Bank Lawyer's Blog

Blindsided

I returned to the office today, haven't had time to read the SCOTUS opinions in Cuomo v. Clearing House Association, and won't get a chance to read them until this weekend. Therefore, I'll save my bloviating about it until next week. By that time, I should have some decent commentary written by others to pilfer and/or mock. One preliminary reaction, though: I didn't see this one coming, any more than I saw Ginsburg and the other court liberals joining forces with The Court Jester, then letting him write the majority opinion. I guess I should have taken the questions asked during oral argument by Roberts and Ginsburg at face value, since they indicated that those two weren't playing devil's advocates after all. Instead, they were telegraphing their ultimate positions. Then again, according to today's American Banker, both sides were caught flat-footed by the Supreme Court's siding with Andy Cuomo. As far as the practice of trying to predict human behavior is concerned, it's always useful for a bellowing bovine to realize that he's just as much of a dull-normal cud-chewer as the rest of the herd.

By the by: I heard that Andy was still so excited by this unexpected decision that he spit up a little while being burped by Eliot Spitzer this morning after his bottle.

On a completely unrelated topic, TJX continues to pay various aggrieved entities and natural persons over the massive data security breach we've been following for the last several years. Last week, it was reported that TJX Cos. will pay $9.75 million to settlle actions brought by 41 state Attorneys General over the breach.

[I]t will pay $2.5 million to create a data security fund for states as well as a settlement amount of $5.5 million and $1.75 million to cover expenses related to the states' investigations. But TJX stressed that it "firmly believes" that it did not violate any consumer protection or data security laws.

[...]

TJX must also certify that its computer system meets detailed data security requirements specified by the states and must encourage the development of new technologies to address weaknesses in the U.S. payment card system.

In April 2008, TJX Cos. offered to set aside $24 million to reimburse customers who through their MasterCard credit cards were defrauded because of a data breach last year. A similar agreement was made with Visa-card issuing banks the prior November for up to $40.9 million to help banks cover costs including replacing customers payment cards and covering fraudulent charges.

In January, TJX Cos. offered a 15 percent discount to its customers during a "Customer Appreciation" day to reward customers' loyalty as the company dealt with the breach.

TJX also denied that it had anything to do with the death of Michael Jackson, the downing of another Airbus, or that recent nasty outbreak of E. Coli bacteria in ground beef, although that doesn't mean it won't eventually be forced to pay something to settle claims related to those events made at some point in the future.

Data security breaches: gifts that keep on giving.

On The Road Again

My misanthropic nature periodically takes a whipping, usually at the instigation of my spousal unit. The next week is one of those times, when we must hit the road and visit family members. Inasmuch as my wife's family never heard of "family planning" (not even "natural" family planning) and bred like rabbits, this will entail a thousand miles of hard road, survivable only by the consumption of many (and I mean "many") Shiner Bocks (thank God Catholics drink!). Therefore, this blog will be on vacation  until the middle of next week, at least.

On the other hand, while I'll have laptop, cell, and other tools of modern mobile communication with me, much travel will be over portions of the country so barren that roadkill improves the scenery and reception is "spotty." Thus, I expect the trip, for the most part, to be relatively stress free (an attitude aided by beverage consumption). In fact, I may come back as refreshed and enthused as Terry Tate, Office Linebacker. I certainly hope so.

ILCs: Plenty Of Fight In The Dog

It's not the size of the dog in the fight, it's the size of the fight in the dog.
---Mark Twain

While the OTS has been getting much of the attention of the trade press for being singled out by "The One" and his minions for liquidation, the industrial loan corporation charter and similar forms of "non-bank banks" are also on the administration's chopping block. The Democrats in the House have been pushing for the end of the ILC for the last few years, especially during the eighteen month period that ended in early 2008 when the FDIC put a moratorium on insurance applications for new ILC charters and for non-financial firms acquiring existing ILCs. "Rampaging Robert" Bennett, the Republican Senator from Utah who sits on the Senate Banking Committee, effectively killed attempts to pass such legislation in the Senate (although it passed in the House in 2007). He shows no signs of relenting.

During testimony last week before the Senate Banking Committee (paid subscription required), Treasury's "Tim Terrific" Geithner was pummeled by Bennett over the issue.

"There is not a single ILC that contributed to the crisis, not a single ILC that went down," Bennett said. "Destruction of an industry is not a modest change. … You are taking an area that worked and going to abolish it. You are engaged in overkill, in my view."

He left unspoken a threat to take Geithner snipe hunting with Dick Cheney if the Obama administration pursues the ILC charter's immolation. Since Utah is home to most of the remaining 45 to 50 remaining industrial banks, thrift and loans, industrial loan companies, and similar "loophole" financial institutions, Bennett definitely has "skin in the game." Plus, he's got a track record of winning when nit comes to protecting his home state's turf.

Also with skin in the game is Senate Majority Leader "Dirty Harry" Reid of Nevada, which is home to some of those institutions, as well, and which is a state whose economy doesn't need to lose anymore economic firepower of any sort. As he did with previous fights over this issue, Harry's not wild about face time and has left the public fighting to Bennett. As I speculated before, however, I don't think Senator Reid will stay out of the game if the Democrats push the issue.

It should be noted that while the Obama proposal is not to outlaw the charter itself (as it has proposed to do with federal savings banks and savings associations). Instead, the administration wants to require ILCs to be defined as "banks" under the Bank Holding Company Act, which would eliminate the ability of "non-financial" holding companies like Target, Harley-Davidson, Pitney Bowes, BMW and others to continue to own them and to also carry on their "commercial" activities. They would also have to meet the FRB's capital levels and would be examined and more closely regulated just like other "bank holding companies." As noted by David Enrich and Robin Sidel in a recent Wall Street Journal piece (paid subscription required), the practical effect of this change would be to cause the holding companies to close the ILCs down.That, in turn, may very well have the effect of choking off credit to businesses and consumers at a time when the economy needs these financing sources.

Though relatively small players in the financial system, ILCs provide a wide variety of products and services to businesses and consumers. The offerings range from financing purchases of Harley motorcycles to loans that cover corporate medical payments to insurers. Eliminating or sharply curtailing those operations could make it harder or costlier for customers to get credit.

While most ILCs and their holding companies are publicly taking a wait-and-see attitude, and Utah bankers profess optimism, the proposal has got to be severely annoying to the industry. A well-placed source told me that a couple of months ago, a delegation of executives of Utah ILCs and other interested parties from Utah made a trek back to D.C. to visit with FDIC Chairman Bair as to when the FDIC might, in actuality, remove the moratorium on ILC acquisitions and new charters in light of the fact that the moratorium had expired over a year ago and yet the FDIC had not approved any pending applications since that time. "Chair Bair" told them that these were tough times for new charters but that if some holding company came up with big bucks to help take a load off the FDIC's back in the form of a rescue of an FDIC-insured ILC that needed the assistance, that might play favorably with the FDIC. No mention was made of the idea that the federal government was getting ready to unload a world of hurt on the business model itself, so that the whole discussion was likely moot. That may mean that Ms. Bair (reportedly not a favorite of Tim Geithner's) was out of the loop on this issue, or it may mean that she was simply not forthcoming. Regardless, they could have saved themselves the trip had they known what was coming down the pike.

 It's very early in this game, but if I were forced to bet now on the eventual winner, I wouldn't back the anti-ILC crowd. ILCs and their supporters have large investments to protect, businesses that make good sense for them and their customers, and, perhaps most important, plenty of fight in them if the going gets nasty.

Ice Skating Through Hell

I'm lounging around the Colorado Diablo Bar & Grill on the Eighth Level of Hell last Friday, knocking back my second boilermaker of the afternoon with my old pal, The Prince of Darkness himself. He tells me that I've got five or six years left, at a minimum, before he accelerates the maturity date on my contract with him and calls due my soul for all eternity. I nod and tell him that might work for me (although I'm constantly looking for loopholes), and he gives me that sly grin of his and says "Just screwing with your head, Hoss. You've got five or six weeks, max." Then he erupts with that "BWAAAAAHAAAAAAAHAAAAAAHAAAAA" cackle that just irks the living heck out of me every time I hear it, which is one too many times in my sordid life, let me tell you. Soon, he's doubled over with belly laughter and just about choking himself to death, all red in the face and spitting flames out his nose. I mean, this guy could piss off the pope. Which I believe he does regularly, come to think of it.

Anyway, Old Scratch suddenly turns off the laughter as if a switch had been thrown, sits bolt upright in his chair like he'd just been touched by an (unfallen) angel, and whips his head around like Linda Blair in "The Exorcist" before Father Karras threw himself out the window. Simultaneously, an arctic blast of wind comes barreling through the saloon, knocking us both over. In no more than a blink of an eye, the place is covered with ice--all four walls and windows are a sheet of the stuff a good foot thick. To top it off, the iceberg that sunk The Titanic crashes through the front door and comes to rest between me and all of the Jack Daniel's Black in back of the bar, which REALLY frosts me.

"What the hell just happened, Nick?" I ask as The Deceiver picks himself up and starts slipping and sliding around, trying not fall and break his tail. You can tell this guy doesn't know his way around a frozen pond. Me, I grew up in upstate New York, smack in the middle of the snow belt. I could slide on ice before I could walk, which was a good thing, seeing as how many times my parents frequently threw me in snowdrifts late at night until I reached the age of five.

He turns to me and with a look on his face composed of equal parts rage and incredulity, explains: "That quarter-wit Spitzer just wrote something you agree with. Even I never saw that one coming."

As I glided past him to head home, grab a computer, cruise the Internet, and Google "Spitzer+Hell+Freezing+Over," I heard The Beast screaming for his demons, some gal named Nancy, and some guy named Barney to grab the "Space Heaters of Gehenna" and start melting "this Satan-forsaken ice."

Bair-ly Everywhere

No sooner had Treasury Secretary Tim ("Pinocchio") Geithner issued the Obama administration's regulatory reform white paper last week, then FDIC Chairman Sheila Bair was praising it out one side of her mouth and  bashing it out of the other side. Simultaneously, her critics were hard at it, baiting the Bair.

The FDIC press release on the proposal is a not-so-subtle reminder to President Obama that the FDIC ought to be front and center in the management of "too big to fail" systemic risk. Reading only that statement, you might believe that Ms. Bair had decided to become a team player. In an interview aired on Friday on CNCB, "Chair Bair" ("just call me 'Chairman'") revealed that she intends to "study the white paper," which she labeled a "good opening process" by Obama, and then "work with the administration and Congress constructively on this.”

She then tipped her hand as to who she thinks should be running the show on "too big to fail, and it's not the Fed. She said the FDIC has played a substantial role in stabilizing the financial system and would like a seat at the table in any oversight council that's created.

“[The FDIC] is guaranteeing over $6 trillion right now,” she said. “The FDIC has tremendous exposure to the system so we would like a real say on systemic risk issues. [Reform overhaul] is an institutional issue, not a turf issue or a personality issue.”

Additionally, Bair suggested creating a separate fund going forth for existing firms that are already “too big,” as a way to create economic disincentives for companies that put others at risk.

“We suggest that for very large financial organizations including bank holding companies, Congress should consider creating a fund—just as we do with a deposit insurance fund–that could be set up [for firms] that have risk-based assessments," she said. "So if an institution is extremely large, interconnected or imposes a risk to the system—they would pay a higher assessment.”

In the interview, she made it clear that she wants the FDIC to have a "seat at the table" and "a real say" on rule making and enforcement of "too big to fail" policy. She also makes it clear (after being served up soft balls by Camden Fine, of all people) that the Oversight Council has to have "real teeth," not merely serve an advisory role. In other words, she doesn't think the Fed is where the power should lie.

She specifically denies that any of the disputes between the Fed and the FDIC (and, obviously, between the FDIC and the administration's point man on these issues, Tiny Tim Geithner) involve a "turf war" between the various regulatory agencies. Sure, I believe that. I also believe that The Great Pumpkin exists.

On the good news front, she supports the dual banking system (state and federal). That support will last as long as the FDIC remains the primary federal regulator for state-chartered, non-Fed member banks. Consolidating all supervisors in one federal banking regulator is not a model preferred by Ms. Bair, who favors a larger, not smaller, role for the FDIC, based entirely on what's in the best interests of the country as a whole, of course, and not (Lord forbid!) a matter of bureaucratic turf wrestling.

Review the interview and decide for yourself for yourself the sincerity of her positions. She's good on camera, you have to hand it to her. In comparison, she makes Timmy look like Elmer Fudd after ingesting a bit too much caffeine.

I don't think that she's any worse than any of the other federal regulatory arm-wrestlers, other than that her fetish for consumer advocacy is often hard to stomach. Given her role as "Chair Bair" of the FDIC, she should make the best interests of insured institutions her primary concern. "What's good for the consumer is always what's best for insured institutions" sounds nice as a populist slogan, but it often rubs up against the facts, as it has in the "system-wide loan modification" train she's been driving the past two years. As Ocwen has demonstrated convincingly, looking at each loan individually makes more sense for lenders than across-the-board, one-size-fits-all, approaches. Also, her double-dealing between Citigroup and Wells Fargo over Wachovia and her pathetic political butt-kissing in the industrial bank charter moratorium affair didn't win her any points with me, even if many commercial banks were happy to see Wal-mart and Home Depot shut out of starting or acquiring a non-bank bank. Moreover, as an attorney for community and regional banks, I can't help but notice how the FDIC under her watch has been especially tough behind the scenes on the little guys while it caters to the giants. Well, those giants who don't curse her for her two-faced ways. Those giants earn her undying wrath and calls that they be replaced immediately, even if she's the only federal regulator who thinks so.

Wait a minute...I DO think she's worse than any of the other regulatory arm-wrestlers. That said, I hope that the FDIC does not become "the biggest loser" (as the New York Post speculated in the story linked in the first paragraph of this post). As I've stated previously, the rank-and-file of that agency, including many of the old salts who've been called out of retirement to deal with this crisis, and also including many of the independent contractors the agency has engaged to help manage failed institutions and their assets, "know their stuff." It would be bad news for the country if that expertise is wasted because political appointees are engaged in a game of throwing elbows at an "elevated" level.

"Dead Man Walking!"

The weeping and wailing has already begun for the Office of Thrift Supervision. Fingered for liquidation (along with the federal thrift charter) by the Obama administration's "reform" plan that was announced yesterday, Reuters called it "The Saddest, Unloved Bank Regulator." Bank trade associations, on the other hand, rushed to its defense.

The bankers say eliminating OTS would wipe out a culture that understands the needs of small thrifts, which are obliged to channel most of their lending to housing-related activities.

"The vast majority of OTS-regulated thrifts have done a great job supporting housing," said Chris Cole, senior regulatory counsel at the ICBA. "We think the merger could have some impact on housing lending."

Needless to say, anything that helps to make more money available for mortgages at a time when home prices in many markets are in free fall is likely to have some appeal in Congress. Bankers have taken note.

"If we want to make housing a national priority, we need to keep issues like this in mind," said American Bankers Association spokesman Wayne Abernathy.

There are also questions about whether the OCC is the right agency to take over supervising small thrifts, given its current brief of overseeing larger national banks.

"Losing the OTS would be a mistake," said Jim Wheeler, a financial institutions partner at law firm Bryan Cave in Atlanta. "What Bank of America has in common with the S&L on the corner is nothing. They don't even speak the same language."

Apparently, Mr. Wheeler's PR representative found a full-fledged "biter" at Fortune when he threw that pithy line in the ocean of e-mail spam. Good for him.

Today's The Washington Post ran an article that indicated that OTS employees are taking the bad news in stride.

"These people have been through this before," the employee said. "Not only that. They've lived through the calls for the elimination of OTS" for "pretty much all 20 years of OTS's existence."

It's always preferable for the doomed to take their execution with good humor, refusing the blindfold, accepting the last cigarette, and sparing us any last words other than, perhaps, a heart-felt bit of classical Latin: "Morde Me."

While it has its defenders, the opponents of the OTS finally seem to have it cornered. The agency hasn't helped itself with its dismal list of large thrift failures, the backdating of capital contributions scandal, and its director's confession at a congressional hearing that AIG was its responsibility to oversee. I think that the best current federal thrifts might expect is that they can successfully wage a fight to save the federal thrift charter, which Obama also wants drive a stake through. While Barney Frank was quoted in the aforementioned WAPO story as calling for the abolition of the OTS, he's also on record over the past few days as rejecting the call to abolish the federal thrift charter. Today's American Banker (paid subscription required) quoted Frank as saying the charter will stay put, even if it has a new overseer.

Frank shut the door on scrapping the thrift charter, a move that he said did not make sense.

"We support putting the OTS and the OCC together into one agency, and you want to make sure the thrift charter isn't used to play games with, but I think it would be a mistake to abolish the thrift charter," Frank said.

Frank didn't elucidate the reasons that such abolition would be a mistake. I'll guess that they have something to do with housing, political action committees, and a boy named Sue.

Former OTS employees may find themselves stuck in a basement room next to the boiler in the offices of the new national bank regulator. I assume that they'll keep their retirement vesting dates.

The end of the road has not yet arrived and as acting OTS Director correctly advised his staff, the earliest the end could come would be later this year or early the next. At this point, however, it looks almost certain that, after twenty years of hanging on by a thread, the OTS' string is about to play out.

P.S. This is Bank Lawyer Blog's 1,000th post, which is further evidence that, indeed, "stuff" can be stacked this high.

Ignorance Is Not Bliss

Paul Jackson, editor-in-chief of Housingwire.com and HousingWire Magazine, expressed his frustration yesterday with federal policy makers' apparent lack of comprehension of how the country's mortgage financing markets work. To me, their ignorance is par for the course. I long ago lost my sense of incredulity at the abysmal lack of understanding of many policy makers in Washington, D.C., which is why I'm the bitter, cynical crank who spews acid all over the pages of this blog today. Paul, being somewhat younger than I (a classification that applies to the vast majority of the world's population), is still able to be amazed at the fact that when it comes to D.C, what you need to know is how to acquire and retain political power, and any other knowledge gained is purely by osmosis and mostly superfluous (at least it is as far as the policy makers are concerned).

What especially irks Paul is the notion that issuers of mortgage-backed securities didn't have enough "skin in the game," and that, according to this line of thought, policy makers are proposing to require issuers to retain at least 5% of the risk on any asset-backed security and to forbid the issuer from hedging any portion of that risk. Paul alleges that this approach is 189 degrees "bass ackwards."

The first thing that should be coming to any market participant’s head when they hear about this so-called ’skin-in-the-game’ rule is this: isn’t skin in the game what has literally crippled once-proud institutions like Citigroup Inc. (C: 3.122 -3.94%)? Isn’t skin in the game what put Lehman and Bear Stearns into history books as former Wall Street firms, too?

[...]

[T]he problems at Citibank and elsewhere aren’t because the banks had too little skin in the game. It’s because they had too much.

Paul's also exasperated by the allegation that asset securitization itself is to blame for the mortgage market meltdown. He's worried that many folks who should know better are getting ready to "throw the baby out with the bath water."

Remarks such as this, from a June 15 Washington Post op-ed penned by Timothy Geithner and Lawrence Summers, should scare anyone involved in the securitization industry:

In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The fact that this dreck is coming from the head of Treasury (and from Lawrence Summers, too) scares the living snot out of me, because it demonstrates a fundamental misunderstanding of securitization. A lack of some much-needed oversight into structured finance by federal officials is now being used as an excuse by those same officials to toss cold water on the entire concept?

While Paul concedes the necessity to have a "healthy debate" about asset securitization and related issues, it's extremely difficult to have a debate of any kind, much less a "meaningful" debate, when one side's the equivalent of William F. Buckley, Jr. and the other the equivalent of a potted plant. When it comes to knowledge and intelligence, the debaters ought to at least have the intelligence level of a dull-normal member of the same genus, and preferably the same species.

I'm not optimistic, but, then again, I seldom am.

A Plethora Of Political Incorrectness

Some days, when I'm especially pressed for time, I seriously consider bagging putting up a post. Then, out of the blue, my readers will supply me with material too good to pass on. Two recent examples beg for a post.

The first is a fairly common form of e-mail I receive from public relations flaks, who apparently supply reporters with pithy quotes from attorneys who seek to make their mark as "experts" of one sort or another. I hadn't considered hiring a public relations firm to push quotes on reporters, but then, I've earned my clients the old fashioned way: barratry and champerty. Even more disconcerting was the notion that any person possessed of even the most modest powers of perception would consider this blog a place where the authors might be interested in someone else's opinion. "Unfair and Unblanced" is our motto.

Nevertheless, I received such an e-mail today and decided to post the guts of it, rather than just dribble out individual quotes within the context of a substantive post. Hey, you want free publicity, here it is, unvarnished and without comment. Individual readers can peruse the following and decide for themselves as to its value.

BANK LAW EXPERT: THOUGHTS ON NEW REGULATIONS

Financial institutions law expert James Wheeler, a partner at the international law firm, says the Obama Administration is not shy about wanting to change the financial regulatory landscape, but says all the talk about regulating the banking industry is nothing new.

“This is very similar to what we heard in the mid-1970s and again in the early 1990s,” Wheeler says. “Then, too, there were threats and talk from the federal government on how to regulate things better.”

What’s different this time, Wheeler says, is the severity and global nature of the current recession, as well as the wide-ranging impact it’s had all around the world.

“I hope any change made by the Obama administration is for the purpose of more-efficient regulation, rather than just more regulation for regulation’s sake,” Wheeler says.

The rumored nature of the new regulations is to have key federal agencies work together to avoid another perfect-storm collapse of the national financial system.  But Wheeler says a paralysis among the financial regulators, and a history of non-collaboration, are hurdles the administration must overcome.

“A lot of regulators are unsure what to do,” Wheeler says, “they don't know where they’ll be next week, next month or next year, and that keeps them from moving forward.  Traditionally, federal banking regulators have not always played nicely together, which sometimes creates turf wars.”

Wheeler’s is concerned about the impact rule changes could have on federal thrifts (or savings associations), and other smaller banks and financial institutions.  A frequent rumor has the Office of Thrift Supervision (OTS), now overseen by the Treasury Department, being folded into the FDIC, the Federal Reserve or another national regulatory agency.

“Many people in the industry think moving the OTS would be a mistake,” Wheeler says. “Small savings banks, and savings and loans, need baby steps toward change.  They don't need oversight by an organization that doesn’t always understand their needs.”

There you have it, folks. Straight-up, in-depth insight unlike the kind of snarky fluff you usually find on rags like Bank Lawyer's Blog. I hope you enjoyed it. If so, Mr. Wheeler's publicist says that he is available for interviews.

In another interesting e-mail, a reader from The Left Coast accused me of pushing a hidden homophobic agenda in my most recent mockery of Barney Frank. I tried and failed to get my head around the paradox of having concocted a rational plan (agenda) to push an irrational anxiety disorder (homophobia), but, then, I never claimed to be G.K. Chesterton. Still, I wish to clarify that I do, indeed, hate homosexuals, not because of their sexual orientation, but because I am a misanthrope. Homosexuals are members of either "mankind" or "womynkind" and, therefore, merely a subclass of a despised species, all of whose subclasses are mock-worthy, especially the subclass that consists of Blue State dwellers who awaken each morning convinced that the sun rose in the East for the sole purpose of shining through their bedroom windows and into their soft-lidded eyes just to piss them off, all at the instigation of Sarah Palin and her fellow creationist whack-jobs. To members of this subclass: I must exhort you to fine tune the rabbit ears on your tin foil hats and find another blog to offend you. You needn't search far. Hot house flowers will find almost any climate inhospitable to their delicate, politically correct, sensibilities.

The subclass of professional politicians, to which Barney Frank belongs, is also high on my list of the mock-worthy. It's not as target-rich a subclass as lawyers, but it's pretty darned close. Any aspect of Frank's sordid past is open season. Any aspect, from his notorious association with Stephen L. Gobie, who Frank paid for sex and who ran a prostitution ring out of Frank's apartment, to his recent branding of Justice Scalia as a "homophobe" (sound familiar?). This despicable human being is the head of the House committee on banking legislation. If the consequences of the gaping holes in the characters of men and women in his position and other leadership positions in Washington, D.C. weren't so serious for the country, he'd be a laughingstock. Instead, the fact that he's in a position of such power is potentially tragic. If you don't like my mocking clowns like Frank, again, I urge you: read elsewhere. The Internet is a place filled with an infinite amount of white noise and you'll surely be able to find an echo chamber to your liking, a place where bloggers aren't so "mean."

Now that I've driven away more of the bootless and unhorsed, it's time to tell my more robust readers what really chaps my hide: short people. I also suffer from mycrophobia.

Have a nice day.

More Evidence That Failed Bank Directors Are In FDIC's Crosshairs

If you're not reading FinCri Advisor, you should be. It's putting out some of the most useful commentary on the financial crisis to be found on the internet.

No, I have no connection with Fin Cri Advisor and this is an unpaid endorsement. I simply like their reporting. For those who loathe this blog, I may be damning them with my praise. Of course, if you loathe this blog, I doubt you're reading this recommendation.

One of the most recent posts discussed a topic that we've been pursuing, that being the not-so-subtle indications that the FDIC is gearing up to sue directors and officers of failed FDIC-insured financial institutions. According to FinCri Advisor's sources, the FDIC has been sending claims letters to former officers and directors of failed banks in order to preserve recourse against "claims made" D&O insurance policies. The fact that these letters are going out impacts not just the obvious persons involved, but every bank that has a D&O insurance policy; in other words, practically every commercial bank and thrift institution.

Such actions "impact everyone - not just failed banks, but all banks - in terms of D&O costs and provisions of the policies," says attorney Walt Moeling, co-manager of the Financial Institutions Group at Bryan Cave in Atlanta.

As the author of the article correctly observes, more claims activity means higher premiums for banks.

The ripples extend beyond existing FDIC-insured institutions, however.

That, in turn, leads to other issues, a 16-year investment banking veteran who blogs at www.capitalbeacon.com writes to FinCri Advisor. "I am aware of several people that have altered plans to raise private equity funds because D&O insurance was either too expensive or unavailable," he offers, adding that it affects mortgage companies, hedge funds and private equity firms, also.

Bryan Cave attorney Walt Moeling points out that while he's not aware of any suits having been filed to date, that doesn't mean that they won't be filed, and if they are, the effects won't be pleasant.

The statue of limitations to file typically is 1 to 2 years, depending on the D&O policy, but the actual litigation can last 6 to 12 years, "and it is very painful for an individual to defend it," Moeling says.

There's other useful information for directors and officers who are concerned about their coverage, including:

• A lawsuit is more likely if there is D&O coverage.
• Directors and officers sleep better at night knowing that they're covered and are more willing to settle if the settlement money is coming out of the insurance carrier's pocket.
• The "regulatory exclusion" (discussed here last week) can ruin the day of both the FDIC and the insureds, so read your policy carefully before you purchase it.
• Also, read the policy carefully for what acts and omissions are and are not covered.
• Renewal of coverage can be a painful process and is likely to become increasingly painful as the FDIC increases its claims activity.

One of the interesting (to me) sidelights of the story is the fact that Bryan Cave acts as independent counsel to the FDIC in suits against officers of failed banks and at the same time has clients that have received claims letters from the FDIC. I assume they'll have to pick either the FDIC or the recipients of the letters as clients if the claims letters ripen into litigation. I haven't looked into the conflict-of-interest policies of the FDIC recently, but when I acted as independent counsel to the RTC in the early 1990s, it used the FDIC's conflict-of-interest policy, which prevented law firms from representing parties whose interests were adverse to those of the FDIC "anywhere in the system" if they also represented the FDIC "anywhere in the system." For example, if you were acting as outside counsel to the FDIC in evaluating potential claims against directors and officers of one failed institution you couldn't represent the director of another failed institution in an action brought by the FDIC. I assume these policies remain essentially unchanged. For those who are interested, here's a link to the FDIC's Statement of Policies Concerning Outside Counsel Conflicts of Interest.

Don't even think about trying a "Chinese Wall" argument with the FDIC. It's not biting into that apple.

Jeb Hensarling: Modern Day Don Quixote

I didn't agree with Texas Congressman Jeb Hensarling, the only sitting member of Congress who serves on the TARP Congressional Oversight Panel, when he initially opposed the Bush administration's original TARP proposal last year. I can't say that I agree with every position he takes on political and economic issues. On the other hand, he's nothing if not consistent in his suspicion of the role of big government (especially, big federal government) in intervening in the economy, and for that I respect him. We need thoughtful opposition to the march of the current administration and Congress, aided and abetted by the federal banking agencies and some of the more notorious opportunists who head a few of them, to impose their version of a "command economy" on this country under the guise of dealing with an "economic crisis."

Last week, Hensarling proposed a bill that would end TARP on December 31, 2009. It would also make it easy for any TARP recipients to repay TARP CPP capital and would end the current administration's attempt to make TARP a roach motel for certain large banks (e.g., Bank of America, Citigroup) that are branded "too big to fail," which is turning into "too big not to be micromanaged by Democratic politicians for the benefit of their core constituencies and largest political contributors." Hensarling's legislation would also force the Treasury Department to liquidate warrants as TARP preferred stock is repaid, thereby removing a hammer hanging over the head of those banks that have otherwise repaid what they "borrowed." Finally, it would reduce the TARP funds available for use by the Treasury Department dollar-for-dollar with the amounts repaid, thereby reducing the Treasury Department's ability to spend those dollars again and meddle elsewhere in the economy with them.

Hensarling appeared last week on CNCB's program "Squawk Box" (see clip below) to discuss the proposed legislation. It became apparent that TARP's merely one of the aspects of the federal government's intervention in the economy that's bugging him. He admitted that his "tipping point" was the "lawlessness" (my term, ot his) of the Obama administration's behavior in perverting the bankruptcy laws so that the United Auto Workers union received far more than they would have had Obama and his minions not used TARP as an arm-twister to get creditors who received TARP and other federal assistance to approve a plan that screwed bond holders who otherwise would have been entitled to more preference than they were given in the final plan. He's worried that this is only the first of many instances of creeping "command economy" maneuvers by the current administration and the majority party in Congress. I suppose he calculates that he might as well start "squawking" about it on television and through whatever other venue he can.

I agree with his attitude toward the prospects of the legislation being enacted: "high hoes, low expectations." I'd add something about a snowball in Hell, but I think he covered the prospects properly. Nevertheless, as time marches on and the agenda of the powers-that-be continues to play out, he'll likely have an increasingly sympathetic audience among many bankers, including all those community bankers who are too small to save, and who've either been left on the sidelines or beaten like drums by the same regulators who handle the big boys with kid gloves.