Cleveland housing attorney Kermit J. Lind calls "toxic title". While formal ownership remains with a borrower who has fled, the bank retains its lien on the property. That opens up a dispute over who is responsible for taxes and maintenance. Even when lenders do complete the foreclosure, they may walk away from the property, leaving it to be taken by a city for unpaid taxes, a process that can take years. Orphaned properties quickly fall into disrepair, the deterioration sometimes hastened by vandals who trash the interiors, lighting fires and ripping out wiring and pipes to sell for scrap. Squatters or drug dealers may move in.

[...]

In Buffalo, prosecutor Cooper is bringing lenders before Judge Nowak to hold them accountable. Wielding the threat of liens, which can hold up the lenders' other real estate transactions, she aims to make banks keep foreclosed homes in good condition until a buyer can be found. As an alternative, Cooper or Nowak may try to get lenders to donate properties to community groups or to pay for demolition when houses are beyond repair. "At least in Buffalo," says Cooper, "the days are gone when you can do a foreclosure and walk away without taking care of the property."

Some of that sounds reasonable on the surface. If a lender completes the foreclosure process and takes title to the property, then, as the "owner," it seems to the average reader that the lender ought to be responsible for maintaining the property. However, Ms. Cooper is stretching the definition of "owner" beyond the pale.

The industry denies responsibility for properties to which it has not taken title. "The notion that a mortgage company has an obligation to make repairs on a property that it doesn't even own is very hard to comprehend," says Marco Cercone, a Buffalo attorney who represents a range of lenders before Nowak in the courtroom. Cooper says that banks and other financial firms once extolled houses as the best possible collateral for a loan. Now they're stuck with that collateral, and they don't like it.

[...]

Lenders may rue the day the State University of New York at Buffalo admitted Cooper to pursue a PhD in sociology and a law degree. The subject of her doctoral thesis, submitted in December, 2006: the role of banks in residential abandonment and why they should be accountable for property-code violations. The fourth-generation Californian says she quickly became attached to Buffalo for its history and architecture. Now 33, Cooper and her husband are rehabilitating a house that she bought after getting an IRS tax lien removed from the property. "My passion for this work is because I love this town," she says.

While researching her thesis, Cooper interned for Judge Nowak. Tall, soft-spoken, and unfailingly courteous, the judge, 39, began holding Bank Day earlier this year and schedules it once a month. The civility of the proceedings and the large number of bank lawyers in attendance belie a noteworthy fact: They are there under coercion. A few years ago, Nowak says, "the city became increasingly frustrated with the banks' role" in contributing to Buffalo's abandoned-property problem. (Estimates put the number of abandoned homes in the city at between 5,000 and 10,000.) In 2004, New York State amended the definition of "owner" in its property maintenance code to include not just titleholders but others who had "control" over a premises.

While the statute makes no reference to lenders, Nowak contends that the letters banks send to defaulting homeowners threatening to boot them from their houses show that they have begun to "assert some measure of control." On this premise, Nowak says, Buffalo began contacting banks "en masse" about foreclosed properties, but "a lot of times we'd just be rebuffed and ignored."

Cooper, as an intern, suggested a tactic that the judge adopted. When banks ignored summonses for code violations, Nowak began entering default judgments against them and imposing the maximum fine, which can reach $10,000 to $15,000. For a big bank, that's not much. The real pain comes because the fines give the city a lien that impedes the banks' ability to buy or sell other properties in the area. In addition, when lenders come to his court to get residents evicted from a particular property, Nowak refuses to grant the request until the bank addresses violations outstanding on other properties. Judge Pianka employs similar tactics in Cleveland. On Dec. 10, for example, he assessed a $50,000 fine against an absentee defendant, Mortgage Lenders Network USA, for 21 code violations at a home.

The article doesn't do justice to the mind-bending mental gymnastics of Ms. Cooper and her cohorts. In February, the City of Buffalo filed a complaint against a plethora of lenders in New York State Supreme Court, alleging that they were "owners" of various properties due to the fact that they had obtained judgments of foreclosure on (but had not applied for or obtained title to) those properties, and that the lenders were not only liable for common law nuisance and city code violations for the specific properties on which they had foreclosed, but jointly and severally liable for creating a public nuisance. Even bank-haters might think that the last claim might be a stretch too far, even for the Gumby-like Ms. Cooper and her pals. If that's what you thought, you'd be wrong. A source close to the litigation, who requested anonymity, told me that at a meeting with lawyers for the lenders, a "giddy" female attorney for the City of Buffalo (I'm not certain whether or not it was Ms. Cooper) offered to let each lender off the hook for a mere $30,000 to $40,000 each. I assume her giddiness was caused by her being drunk with power.

The lenders are having none of it. A number of them have banded together, brought in some big guns who aren't worried about their future relationship with people like Ms. Cooper and her ilk, and are preparing to unload on this over-reaching abuser of the legal process. According to the Joint Memorandum in Support of a Motion to Dismiss the Complaint, it's not merely that the City of Buffalo doesn't have law in support of its contention that the lenders are liable, it's that binding precedent is clearly against the city on all counts. Under New York law, a lender is not a "mortgage in possession," and does not have "control," by virtue of the fact that it obtains a judgment of foreclosure. Moreover, the "joint and several liability" allegation would be laughable if it hadn't been made with a straight face. Each lender is liable for every other other lender's actions and/or omissions. Uh-huh.

What this appears to be is an attempt by a government bully to strong-arm lenders into coughing up cash without a firm legal basis for doing so, merely by creating causes of action that have little or no merit, dragging the lenders into court, forcing them to hire defense counsel (shudder), and assuming that they'll settle as a result of a cost/benefit analysis. To some of the more sensitive noses, these tactics might contain the whiff of extortion (for example, as defined by 18 U.S.C. Sec. 1951(b)(2): "the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right."). For government punks with the power of the public purse and no real accountability (no voter sheds tears for big, bad banks), it's called "Going All Spitzer On You." That's a time-honored tactic not only on The Sopranos, but in New York government circles, as well.

The foreclosure crisis in Rust Belt cities like Buffalo and Cleveland is unfortunate. It's bad for any community to have an increasing number of run-down and/or abandoned homes in communities that were into a terminal downhill slide well before anyone heard of subprime loans. Lenders share in some portion of the "blame" for the situation, the extent of that blame being arguable and depending upon where your self-interest is situated. However, the use of hallucinogenic drugs and a trip through the looking glass in order to make an owner out of a lien holder, simply by adopting the Humpty Dumpty line of "when I use a word, it means what I say it means," is perhaps not the best way to "make things right."  The use of such tactics evidences a disdain for the law, not a respect for it, no matter how much "public good" you think you're achieving. To paraphrase Thomas More in Robert Bolt's play "A Man For All Seasons," once you've flattened all the laws in pursuit of the devil, to what will you turn for protection when the devil turns round on you? From a practical standpoint, unless the bullying works and the lenders cave without a fight, then unless you're in the jurisdiction of the US Ninth Circuit Court of Appeals, you'll eventually hit an appeals court without a political ax to grind, which will then spank your little bottom for being a bad, bad girl (and it won't be the kind of spanking that "bad girls" sometimes enjoy).

This is an area where the legislature might want to intervene and pass some more incredibly useful legislation like the recent expansive subprime lending law signed into law by New York's Governor Patterson, which has already prodded Fannie Mae and Freddie Mac to announce that they'll cease purchasing any such loans made in New York. You know, more useful legislation like that. At any rate, the political arena seems a more appropriate one than the courtroom.

A more viable solution might be to have cities like Buffalo and Cleveland admit that they're irreparably broken, shut down, and encourage their inhabitants to move to Texas. All except the Ms. Cooper and her crusading buddies. They can resettle in South Ossetia. They won't like it much in Texas, although they might find safe haven in certain sections of Austin.

I'm not aware of what sanctions might be available to the lenders in this case. A private party would have to carefully consider a frivolous and groundless counterclaim before filing a complaint that held such little merit. Apparently, that prospect didn't deter legal counsel for the City of Buffalo. Then again, the fun's just beginning, so we'll see where this all shakes out.

Next up: Cindy Cooper creates, and the City of Buffalo files, a complaint in The International Court of Justice, that accuses all major US banks of ethnic cleansing.

Picking Your Fight Carefully

A recent article about a catfight between a state bank and its state regulator caught my eye.

State regulators say Joanne P. Gaines isn’t fit to serve on the board of Floridian Community Bank, but the Davie-based institution is pressing its case.

Gaines, a Cooper City resident, has been criticized by the Florida Office of Financial Regulation (OFR) officials. They allege she was involved in a plan by a church to illegally take over First Western Bank, of which she was CEO. That since-shuttered church was later accused in a federal indictment of running a Ponzi scheme.

Floridian Community Bank, in its case before an administrative law judge, said Gaines should be considered exonerated because she was not mentioned in the Federal Reserve’s action against those who wanted to buy First Western. The $80 million-asset Floridian Community wants the judge to set aside the OFR’s objections to putting Gaines on its board.

Gaines is the bank’s marketing director and a founding shareholder. The bank showed regulators letters of support she received from Mary Partin, CEO of the Dan Marino Foundation; Theresa Barbieri of Stiles Property Management; and former Davie Mayor Joan Kovac.

Gaines did not return several calls for comment.

I don't know who's right and who's less-than-right as to the facts of the particular dispute. I do know that it's relatively rare for a bank to fight tooth-and-nail to install a director over the objections of its primary regulator. Assuming that Florida's administrative process is fairly typical, the burden will be on the bank to show that the decision of the regulator is without a substantial basis or is arbitrary and capricious. The deck is usually stacked in favor of the regulator. That's why most banks, when faced with such objections, usually tell the proposed director "see ya," and go find another sucker candidate to take his or her place.

A banking analysts agrees.

Miami-based banking analyst Kenneth H. Thomas said it is generally a bad idea to challenge regulators over a board member rejection unless that person offers a major capital infusion.

“Most bankers would never take it to this point,” he said. “They would just accept it.”

Regulators in general can subjectively get tough on banks by scrutinizing their books, and challenging them in court can draw their fire, said Thomas, who is on the faculty of the executive education program at the University of Pennsylvania's Wharton School of Business.

[...]

“We’re ultimately confident that Mrs. Gaines will prevail and be on the board of the bank,” said the bank’s attorney, Mark Freund, of Tallahassee-based Igler & Dougherty.

Well, maybe so, but as they used to say in the old Midas Muffler commercial: "Pay me now or pay me later." You may not die of a single sword stroke, but that doesn't mean that you won't eventually bleed to death of a thousand cuts made excruciatingly slowly over an extended period of time. Like elephants, regulators have long memories and they can make life miserable (and doing business-as-usual virtually impossible) in oh so many ways. I hope that this fight is worth the ill-will.

Feds vs. Feds

Damian Paletta at The Wall Street Journal has another interesting inside look at the federal banking regulators, this time focusing on the tension between the FDIC and the other federal banking agencies over FDIC-insured institutions whose financial condition is deteriorating. The FDIC wants the the other agencies to be more aggressive in downgrading the CAMELS rating (Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to market risk) of troubled institutions, thereby placing legislatively-mandated restrictions on their use of brokered deposits, their ability to make distributions to shareholders, and their ability to grow. According to Paletta's sources, the FDIC wants troubled institutions to be classified 4 or 5 (the worst two ratings classifications) much more quickly than the other regulators have been doing. Why?

"The FDIC's job is to handle the failures, and it -- generally speaking -- would rather be tougher...on the theory that the sooner the problems are resolved, the less expensive the cleanup will be," said former FDIC chairman William Isaac, who now advises banks as chairman of consulting firm Secura Group. "The primary regulator tends to want to see if they can rehabilitate the bank and doesn't want to act precipitously as a rule."

[...]

"The FDIC works cooperatively with primary regulators," FDIC spokesman Andrew Gray said. "Historically, the FDIC comes at determinations from the perspective of an insurer -- which tends to be a conservative point of view."

Although none of the other agencies would publicly comment on the dispute, the OCC, FRB and OTS are resisting the pressure.

For example, the Office of Thrift Supervision, a division of the Treasury Department that supervises more than 800 savings-and-loan institutions, largely focused on mortgage lending, has resisted the FDIC, arguing for a less-dire analysis, people familiar with the matter said.

There are a couple of lessons evident from this struggle. First, the last time around, in the 1980s, the deposit insurer of thrifts, the FSLIC, was not sufficiently separated from the primary federal regulator of federal thrifts, the FHLBB. In fact, the FHLBB, for all practical purposes, ran the FSLIC. Many broken thrifts were allowed to continue to operate, some trying to grow their way out of their financial difficulties, which ultimately increased the cost of the eventual bailout. The consensus in the aftermath of that debacle was that the insurer and the regulator had to be separated.

The FDIC's role in prodding the primary regulators to be more aggressive is legitimate from a policy standpoint. The FDIC will bear the brunt of the ultimate failures, so limiting its losses makes sense. On the other hand, the OTS (or the OCC) doesn't want to lose another assessment-paying regulated institution if there's a decent chance that the temporarily-troubled bank can weather the storm. The survival of a healthy, competitive banking industry wouldn't be served over the long term if "survivable" institutions are prematurely hamstrung and, in effect, doomed by an aggressively conservative CAMELS rating. Unlike the last time around, however, the FDIC's watchdog role will likely keep the "forbearance" of the primary regulators within reasonable limits.

The second lesson is one I've noted previously. Investing in a FDIC-insured bank or thrift is unlike investing in another type of business enterprise. When financial difficulties hit, there's no "Chapter 11" to permit the business to work out its problems and survive. When capital levels fall below regulatory minimums, you're usually on a fast slide to the dust bin. We've seen that scenario play out recently, and we'll see more of it.

While a few wild risk takers make it through the door, few, if any, survive for long. If you're looking to invest and operate in the Wild, Wild West, it's almost always best to look outside the banking business, Countrywide notwithstanding.

It's Hinky, Sam

From the 1993 movie, The Fugitive:

Marshall Biggs: It's hinky, Sam. I mean, this guy is a college graduate. He became a doctor. I mean, he ain't gonna go through here with all this security. Hinky.
Deputy Marshal Sam Gerard: Biggs, what does that mean, hinky?
Marshall Biggs: I don't know. Strange. Weird.
Deputy Marshal Sam Gerard:: Well, why don't you say strange or weird? I mean hinky, that has no meaning.
Marshal Biggs: Well, we say hinky.
Deputy Marshal Samuel Gerard: I don't want you guys using words with no meaning.
Marshal Biggs:: [sotto voice] How about 'bullshit?' How about 'bullshit,' Sam?

We'll settle for "hinky," because we know what it means.

Lately, banks with concentration of assets in commercial real estate loans have found bank examinations to be definitely "hinky."

As financial institutions grapple with a weaker economy and growing loan defaults, they’re dealing with tougher questions from regulators, say bank executives and their advisers.

Regulators say they’re following the same standards, but banks have more items that warrant scrutiny now.

“To the extent there have been some more stresses in the economy, yes, we’re looking at those things more,” said Bob Bacon, deputy commissioner of the Texas Department of Banking.

Still, since the very public collapse of California’s IndyMac Bank (and the failures of seven other institutions this year), banks have become the subject of greater public scrutiny — and anxiety.

That shift has been reflected in bank examinations, said Dallas attorney Sandy Brown of Bracewell & Giuliani LLP.

“A month ago, I would’ve said they’re taking a more measured approach. In my more recent experiences, they’re being unreasonable,” he said.

In particular, regulators are taking a much harder stance on real estate loans, and the value of the land collateral behind those deals.

“They are much less willing to have a meaningful discussion on things that are by their nature subjective,” Brown said. “It’s pretty subjective what a piece of real estate is worth today.”

You're preaching to the choir, Brother Brown. Our experience is similar. We're starting to wonder whether we'll see a bloodbath similar to December 1985, when the bank regulators swooped into Texas, marked-to-market depressed real estate collateral on loans, drove scores of state-chartered thrifts insolvent, and put them under supervisory control. Of course, the regulators didn't know what to do with them once they got them, and the FSLIC and FDIC didn't have the moola to liquidate them, so they appointed state supervisory agents to "control" them, called in law firms to try to work out the bad loans and other real estate assets, and ended up letting them fester for a few years, making some law firms rich while they added to the losses of the broke thrifts, losses that were compounded every 30 days as interest on deposits rolled over. Man, those were the days! At least, they were if you were a bank lawyer or a litigator.

I'm not the only one looking back.

It’s little surprise that regulators are zeroing in on real estate and development loans. Those loans were at the heart of the savings and loan crisis in the early 1980s.

“It’s back to the future,” said J. Terry Smith, managing director and real estate lender at Highlands Bank in Dallas.

This time around, however, the speed limit for bad consequences has been raised.

In contrast with past banking crashes, the speed with which money (and rumors about banks) can move has created a different environment for regulators and bankers to work though.

“In the S&L times, you had asset problems. You had bad loans that burned all the way through institutions,” said Charles W. “Stormy” Greef, a Dallas banking attorney with Hunton & Williams LLP.

In the case of IndyMac, reports of suspect loans and instability at the bank led depositors to line up and yank their funds from the institution. It’s tough to say whether that institution would have survived without the run on the bank, but it certainly didn’t help.

“A public flogging of a financial institution can be very damaging,” Brown said.

That’s especially true in an era when banks can build up their deposit base by acquiring large pools of money through brokers. Regulators view such brokered deposits as “hot money” — funds that are as likely to be gone the next day as they are to stay.

If a bank has a growing number of bad loans, the brokers who place that money are likely to shift it to another institution.

“We’re in a different mode, with brokered deposits, and just fewer banks,” Greef said. “Liquidity is a big issue now.”

Sure, there are differences between then and now, but the more things change, the more they remain the same. This time, however, it's not likely that Texas will be the focal point of the bad news. For that cold comfort, we in The Great Republic will remain grateful.

Quick Silver

Shades of Neil Bush, right down to the word "Silver" in the bank's name.

Sen. John McCain's son served until last month on the board audit committee of a Nevada bank that is struggling to survive amid mounting losses and regulatory scrutiny.

Andrew K. McCain, 46, was on the board of Silver State Bancorp for five months before he resigned on July 25 for unspecified "personal reasons," according to a news release issued by the bank at the time.

A week after Mr. McCain's departure, the Henderson, Nev., company reported a loss of $62.7 million in the second quarter and said its capital -- the bank's cushion to absorb losses -- had eroded significantly. At the same time, Silver State announced the resignations of its chief executive and chairman.

On Thursday, the bank said in a securities filing that it actually lost $73.2 million in the second quarter. Silver State also said in the filing that its worsening financial condition means there is "uncertainty about the company's ability to continue as a going concern."

The article's authors correctly observe that there is no evidence of any negligence or wrongdoing by McCain the son, nor of any involvement by Dad in any aspect of the bank. In fact, the younger McCain served on the Board's audit committee for only five months, and it's obvious that, unlike the case of Neil Bush and Silverado Savings, the financial problems of Silver State Bancorp are the result of loans made long before he arrived on the scene. However, as they also correctly note, it still could become a campaign issue, especially if the bank fails. Guilt by association, the facts be damned.

Senator McCain isn't helped by any incident that brings to mind his past association with failing banks. As a member of The Keating Five, he made one of the worst political mistakes of his life by trying to help out a constituent, Charles Keating, who ran one of the more spectacular savings and loan failures. By running interference with federal thrift regulators who were trying to clamp down on Charlie, McCain and his handful of clueless comrades only made themselves look like the tools of bad actors.

If you're a business man or woman, with no financial interest in a bank, and the CEO, Chairman or other affiliated person of that bank asks you to sit on the bank's board of directors, and if you're intrigued by that prospect, I recommend that before you make a decision  to accept that offer, you watch the following video of the first television network appearance of the late Sam Kinison and heed his advice to the young gentleman in the audience named Lou, about the advisability of marriage.

Piggybackers Are Still In The Game

Last year, Fair Isaac Corp. vowed to do "whatever it takes" to prevent the practice of "piggybacking" for profit. The term refers to the business of finding folks with good credit scores who are willing--for a price--to add strangers with poor credit scores as "authorized users" to their credit accounts, in order to artificially boost the FICO score of the authorized users. Some businesses made the claim that piggybacking could boost a credit score of an authorized user by 400 points. Fair Issac disputed that impact, although it conceded that scores of "authorized users" could be approved by up to 30 points through the practice of piggybacking.

According to a recent story in the American Banker (paid subscription required), Fair Isaac has backed off of its plans to eliminate piggybacking. It's lenders, not consumers or consumer advocates, who are forcing Fair Isaac to reconsider the crackdown.

Fair Isaac Corp. is tweaking the newest version of the FICO score so that, like earlier versions, it will consider "authorized user" accounts, saying lenders asked it to do so for compliance reasons.

However, the Minneapolis company says that as modified, FICO 08 will boost the scores of those listed as authorized users of others' credit card accounts by a much smaller amount than older versions of FICO.

[...]

Tom Quinn, Fair Isaac's vice president of global scoring, said Friday that several banks subsequently notified his company that they had relied on FICO to meet the Equal Credit Opportunity Act's requirement that lenders consider the credit of a spouse when evaluating creditworthiness.

"Some banks were saying they use FICO to meet that regulatory obligation," Mr. Quinn said. "They were basically telling us that, if we brought the new version to market and it didn't include authorized users, they wouldn't use it because they would have to work around it."

As is customary in the credit scoring business, the scoring business won't reveal the details of how its scoring model measures the impact of an authorized user. However, Mr. Quinn asserts that Fair Isaac's latest adjustments will reduce "drastically the ability of someone to manipulate the score while lowering the impact of authorized users." You'll have to take his word for it. He does concede, however, that "the potential for such abuse remains...because there is no way of knowing whether an authorized user is a family member or a stranger introduced to the account holder by a third party." 

Fair Isaac's rival VantageScore (a joint venture of the big three credit reporting agencies) asserts that its model doesn't use, and has never used, authorized user information and that from an ECOA standpoint, lenders would not comply "to any lesser degree" by using a VanatageScore instead of a FICO score. I haven't researched the Regulation B issue, but off the cuff, it seems to me that using the FICO score to satisfy any requirement that you consider the credit of the spouse would make sense if the spouse is an authorized user of the other spouse's credit accounts, and if you could document that fact. If there are authorized users on an account other than the spouse, are you really considering the spouse's credit when you use a FICO score and if so, to what degree? Again, I haven't considered the issue in detail and won't do so until someone pays me cold, hard cash (preferably in gold bullion), but it's an intellectual exercise that someone with lots of time on their hands and not otherwise gainfully employed might want to dive into. Like a college professor, a "management consultant," or, perhaps, a life coach.

Thus, while the "potential for abuse still remains," the flip side is that certain "credit repair" organizations can still make some scratch by lining up deadbeats with fat cats, slapping some lipstick on a pig, and sending the happy couple off on a piggyback ride to higher FICO scores.

ResCap Force Feeds Bad Loans To Sellers

The elephant stampede that we discussed not long ago has caught the attention of the mortgage press, particularly the folks at Housing Wire, who ran a story today about Residential Lending, LLC, suing the snot out of loan originators who sold it pigs-in-a-poke. Unfortunately for ResCap, a couple of the big loan originators are Implode-o-Meter All Stars.

More than 15 cases have been filed by Residential Funding this year against lenders that sold it loans under a repurchase agreement, most against the sort of small mortgage banking operations that were common during the boom. Contrary to the claims of an August 9 story in the [Minneapolis Star] Tribune, none of the cases are repurchase suits seeking recovery from third-party brokers; all involve existing repurchase agreements ResCap had in place with various residential and commercial lenders.

Many of the cases involve firms that have already filed for bankruptcy or are now out of business, including Florida-based Paramount Financial, Inc. and California-based Home Loan Funding, Inc., two lenders that specialized in subprime lending. A search of the internet archival service www.archive.org shows that Paramount’s website went offline in late November of last year, while Home Loan Funding’s website went offline in early January of this year.

Other cases involve firms that filed for bankruptcy right before ResCap’s lawsuit materialized, including California-based EquiPoint Financial Network, Inc. RFC filed suit against EquiPoint for more than $2 million in repurchase claims on July 16 in Minnesota District Court. On July 10, Equipoint had filed Ch.11 bankruptcy in California’s Southern District bankruptcy court.

[...]

Taken together, the cases make it clear that at least one major financier isn’t waiting to go after recovery wherever it can in distressed loans; and with losses mounting at Rescap — the company lost $1.86 billion during the second quarter — it’s likely more cases will be forthcoming.

I suppose we could say "we told you so," but then we'd be just another snarky blog-based know-it-all, instead of the very special snarky blog-based know-it-all that you've come to know and loathe. Rather, we'll just say, "Huh! How about that!"

Some years it's good be a deal guy; some years its good to be a bankruptcy guy. Every year is a good year to be a litigator, however, especially in sue-happy America, land of the aggrieved and home of the victimized.