Bank Lawyer's Blog

Arrogance Has Its Price

A recent decision by a New York state trial judge has caused a bit of a buzz about the blogosphere, especially on borrower advocate blogs and other "fora" where banks are bashed and every set-back for foreclosing lenders is greeted with a cheer, a shot of Rye, and a beer chaser. The case is an extreme example of the bad things that are happening to residential mortgage servicers who try to dummie up after-the-fact assignments of notes and mortgages and fail to prove a chain-of-assignment that satisfies a trial judge who doesn't care much for the "mortgage follows the note" rule of law. In this case, what might be just as important to the extreme outcome (cancellation of the note and mortgage, and vacation of the foreclosure judgment) is the fact that the judge was obviously less than enamored with the demeanor of the officer that the servicer sent to testify. When a court's opinion makes much of the "opprobrious demeanor and condescending attitude" of that bank officer, you know the lender would have been better served to have sent someone to court who understands that when you talk down to a judge, your buttocks can end up in your hands.

Best of luck on appeal, OneWest.

Taking TARP Takes a Toll

It appears that all those banks that didn't take TARP money and used that fact to publicly bash their brothers who did take TARP needn't have bothered to spend all those bucks on billboards. According to Rich Brose of Maritz Research in a recent interview on Fox Business News (a hat tip to "Tweeter" Abby Carr), the mere fact of taking TARP has cost TARP takers an average loss of 26% in customer trust over those competitors who resisted TARP's siren call.

According to Rich, Martiz's research shows a steep drop in overall trust of banks since last April. Especially hard hit by the "lack-of-trust factor" were those banks that received government assistance in the form of TARP's capital purchase program. Traditionally, the percentage of consumers who say that they trust their bank (as opposed to "the other guy's bank," I suppose) is in the 90s. The most recent surveys by Maritz show that the trust factor has fallen to 68% with respect to consumers whose banks haven't taken TARP, and to 42% among consumers whose banks stepped up to the plate and took a fastball in the face for Uncle Sam.

Another disturbing survey result concerns the percentage of those surveyed who thought that the US government ought to regulate executive compensation at all banks (not just those who received government assistance). That percentage is 53%. That means that for all the tough talk we hear by talk-show pundits who claim "the people" oppose "creeping socialism," there's a good indication that a majority (a slim majority, but a majority nonetheless) are ready and willing to see "leaping socialism" employed, as long as the recipients of that socialist control are banks.

As with so many of these surveys, you have to wonder what comes to the mind of the polled when the word "bank" is used. James Stewart in "It's A Wonderful Life"? Doubtful. More like Angelo Mazillo, would be my guess.

I love the way that one of the interviewers goes off on a rant about her bank (and she names it) "nickel-and-diming me to death" with a recent uptick in fees. That puts a personal spin on it that we can all enjoy and, after all, it's Fox News, so no one expects anything other than "fair and balanced," right? Even those of us who make out livings from serving banks like soulless slugs can sympathize with her irritation.

The rest of this week we'll be stuffing our pie holes and guzzling various harmful intoxicants, watching football, and generally making a slothful nuisance of ourselves, just like the rest of America. Enjoy the holiday, even if you're a vegan and wouldn't touch a Turducken with a ten-foot pole.

Concentrating on Commercial Real Estate

Reports of increased scrutiny of banks--particularly community banks--because of deteriorating commercial real estate values keep piling on. In Boston, the local business press seized upon the fact that commercial real estate concentrations at several local banks "soared past" the "limit" of 300% of capital set forth in federal bank regulatory agency guidelines. Bank executives tried to put a smiley face on these figures, one even evoking a vision of an empty office tower in Houston and saying "that ain't us." However, I doubt anyone's buying that line. First, Houston circa 1988 is not Houston today. Today, Houston is doing better than just about any other major metropolitan area in the US, thanks in no small part to the fact Texas was hit so hard the last time around the block that Texas didn't have the real estate bubble that has burst all over places like Georgia, Florida, Illinois, Nevada, Arizona, and California. Houston also is home to large oil and gas companies, and those folks are rolling in dough at the present time. Just ask Lexus where it's selling and leasing the most cars in the US. If we're talking "empty office towers" during the current melt down, look at south Florida, not Texas.

In fairness to the banks profiled in the article, they seem to be taking steps to meet regulators' concerns, including "kicking the tires," tightening lending standards, lowering loan-to-value ratios, raising additional capital, and otherwise showing the regulators that they are proactively dealing with the increased risk. Not one of them was mentioned in the article as currently being under any type of formal or informal enforcement action because of their concentration in commercial real estate lending.

Nevertheless, banks like these can certainly expect extra special attention from their primary federal regulator for the foreseeable future. As guest blogger John Walker chillingly pointed out a few weeks ago, "the CRE problem is real." As he also predicted, the problem is going to get worse, maybe a lot worse. As long as that's the case, banks with high concentrations of commercial real estate loans in their portfolio--regardless of their perceived quality and regardless of whatever other arguments the bank makes in the way of risk mitigation--will be in the examiners' cross-hairs.

"Due Care" and the Benefit of 20/20 Hindsight

Well over four years ago, before the subprime mortgage meltdown caused all our economic dominoes to tumble one into the other, leaving us wallowing in the current morass, I wrote a brief post about an important case involving directors of a company more associated with fantasy than funding. At the time I wrote it, I was thinking about the 19980s and 1990s, when directors and officers of failed banks and thrifts were mercilessly pursued by the FDIC, especially if they were covered by a liability policy the FDIC could tap to extract a settlement. When a fellow banking lawyer recently told me that the FDIC was, indeed, commencing its pursuit of directors of failed FDIC-insured banks, I thought it would a good time to re-post this short exposition on the problems associated with trying to impose legal liability upon folks with the benefit of 20/20 hindsight.

Those of us who represented banks and savings banks in the 1980s, especially those in Colorado and Texas, know that when scores of banks and thrifts failed at the end of that decade and in the early part of the next decade, the government agencies pursued the former directors (along with the former officers, controlling shareholders, borrowers, attorneys, accountants, appraisers and other professionals). Even where there was no criminal wrongdoing or conflicts of interest alleged (and, surely, there was some of that), the government sued directors for the breach of their duty to exercise "due care" in exercising their "business judgment." Initiated years after the decisions were made by the directors, many (certainly not all) of the actions pursued against these directors appeared to many of us to smack of the use of 20/20 hindsight to attempt to hang these board members out to dry.

In many cases, directors and/or the insurance companies that issued their errors and omissions policies, paid through the nose. Many settled these actions when they could to avoid being eaten alive by attorneys' fees and costs, and to limit the "psychological damage." No one, least of all an angry public that lacked understanding of the underlying economic causes of the failure of some of these banks and thrifts, wanted to hear was "it was a reasonable decision at the time that did not work out." Somebody had to pay, and the government went after every private nickel it could squeeze.

That's why, so many years later, I read with wry amusement today's decision by a Delaware court in the case filed by Disney shareholders against its Board of Directors over the hiring of uberagent Michael Ovitz as Disney's CEO and the granting to him of a $140 million severance package when the Board gave him "the boot" 14 months later.

Chancellor William Chandler III said that while directors' conduct "fell significantly short of the best practices of ideal corporate governance," board members did not breach their duties or commit waste.

"It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk - the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known," Chandler wrote in a 175-page opinion.

I haven't read all 175 pages, but no more reasonable statement of the realities of the business world could be given. Too bad Chancellor Chandler was not overseeing some of the cases I consulted on 15 years ago. Some good people could have been spared some pain, and the "bad guys" would still have been punished.

Another Day of Progress in D.C.

Whatever Mark Zandi's smoking, I want a toke.

Testifying today before the Congressional Oversight Panel that "oversees" the Treasury Department's TARP, Mr. Zandi made a bold assertion.

Mark Zandi, the chief economist and cofounder of Moody’s Economy.com, said that banks were “overcapitalized.”

[...]

Zandi testified that the most effective aspect of the TARP program has been the use of funds to provide capital to the banking system. The Treasury committed $205bn through the Capital Purchase Program (CPP) to recapitalize the banking system and another $115bn to support AIG, Bank of America and Citigroup, Zandi said.

“The most successful part of the TARP program has been the CPP,” according to Zandi’s testimony. “Without capital injection from the federal government, the financial system would have likely collapsed.”

Zandi said that the while the financial system is not functioning normally, it is stable.

“The stress test conducted earlier in the year was substantive,” Zandi said. “Once housing prices stop falling and unemployment numbers go down, lending will go up.”

Mr. Zandi's views were not shared by others, especially his opinion that banks are "overcapitalized."

“That’s laughable,” responded Charles Calomiris, a professor of financial institutions at the Columbia Business School.

I had a bank insider who read this same article call me this afternoon and express the similar sentiments, albeit a bit more "robustly" than Professor Calomiris did. On the other hand, he agreed wholeheartedly with Calomiris' comments about regulatory "overkill."

“In my conversations with banks, it’s widely believed that some of the banks are insolvent,” Calomiris said.

He did not want to go on the record to say which banks will fail, but he did say that one bank is insolvent. Regulators, he said, are playing political games with capital requirements and are creating an “overkill” environment.

[...]

“Capital scarcity persists,” Calomiris said.

Whatever "games" are being played are not amusing the banks. Instead, they're alternately dismaying and enraging them. Moreover, the end result of some of those games is to make it difficult for those banks that most need capital to raise it.

Another testifying expert accused Treasury of running a "hedge fund." If it is, it's a hedge fund that no one in their right mind would invest in.

Alex Pollock of the American Enterprise Institute had a free marketer's take on how Treasury should be running TARP and how it was failing miserably at that task.

Alex Pollock, a resident fellow at the American Enterprise Institute, suggested that TARP be run like a business with quarterly reports and focusing on acquiring assets.

“However, with the $50 billion “Home Affordable Modification Program” (HAMP), TARP is not acquiring an asset at all, but simply spending the taxpayers’ money to subsidize mortgage loan modifications, including subsidies to mortgage servicing companies. There is no asset acquired,” according to Pollock’s testimony.

A lawyer friend of mine told me, "You get two lawyers in a room, you immediately have three opinions." That could also apply to economists, college professors, and resident fellows, only you'd have to use a multiple of three.

To The Contrary

Former client and long time banker Pat Dalrymple (the subject of a previous post) has joined the world of banking bloggers with "Contrabanker: A Bank Contrarian's Blog"). If Pat's first post is any indication, he's going to provide a no-holds-barred, cranky (but amusingly so) read. That's what happens when you've been around the block so many times: nothing surprises you and you don't really give a hoot whose toes you step on when you tell us what you really think.

After "dissing" himself for not being the "expert" he thought he was (modestly omitting the impact of an economic steamroller fired up and run by bad boys and girls much bigger than his small institution), Pat tells us some of what he's learned:

• Bankers can be very smart, and yet do very dumb things.


• I was never as smart as I thought I was when things went well, or as dumb as I viewed myself when they went badly.


• And, to paraphrase Bobby Kennedy on politicians (and he got it from somebody else): "To be a banker, you've got to be smart enough to do it, and dumb enough to think it's important".

Pat's got some other gems, particularly about interest reserves, so I recommend you read the whole thing. I hope it's the first of many enjoyable (and snarky) posts to come.

Talking Trash 'Bout TARP

Sheila Bair said last week that the TARP CPP program was, in retrospect, maybe not such a good idea.

“I just see all the problems it’s created now,” she said in an interview with PBS economics correspondent Paul Solman. “The horrible public outcry — it’s had a terrible, terrible impact on public attitudes towards the financial systems, towards the regulatory community. It’s created all sorts of issues about government ownership of these institutions. What happens if they get in trouble again? Do we contain the bonuses and the compensation because they are partially taxpayer owned, which might make things worse because they can’t bring in new and better management, which in some cases might be necessary.”

As one astute commenter states, her objection is not that the TARP CPP was unsuccessful, but that it was unpopular. I thought that's what national leaders were supposed to do: what they think is the best thing to do for the country, regardless of its popularity. Is this a representative democratic republic or a pure democracy? I'm just asking the obvious rhetorical question, because I'm not deep or nuanced enough to ask any other type of rhetorical question.

Speaking of unpopular, TARP is now being bashed because a few of the TARP takers have bitten the proverbial "big one."According to an article in today's The Wall Street Journal, 27 banks that have been "seized or threatened" by federal regulators have received capital injections through the TARP. "Seizure" wipes out the government's investment right along with the investments of other shareholders. "Threatening" does nothing to capital other than often making it impossible to raise, thereby making "seizure" more likely. According to the article's author, David Enrich, of the total $204.68 billion pumped into banks through TARP, the federal government might lose---GASP---$5.1 billion. However, its already made back "$10.1 billion in dividend, interest and fee payments from TARP recipients," so the return on investment made to date covers the $5.1 billion. 

Criticism by the Treasury's Inspector General over the use of the terms "healthy" and "viable" when describing banks that later failed is well noted. On the other hand, what looked "viable" in the fall of 2008 could have looked "not so viable" mere months later when the entire banking business was (and still is) listening to a giant sucking sound made by an economy being absorbed into a collapsing black hole of death. Besides, criticizing government officials for playing fast and loose with the truth is like being shocked that Bill Clinton would cheat on his wife. Anyone acquainted with reality knows that's just the way he rolls!

Nevertheless, it is worth a furrowed eyebrow or two (or three, if you're so endowed) to note how quickly following approval by their primary federal regulator for receipt of TARP capital injections some banks were to receive a supervisory smack down from the same federal regulator. The experience of Grand Mountain Bank in Granby, Colorado, as related by its president, was especially amusing (or not, depending on how close you are to the situation).

In May, Treasury officials wired $3.1 million to Grand Mountain Bancshares Inc. Seventeen days later, the Office of Thrift Supervision wrapped up an exam at the Granby, Colo., bank.

According to a government filing, examiners found Grand Mountain "has engaged in unsafe and unsound banking practices which have resulted in deteriorating asset quality, ineffective risk management practices, and inadequate oversight and supervision."

Frank DeLay, Grand Mountain's president, said company executives were stunned.

"We said: You guys had just approved our TARP application and...now you're going to slap us upside the head with a baseball bat?" Mr. DeLay said. "There's kind of a disconnect there."

"Kind of," uh-huh. And the "disconnect" continues. As the article reports, a number of the TARP recipients who've subsequently been disciplined by their federal regulators have been told by those same regulators not to make any dividend payments on the preferred stock held by the US Treasury Department. That may be a testament to a lack of regulatory perceptiveness at the outset of this mess, a sign that the quality of bank assets is deteriorating faster than Sarah Palin can weave the word "rogue" into a sentence, or maybe both. Whatever it's attributable to, the biggest loser in this "disconnect" if things get substantially worse than are today (as many respected observers are predicting) is likely to be the US taxpayer, but then that's often the case, isn't it?

I wish I could say that this circus act inside The Beltway surprises me, but that would be lying. During the midst of another economic crisis when the regulators were cracking down in ways as inconsistent as they were lethal, the CEO of bank client reminded me of the immortal words of Hyman Roth to Michael Corleone in the movie The Godfather Part II: "This is the life we have chosen."

Yes, this is the life we have chosen. Are we having fun yet?

It's As Bad As You Think

Another astute observer of the banking scene jumped on the 1,000 bank failures band wagon today.

James Dunne, senior managing principal of Sandler O'Neill, said he believes up to 1,000 banks will fail during the current crisis and the total bill will surpass the government's latest projection of $100 billion.

"There are a couple absolutes in the crisis," Dunne told the Reuters Global Finance Summit in New York. "Whatever you thought it was going to cost, it has cost more."

Dunne made a couple of other cogent points. He said that the process of cleaning the bad banks out of the system will take several years. Therefore, all the "Tweeters" who've formed a "BankFailFriday" hashtag group and follow the Friday afternoon take downs of commercial banks by the FDIC are going to be bored to tears as the process wears on and the novelty wears off. They'll likely have to move on and focus on another variety of road kill at which to gawk.

Dunne also made the point that while commercial real estate loan portfolios are "just beginning to deteriorate," and, I assume, the pain from commercial real estate will therefore grow substantially over the next few years, there's a silver lining to this dark cloud.

Dunne said that headache is better than the crisis in confidence last year when banks were being brought down by deposit runs.

"I think the FDIC has done a terrific job of removing the liquidity issue off the table," he said.

Agreed. On the other hand, while the issue may be off the table as far as recent runs on banks are concerned, it's certainly not off the table as a supervisory concern of the FDIC and, therefore, of the banks it supervises. There's still a strong regulatory bias against the use of brokered deposits and other sources of so-called "hot money." Banks--especially those whose financial health is not "robust"--are going to find that liquidity management is going to be an increasingly thorny problem over the next few years.

Wal-Mart Marches On

Last week, the American Banker featured a story by Maria Aspan (paid subscription required) that looked at Wal-Mart's business of providing consumer financial services to its customers, two years after it finally gave up its quest to get the FDIC to move forward (as the law required it to do) on its application for approval of insurance of accounts for an industrial bank charter and withdrew the application. According to Aspan and expert observers she interviewed for the story, Wal-Mart has not only adapted well to a world without bank charters, it may have "dodged a bullet" by not owning an industrial bank at a time when the Obama administration and Democrats in Congress want to do away with that charter.

"...Wal-Mart's coming to the realization, 'You may not get the charter, but that doesn't prevent you from getting the consistency reputation in financial services,' " [Louisiana State University professor Joseph] Mason said. As for competition from traditional banks, he said, "Right now, I don't see that push-back, and of course the crisis is aging, so I don't think we're going to see anything hinder Wal-Mart from amassing a financial superstore even if they don't do it with a charter."

Wal-Mart appears to have done a "work-around" the lack of a charter through partnerships with "General Electric's GE Money Store which issues its branded credit cards and prepaid cards, and FiServ Inc.'s CheckFreePay unit, which provides its walk-in bill service."Even consumer advocate groups admit that Wal-Mart's prepaid cards have been a hit with the audience that matters most to the retail giant: its customers.

"There are things offered by Wal-Mart that banks are not able to provide, or it is going into places that banks are not willing to," said Linda Sherry, the director of national priorities for Consumer Action. But "the Wal-Mart brand is perhaps more trusted by individuals and people who shop at Wal-Mart than by consumer advocates and union types."

It's difficult to believe that consumers would ignore the warnings of those who know better than "the sheeple" what's in their best interests. What's next: Jesse Jackson stages a press conference for the next trumped up Duke Lacrosse Team "scandal" and nobody shows up?

It's interesting that Wal-Mart, by not being in the banking business, is side-stepping the public relations backlash that is tainting other bankers who had nothing to do with the causes of the current crisis, such as community banks that are dropping like lawyers on a dove hunt with Dick Cheney. Instead, Wal-Mart is using the avenue open to it (not ideal, but workable) to cement its relationship as a low-cost provider of financial services to working class Americans. The Beast of Bentonville refuses to be tamed.

To be perfectly fair to the community bankers and other segments of the conventional banking business that howled so loudly about Wal-Mart's real intentions in seeking to obtain an industrial bank charter, I think they were correct. Wal-Mart wanted to bring to the banking business the same Wal-Mart business model that it brought to the selling of cheaply-made pants for Americans with wide butts: give the people what they want at prices below the competition. They would have been a formidable force in traditional consumer banking. As some "lone wolf" critics claimed two years ago, that would have been a good thing for banking business, which tends to get fat and lazy when competition is restricted.

Of course, Wal-Mart still might become a formidable force, although not in through a conventional route.

Speaking of conventional routes, no mention is made in the article of Wal-Mart's decision to pursue a conventional retail banking business outside the United States, where the separation of banking and commerce is not, shall we say, a concept that causes governments to seize up like a Ford F-150 with a leak in the oil pan. As we noted a couple of years ago, Wal-Mart's announcement that it was entering the consumer banking business in Mexico  "lends credence to those of its critics who warned during the ILC debate that opening the door even a crack to Wal-Mart would have been a big mistake."

We Interrupt This Madness To Bring You The Following Insanity

I had a juicy topic related to the banking reform legislation sweeping through D.C. all teed up and ready to knock out of the ballpark, but, unfortunately, a friend turned me on to the fact that all legislative activity in our nation's capitol has ground to a halt while our peerless leader negotiates our way out of our latest crisis. That silver tongued devil is one smooth talking Rico Suave, isn't he?

Obama To Enter Diplomatic Talks With Raging Wildfire