Bank Lawyer's Blog

OTS "Corrects" Me on Charter

My post of last Monday caused some people to sit up and growl, including current and former OTS employees. Not only the OTS wrote me, but also a number of others, including a member of the Wertheim family, and a few tin foil hat wearers convinced the entire affair was further evidence of socialist creep. A PR employee of the OTS even sent me links to "facts from public documents," for which I thanked him, even though those of us at Bank Lawyer's Blog prefer to wallow in the soothing, tepid waters of our prejudices and regard one man's facts as another man's damned lies.

Although I haven't spent a great deal of time following up on this, having to actually make a living from something other than blogging, here are some conclusions I've reached since my previous post:

• The former owners of the failed thrift, the Wertheims, seem like very decent people. They've done a lot of good for New Mexico, and it's sad to see their bank steamrolled by this crisis in real estate values, which is only getting worse, notwithstanding Panglossian blatherings by some snake oil salesmen in D.C. Also, "shoulda', woulda', coulda'" regarding real estate lending is a game for second-guessers who've never actually run a bank. Unfortunately, the Wertheims and the other directors and senior officers of the bank better be prepared for that game, because that's one the FDIC loves to play.

• An allegation made by more than one reader (all of them pro-OTS) was that the real estate assets couldn't have been worth what the Wertheims claimed because no other investors stepped in to buy the thrift before it failed. No acquirer in the current environment is going to buy a thrift the size of Charter Bank in the situation that Charter Bank was in after OTS-directed writedowns, when they know they can get a relatively risk-free deal if they just wait until the FDIC receivership and, if they win the bid, get loss coverage from the FDIC. As Bruce Hornsby sings, "That's Just The Way It Is." Given the the current paradigm (including the fact that open bank assistance for too-small-to-bailout community banks will never happen outside of that wonderfully unsuccessful TARP CPP), private investors who buy from the FDIC don't need to take any practical risk on future losses of commercial real estate assets compared to the risk they face if they acquire the same bank without the loss coverage on commercial real estate, even if they think that the OTS was overly aggressive in writing down the collateral values of those assets.

• The September 2009 Thrift Financial Report to which I was linked by an OTS representative support the OTS in countering Ed Morrissey's contention that at the time the thrift failed, the loan portfolio was substantially performing. Morrissey's article is wrong to imply that. The delinquency rates cited by Ed at the end of his article are not applicable to September 2009, when, as the OTS PR person pointed out to me, "Charter Bank had high levels of loan delinquencies, particularly in construction loans (single family and commercial) and loans for land: 19.48 percent of gross outstanding construction loans were at least 30 days delinquent and 22.88 percent of gross mortgage loans for land were at least 90 days delinquent." That's correct, a year after the OTS required massive write downs of the the value of real estate loans that were, at that time, substantially performing, the thrift was in trouble. How much of that trouble, particularly in the construction loans specifically cited by the OTS, was caused by overly aggressive writedowns and loss reserves with respect to loans whose history did not reflect the need for such levels of reserves and devaluations? For example, since a federal savings bank can't have more than 400% of its capital in nonresidential real estate loans, does it seem possible that a sudden deduction to capital might impair the thrift's ability to loan funds needed to keep particular projects or borrowers alive? Also, since the maximum loan-to-value ratio of residential construction loans is 85% and of nonresidential construction loans is 80%, do you think it might cause a problem with continuing to fund such a loan if the collateral value of that loan is suddenly whacked by a substantial percentage? Although thrifts have implied "salvage powers" to exceed such limits to salvage their investment, bank attorneys have seen cases recently where the regulators have ignored such implied powers and have required banks to stop funding loans or to start liquidating assets where regulatory limits would be exceeded. I'm not saying any of these events occurred at Charter Bank or contributed to the high delinquencies because I don't have personal knowledge, but I am saying that because you take a snap shot on September 30, 2009 and say on that date the financial condition of the thrift is X, that doesn't tell you why the thrift arrived at that point. The contention of former Charter Bank CEO Glenn Wertheim, as set forth in the press accounts quoted in last week's post, is that the relevant date to look at is a year earlier than September 2009, when the OTS made aggressive valuation allowance and collateral devaluation demands on loans that were performing. He claims that the OTS made this situation much worse than it had to be by taking such actions.  The "facts" sent by the OTS do not refute that allegation.

• The act of appraising a piece of real estate is as much art as it is science. An appraisal arrives at an individual's "opinion" of fair market value. Reasonably knowledgeable people can disagree on value, which happens all the time. In its order appointing the FDIC as receiver, the OTS claims that even accepting both management's analysis and a third party appraisal report (which the OTS rejected), the thrift was still "undercapitalized." That's like saying that even if we hadn't shot you in the head, you would have still had the flu. "Undercapitalized" means you're severely ill but salvageable. "Critically undercapitalized" means you're dead. Given the stakes, wouldn't a third valuation have been something the OTS could have found acceptable, using a mutually acceptable appraisal group? Why the rush to accept the worst-case appraisal, that of the OTS? Why the rush to close this bank down?

• Some readers objected to Ed Morrissey's blaming all this on CRA. I, too, thought that was Kool Aid drinking on Ed's part, which is why, if people had bothered to read my post, I didn't mention it. As I've said before, in my opinion, CRA was not responsible for the subprime mortgage credit meltdown and wingnuts who keep ranting about it condemn themselves as rebels without a clue. Thus, please stop setting up straw men to knock me down. My bloviations always have sufficient legitimate holes in them without manufacturing false ones. That said, Morrissey has a large readership on the right, and the fact that he's on the case of the OTS at all does nothing but add to the woes of a federal agency that needs not a single additional one.

• The OTS is not alone in its aggressiveness on real estate valuations and loss reserves. To me, it's no more aggressive than the FDIC, OCC or FRB (Barney Frank's letter notwithstanding). Community banks of all charter types are finding this out. Therefore, trying to single out the OTS as a renegade in this respect is a fool's errand. On this issue, charter flipping is not an answer.

• A colleague told me that the fact that I got so much feedback, especially from the OTS, is somehow complimentary of me. I disagree. I'm just some solo practitioner with a background in this area who fires off a rant four or five times a week at most, usually off the top of my head and with a beer in one hand (as evidenced by several typos in the first version of this post). I enrage as many as (or more than) I interest. Instead, I think it shows the defensiveness of the OTS to criticism from any quarter. As I reminded one of my OTS correspondents, the agency would have been better advised to simply ignore a crank like me. After all, I'm not a reporter, I'm one of those pajama-wearing "blogger" nutjobs.

A final observation. When Glenn Wertheim says that his family, like The Terminator, will be back--perhaps even back in the banking business--I believe him. His family's track record would certainly support that contention. I started working with the predecessor to the OTS (the Federal Home Loan Bank Board) when I joined the legal staff of a large savings and loan association in February 1977, and I've dealt with them for over three decades now. During that time, I've heard repeated calls for their demise, and generally discounted those calls. This time, however, I believe that the agency's days are numbered. Notwithstanding some brave talk from its Acting Director, I think people within the agency also believe it. Even with a dwindling assessment base, they appear to be aggressively eating their young, which is not a plan for long-term survival. This year or next, Congress is going to put a bullet in its head (although I think the federal thrift charter will live on for awhile). It may very well be that while the OTS won this "battle," the Wertheims will eventually dance on its grave.

Bashing Bankers to Push Brew

Obama's recent bout of banker bashing didn't originate in the fertile minds of his brain trust. No, it's been a time honored tactic of brew sellers in the UK. Witness last year's Strongbow Beer ad where a chorus of workers gathered for battle in a formation reminiscent of the movie "Braveheart" tells bankers to "Sod Off."

You've got to admire the crusty elan of the oldest banker flipping the bird to his critics on his way out of the scrum, though. You couldn't pull that one off on US broadcast networks. Thank god it's flex day Friday, when readers are scarce.

Community Banks Must Be Invisible

Tonight's post is another guest post by one of my partners at Bank Business Advisors, LLC, John Walker. John's worked up about commercial real estate and its past, present and, most disconcerting, future effects on community banks. He's also not thrilled about either the lack of a plan by the federal government to honestly deal with this train wreck or its lack of transparency in telling us the hard facts about the plan he suspects they might have in mind. But I'll let him tell his story in his own words. John, bank consultant Larry Martin, and banking accounting expert Dan McDonald have a lot more to say about commercial real estate lending, community banks, and related regulatory and accounting issues in their upcoming webinar for Bank Law Stuff.

As I’ve watched the public “goings-on” over the last 12-18 months with community banks generally, I’m struck by how invisible community banks seem to be to those responsible for stopping the hemorrhaging in our financial system.  You’d think the banks collectively were Burt Campbell (Richard Mulligan’s character) in the long-running tv series Soap, who concluded he was invisible because whenever he’d walk into a room, try to engage in conversation, or otherwise come into contact with other people, no one would acknowledge his presence.

We’ve heard Fed Chairman Ben Bernanke (September 2009) and the President’s top economic advisor Larry Summers (December 2009) announce that the recession’s over.  We’ve heard Treasury Secretary Tim Geithner (September 2009) say that he didn’t think that commercial real estate (CRE) loans would set off a new banking crisis.  We’ve even heard Jamie Dimon say that CRE is a train wreck that’s already happened (January 2010).

But that’s little solace to the community banks.  Deutsche Bank, in it’s quarterly CRE Outlooks published over the last several quarters, provides some perspective about the CRE market that paints a disturbingly different picture for community banks.

• Commercial MBS growth during 2004 – 2007 came at the expense of banks, particularly regional and community banks, as CMBS offered lower costs and higher leverage for higher quality properties with stable cash flows.

• Unlike residential real estate debt, banks hold the riskiest CRE debt, as banks became more concentrated in riskier CRE loans (e.g., construction, condo development, and land loans) with the better lending opportunities going to CMBS.

• Over $2 trillion in CRE loans mature between now and 2013 and a majority of those lack the equity to qualify for loans sufficient to pay-off the existing debt.

• Of those banks in the Deutsche CRE Outlooks’ bank universe that have assets of $25 billion or less (what the Outlooks label smaller regional banks and the community banks - 7,493 of them), they have 27.43% of their aggregate assets in CRE loans, while the larger banks (greater than $25 billion in assets) have only 6.05% of their assets in CRE loans.

• Deutsche Bank expects 1,853 of the smaller regional banks and community banks (collectively with $1.096 trillion in assets) to suffer $72 billion (6.56% of total assets) in CRE loan losses.

• From its total universe of banks in the Outlooks (7,542), Deutsche Bank expects 1,592 banks, collectively holding $1.531 trillion in assets, to lose 50% or more of their Tier 1 capital as a result of CRE loan losses.

Most experienced business executives understand the importance of having a plan with goals or objectives that are clearly communicated, reinforced not only by words but also by deeds daily, and against which all future actions are judged for comparison, particularly when dealing with problems that threaten survival. The plan should incorporate an understanding of the environment in which it’s being implemented and should address the problem, not simply the symptoms.  Commercial real estate loans generally are no better than their collateral, which is not liquid – notwithstanding the efforts of financial engineers to attempt to dress the illiquid wolf in sheep’s mortgage-backed securities clothing – and, in an environment where unemployment is greater than 10%, there appears to be general agreement that the greatest generators of jobs are small businesses, small businesses need loans, and politicians are screaming at banks to make loans, it seems fair to ask what’s the plan to save these community banks.

Railing against “Wall Street banks” with populist fervor isn’t much of a plan to save community banks.  Neither is marching Sherman-like through local communities, wiping out banks’ capital based on a regulatory-based drive effectively to mark-to-market illiquid collateral – especially when value recovery will take time as a number of smart people (including Bill Gross and the McKinsey Global Institute) believe asset value growth in the future will revert back to tracking closely GDP growth as it historically did until the leverage orgy that began in the 1980s.  Issuing updated loan modification guidelines (Fed’s press release) isn’t much of a plan or goal either – as a road to survivability, it doesn’t even rise to the level of rearranging the deck-chairs on the Titanic; at best, it’s mopping the Titanic’s deck before the chairs are rearranged.  If there is a plan for the community banks, it’s not been clearly communicated and present actions make it appear to be one of surreptitiously effecting a banking industry consolidation.

On the other hand, one might excuse a cynic for thinking that in a job-thirsty environment where credit remains tight and small businesses need credit, and where “creative” minds have fashioned “survival” plans that involved shoving aside bankruptcy law precedents for creditor class treatment in order to reorganize forcefully the auto industry, the granting of effective blank-check writing authority to Fannie and Freddie, and the willful granting of huge-dollar special deals to entice favorable votes on legislation, someone could do some unconventional thinking and come up with a plan to cover a defined period of time during which the short-term, capital-threatening pressure of illiquid collateral/assets held by the community banks is alleviated in order to ensure their long-term viability.

Sheila Bair Dispenses Good News and Bad

Ever the realist, FDIC Chairman Sheila Bair expects 2010 to be a "banner" year for bank failures, much "better" than 2009, when a mere 140 banks bit the dust. From clients and consultants I've talked to, I think she's quite correct. The only question is "How many?" We've previously blogged about various prognosticators who are convinced the final tally will be anywhere between 500 and 1,000 by the time the dust settles, and recently I've heard the number 1500 from people I respect. Whatever the final tally, many more banks will fail this year.

In her interview, Ms. Bair dropped additional hints about FDIC positions and viewpoints that should be of interest to those who are looking to read tea leaves and/or buy failed bank assets or deposits. For one thing, she said the FDIC is considering packaging groups of smaller banks, as the FSLIC did in The Southwest Plan of the late 1980s. You get more bang for your buck if you're an acquirer looking to build or add to a franchise if you can pick up more deposits in a targeted geographic area in one pop than you could through trying to buy smaller failed banks' deposits one-by-one. The FDIC will likely get more bidding interest through its use of packages. Higher bids mean lower FDIC losses, obviously.

Ms. Bair admits that bank closings are sad affairs, especially for community banks. Of course, most of the banks that are being closed are "too-small-to-save" so most the weeping is coming from the little guys, not the masters of the universe.

“There are some sad cases of long-standing community banks that had to be closed,” Bair said. “It’s not a happy thing to close a bank, but we’ve learned the hard way that if you put it off, it will only cost more later.”

Many pundits have been saying the same thing about the efforts of the federal government (including Ms. Bair's FDIC) to "kick the can down the road" with respect to residential mortgage loan borrowers by pushing aggressive loan modification programs. All you're doing, the critics say, is compounding the ultimate loan losses when the borrowers still can't afford the loan months or years later. By that time, however, Ms. Bair and her fellow travelers will be haunting the halls of academia, telling the folks in charge how dumb they are not to have seen this coming.

After all the blah-blah-blah was finished, the article ends with a simple line that is almost a throw away.

Bair plans to leave office after her term expires at the end of the year.

Well, paint me yellow and call me a canary. Sheila's publicly stating that she plans to move on down the road when her current term is done. I hadn't seen that bit of news in the main stream media previously.

For those who think Ms. Bair's one of my favorite punching bags, you might also think I'd be glad to see her go. No, I'm not, at least not prior to 2013. I fear her replacement might be even worse for banks, particularly community banks. Better the devil you know than the devil you don't.

After all, President Obama might appoint Elizabeth Warren.

Charter Bank Takes A One-Way Trip Through The Looking Glass

Late Friday, the Office of Thrift Supervision shut down, and placed into FDIC receivership, the first bank to fail in New Mexico since 1999. Charter Bank was owned by a company controlled by the Wertheim family, admired philanthropists and supporters of investments in low-income housing in New Mexico. Casual readers who follow such closing through the caustic #bankfailfriday hashtag on Twitter might chalk this up to just another poorly run bank that ran out of gas. However, there's more here than meets the eye.

Charter Bank management and Office of Thrift Supervision examiners argued for months over the quality of Charter's loans.
        The argument ended about 4:30 p.m. Friday when OTS officials arrived at the bank's headquarters in a small shopping mall at Eubank and Spain NE to declare Charter "unsafe and unsound" and appoint the Federal Deposit Insurance Corp. as the bank's receiver.
        The FDIC in turn handed Charter over to a Texas company, Beal Financial Corp., which will keep the Charter name and open for business as usual Monday.
        Charter's management, led since 2001 by bank President Glenn Wertheim, insisted that loans, mostly commercial real estate loans — which OTS said were troubled — were, in fact, being paid on time. OTS disagreed and ordered tens of millions of dollars of those loans to be classified as toxic.
        That classification, recorded as an entry on the bank's balance sheet, on paper lowered Charter's capital (money regulators require banks to make sure their deposits are safe) to levels well below those regulators regard as sound, even though virtually all of Charter's commercial real estate borrowers continued to pay their bills on time.
        "They had one judgment; we had another," Wertheim said in a Journal interview Saturday.

Glenn alleges that the OTS is being overly conservative on loan evaluations, collateral writedowns, and capital requirements because it's fighting for its life. He's not the first to make that allegation, and I think that there's truth in it.

The bone that stuck in my throat was the fact that the OTS ordered massive writedowns on commercial real estate loans that were fully performing. As a reader of Ed Morrissey's blog who calls himself "The Banking Guy" observed, just because a loan's paying now doesn't mean that it's not subject to classification as "troubled." That's a true statement as far as it goes, and without having knowledge of each individual loan, it's difficult to make a definitive judgment. However, another report said 95% of the loan portfolio was fully performing, yet the OTS declared the thrift insolvent and shut it down. That sends a chill through the hearts of community bankers throughout the country.

Those of us who were in the saddle in Texas in December 2005 saw the Federal Home Loan Bank Board ride into Texas and start marking-to-depressed-market the collateral values of commercial real estate, construction, and acquisition and development loans of savings and loans throughout Texas. As a result, Cease and Desist Orders were flying faster than the Roadrunner on crank. It was a tactic used by a regulator responding to political pressure to seize control of a situation. What they did was help accelerate a death spiral that might have been eased had less draconian measures been employed. They proved that they were tough guys, though. They were tough right up until Congress turned on them and put them out of business less than four years later.

If the OTS, the FDIC and the FRB want to do that to every community bank in the country today, they can wreak even more carnage than they did in the late 1980s. That's something to look forward to, isn't it?

There's another thing about this closing that is seldom, if ever, reported upon in the mainstream media. The people who owned this bank weren't a bunch of wheeler-dealers out to loot a bank or take outsized risks in hope of an outsized payday. Instead, they are, by all public reports, good guys. Certainly, the New Mexico Mortgage Finance Authority thought so.

Ed Morrissey, who's a big dog on the right side of the blogging spectrum, thinks that there's something "fishy" with this takeover by the OTS.

...[T]he fact is that the only reason the bank became insolvent is because OTS made the risk look worse on paper last fall.  Their loans were being paid back at a high rate, probably better than most that OTS allows to continue operations.  OTS appears to have set up Charter to fail with its new risk declarations.

Welcome to our world, Ed. It's a trip through the looking glass. The trouble with it is that real human beings, not fictional characters, suffer.

DAP: Please Just Die

Notwithstanding evidence that seller-funded downpayment assistance ("DAP" or SFDP") was demonstrably disastrous for the FHA (which is why Congress finally banned the practice), its proponents refuse to give up hope that the price-inflating, default-inducing DAP can rise from the grave. The latest redeemer wanna-be is Democratic Texas Representative Al Green (not the same Al Green who plagued the dreams of Ally McBeal). According to a recent story in BusinessWeek (hat tip to Housing Wire), Rep. Green is serious about pushing this bad idea forward.

A bill introduced by U.S. Representative Al Green, a Texas Democrat, and supported by the U.S. Conference of Mayors, would restart a program that allowed nonprofit groups to donate the 3 percent down payment low-income buyers needed to get FHA-insured mortgages. Sellers, often homebuilders, then contributed that amount, plus a fee, to the nonprofits.

The plan, which funded the purchase of more than 1 million homes over 10 years, was halted by lawmakers concerned about rising defaults and evidence that some buyers were overcharged. Those mortgages have soured at about three times the rate of other FHA-backed loans, according to agency data.

[...]

Green said he wants to revive the program with stricter screening and appraisals to reinvigorate the housing market. Doing so would put 300,000 families a year into homes, generating 235,000 jobs and more than $4 billion in tax revenue, according to AmeriDream Inc., a Gaithersburg, Maryland-based nonprofit that provided down-payment assistance in the past and supports Green’s plan.

“This is a program for decent, hardworking people,” said Green, a member of the House Financial Services Committee. “Don’t make the zip code where you’re born the determinant of wealth. The real question is not ‘Can the person make a down payment?’ It’s ‘Can they make the mortgage payment?’”

The bill has the support of 22 co-sponsors, including members of the Congressional Black Caucus and the Congressional Hispanic Caucus, both of which fought to keep the program.

In other words, major campaign contributors want Congress to resurrect a program that HUD estimates has cost it $14 billion in losses, losses that are backstopped by the American taxpayer. This will permit the FHA to once again insure loans to borrowers who have none of their own funds invested in the home they're purchasing, because builder-sellers have funneled the downpayment (incredibly small to begin with in the case of FHA loans) through non-profit community advocacy groups who are paid a "processing fee" by the sellers to "gift" to the borrower the downpayment advanced by the seller . HUD has convincingly shown that DAP FHA loans lead to higher prices and higher default rates.

The goal of putting more people in homes through hinky loans that a high number of borrowers will not repay makes perfect sense to...Al Green, sellers trying to sell homes, and non-profit groups that have sold themselves to builder-sellers who pay them fees to perpetrate this bad joke on the FHA. Of course "stricter screening and appraisal standards" will fix the basic problems of a concept is fundamentally flawed on its face. You believe that, right?

If you do, you'll be in the minority.

No amount of tinkering can save the program as long as sellers can contribute to the down payment and buyers have no capital invested, according to Lawrence Yun, chief economist at the National Association of Realtors in Washington.

“The whole structure is inherently fishy,” said Yun. “This was not a real arms-length transaction. There’s too much temptation for the seller just to increase the price to cover the contribution. The builders pushed this to try and increase sales, but the lender is left holding bag.”

The evidence that DAP FHA loans have been a disaster is overwhelming.

While seller-financed mortgages make up only 10 percent of those insured by the FHA from the beginning of 2001 to October 2008, they account for 31 percent of the agency’s losses during that period, or $3.8 billion, according to FHA data. The FHA estimated in November that the mortgages will cost it an additional $10.4 billion, almost wiping out the 2 percent loss reserves the agency is mandated by Congress to maintain.

About 13 percent of down-payment-assisted mortgages originated in 2004 have defaulted compared with about 4 percent of other FHA mortgages, according to agency data. The figures exclude mortgage re-financings.

[...]

Mark Everson, then Internal Revenue Service Commissioner, called down-payment-assisted mortgages “scams” in 2006 because of the way funds were passed from the sellers of homes to buyers through nonprofits.

“Organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements,” Everson said at the time. “So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the image of honest, legitimate charities.”

Supporters of DAP have cited a 2004 study by the Milken Institute to support the benefits of DAP. Unfortunately, that study has a wee bit of a problem.

The study’s lead author, Milken researcher Perry Wong, said he has since reversed his opinion.

“We’ve learned that to assume that if you just give someone a place in a community all sorts of good things will happen is wrong,” Wong said. “The model could work if you assist the buyer but not give the money away. The buyer has to have a stake.”

That's a problem that "tougher screening" and "stricter appraisal standards" can't address: skin in the game. If there's one thing that the problems we've seen with underwater residential mortgage loans over the last several years should have taught us is that when the buyer doesn't have it, he or she is more likely to walk away from the loan when times get tough.

Let's hope that this idea continues to slumber in the eternal rest that all bad ideas richly deserve and too seldom achieve.

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Two upcoming Bank Law Stuff webinars co-sponsored by Bank Business Advisors, LLC (in which this blog's author has a stake) may be of interest to readers. On January 27, 2010, Denver attorney (and Bank Business Advisors member) Tom Bieging and former banker and current banking consultant Larry Martin, principal of Bank Strategies, LLC, will present "Banks Under The Microscope: Today's 'Hot Buttons' For Bank Examiners." On February 3, 2010, Bank Business Advisors' John Walker will moderate a panel discussion with Larry Martin and Dan McDonald, Director of Loan Review Services at bank accounting firm Fortner, Bayens, Levkulich & Garrison, P.C., on the current and coming commercial real estate "freight train" and what its headlong rush down the tracks will mean for community banks.

The Silver Lining

President Obama's big bank bashing bonanza rolled on today with his announcement that he's going to crack down on the proprietary trading activities of "Big Banks" and otherwise pin their ears back. The major stock indexes went into a funk as Big Bank stocks took a hit. On the other hand, one man's beat-down is another man's pick-me-up. In a video posted today by Fox News, a reporter whose voice could peel the paint from the hull of a guided missile cruiser interviewed Steve Trager, the CEO of regional bank Republic Bank of Kentucky, and Steve was honest in his appraisal that what's bad for giant banks might actually be good for community banks. On the other hand, Steve's comments about his fear of any new regulations applied poorly and how they helped drive all but the biggest banks and a plethora of mortgage brokers "with no skin in the game" out of the residential mortgage market are on the mark.

Also worth a listen is a brief segment of an interview with Warren Buffett on risk management (also posted today by Fox News). His assertion that every CEO ought to be the firm's chief risk officer ought to be stamped on the foreheads of every bank CEO in the country. On the other hand, as Buffett has so aptly demonstrated in his career, eliminating risk is not a reasonable goal, but managing it is. That is, you can't eliminate it entirely if you expect to make any money. That's something the politicians would be well served to keep in mind as they, once again, embark on the Quixotic adventure of making sure that financial failure "never happens again."

Treasury Claims It Took Big Banks To The Cleaners

One of the most popular games in Washington, D.C. these days is poking fingers in the eyes of big banks to show "The Peeps" what a populist can do to a rootless cosmopolitan capitalist oppressor of the working man (and womyn). In that vein, the US Treasury Department today crowed about how it drove a hard bargain with the big banks who repaid TARP CPP money on the purchase price of the warrants those banks bought back.

The Obama administration said Wednesday it's increased the investment return to taxpayers by pushing banks to pay higher prices to repurchase stock warrants given to the government during the financial crisis.

[...]

The Treasury said the $2.9 billion it received in the repurchase transactions exceeded estimates it and others had made. Those estimates had put the value of the warrants at between $2.6 billion and $2.7 billion. Treasury said the initial bids from the banks, which it rejected, totaled $1.7 billion on this group of warrants.

"This report makes clear that Treasury's process for selling these warrants has been consistent, transparent and has delivered strong returns for taxpayers," Herb Allison, the head of Treasury's financial rescue program, said in a statement.

What Treasury didn't crow about was the fact that if the federal government hadn't engaged in bad faith after-the-fact changing of the CPP terms, the banks might not have paid back the CPP funds yet and those warrants would be increasing in value instead of being converted into cash which may very well be flushed down those TARP rat holes called "General Motors," "AIG," Freddie Mac," and "Fannie Mae," entities which will be paying back the money invested in them by the US Treasury when Porky flies over the White House and does a victory roll. But hey, that's just my take on the matter and as every reader of this blog knows, I'm just another bourgeois exploiter of the proletariat, a lickspittle idler and a kulak parasite, a Bonapartist pig, a Trotskyite fascist hyena, a revanchist, and a class traitor, who deserves to be gulaged.

Also getting a lot less public yodeling by Secretary Geithner and his merry band of warrant regulators is a plaintive cry last week from the Conference of State Bank Supervisors for a continuing taste of TARP to be served up for community banks to dine upon. The CSBS wants Geithner to take some of that TARP money that's been repaid and institute a program for community banks that (a) permits banks to qualify for TARP CPP if they can show that they'll be viable after receiving the CPP injection (as opposed to the previous requirement that they must be viable without the CPP), and (b) establishes a "functional and attractive small business lending program" that community banks can use to make loans to those small businesses that drive the economy. Our inside sources tell us that Treasury Secretary Geithner was so impressed with CSBS CEO Neil Milner's request that he personally dialed him up and quoted this famous of line of Jack Handy's: "It take a big man to cry, but it takes a bigger man to laugh at that man."

Frankly, I think Mr. Milner would have made more headway if he'd sent the letter to Ariana Huffington.

The Myth of Charter Shopping

A couple of months ago, we highlighted Fin Reg 21's Darrell Delamaide's assertion that Chris Dodd's charge that we need a single federal bank regulator in order to prevent the kind of "charter shopping" that helped to cause the great financial meltdown we're currently wading through was devoid of any evidence to support it.Today (again thanks to FinReg 21), we discovered that Philadelphia Inquirer reporter Harold Brubaker has gone one step further than Darrell by showing that the facts that do exist rebut Dodd's charge.

Banking law allows institutions to choose national or state charters, to be a savings bank or a commercial bank, and to deal more closely with the Federal Reserve or with the Federal Deposit Insurance Corp. as a regulator.

There is little evidence, however, that large-scale charter-switching has happened generally, or that the Office of Thrift Supervision, the alleged weak link in banking regulation, attracted large numbers of banks to its supposedly more lenient regulatory oversight.

From 1999 to 2008, 45 more institutions dumped the savings bank, or thrift, charter than adopted it, according to congressional testimony in August by John E. Bowman, acting director of the OTS. Thrifts, by definition, are supposed to focus on collecting deposits and making mortgages. Overall, just a tiny fraction of banks switch charters each year, according to data from the FDIC.

It's not easy to find a pattern in the charter "flips," as regulators call them, other than the particular needs of the institutions.

It's a terrible thing for a politician (or a trial lawyer, for that matter) with a story to spin when the facts get in the way. Nevertheless, that has stopped few of them from spinning until they--and the voters--are dizzy.

Let's hope that as more time elapses and more stories like these are written, the rush to "do something, anything" to "reform" and "restructure" the financial system is blunted and that what emerges from Congress is something based more on facts than on folk tales.

Bank of America's Galveston Fish Story

I realize that whenever a bank (or any other business entity) is sued these days the standard public response  is some variation of "the lawsuit is without merit and we intend to vigorously defend," but occasionally, you wonder why the bank didn't simply settle the dispute short of letting it get to the point where a lawsuit is initiated. Some claims are just public relations losers regardless of the legal issues involved. Take the case of the Galveston, Texas, homeowner who discovered that his vacation home had been seized by Bank of America, which thought it was taking control of a home on which it had foreclosed and which proceeded to change the locks on the house and turn off the power by throwing the main power switch.

Unfortunately, at the time the power was cut off, there was 75 pounds of  Alaskan halibut and salmon sitting in a freezer. The homeowner, a retired professor, and his wife were planning to throw a party for 30 guests. Instead, after entering the house a week after the power was turned off, they, and the police officers who responded to their call that their home had been invaded, were poleaxed by the overpowering stench of rotting fish. I assume it will take more than a single air freshener to police up the atmosphere in that dwelling.

“It was the most unbearable stench,” [homeowner Dr. Alan] Schroit said. “It was so unbearable the police officer asked if we could leave the house so he could take the report; it was absolutely horrible, a gooey mess.”

Needless to say, the fish fry was canceled.

The problem for Bank of America is that it seized the wrong house. The professor thinks the bank might have been looking for a house on another street with the same house number. However, he and his wife don't have a loan with Bank of America. I assume they're not likely to apply for one in the near (or distant) future. Whatever the reason for the error, that was a major "oops" moment for the nation's biggest bank.

The professor and his wife apparently are claiming that substantial damages were incurred as a result of the power being cut off, in addition to the rotting fish odor issue.

“The property sustained water damage, potential mold contamination arising from the standing freezer residue, water, heat and high humidity conditions during the time the electrical power was off,” according to the lawsuit.

Schroit said he kept doors and windows open for days to try to rid the house of the foul odor. Cleanup efforts were substantial, he said.

The floors had to be cleaned, as did the joists of a lower-level ceiling, through which fish blood seeped, and some painting had to done to get the house back to a “preinvasion” state, according to the lawsuit.

Perhaps the bank thinks the plaintiffs' monetary demands exceed the bounds of reasonableness. At this point, the bank isn't saying much other than it is familiar with the claims and "we do not believe the case will show merit.”

Maybe it does, maybe it doesn't. You can't determine that from the press report, although it does seem that because the plaintiffs are doing most of the talking, and that big banks aren't exactly admired by the reading public these days, the bank's image is taking a hit. Therefore, you'd think that unless the plaintiffs were trying to extract a windfall, the bank would want to avoid the bad publicity. After all, these stories give reporters a chance to publicize the fact that this isn't an isolated case for Bank of America.

According to an Oct. 30 article in the Floyd County Times, a Wheelwright, Ky., man filed a lawsuit against Bank of America for repossessing his home by mistake and refusing to pay for damages other than replacing the locks.

“Christopher Hamby arrived home on Oct. 5 to find the locks on his doors changed and winterization chemicals placed in the plumbing and various lines cut at the residence,” according to the article.

Hamby also did not have a mortgage with Bank of America, according to the article.