Bank Lawyer's Blog

Reading Between The Lines

Venable LLP partner Joe Lynyak's opinion piece in yesterday's American Banker (paid subscription required) concerning the new Consumer Financial Protection Bureau is a most diplomatic, carefully worded, yet cogent, piece of advice to whoever first takes the reins as the head of that bureau. I don't want to speak for Joe, who is certainly capable of speaking well for himself, but my take on his piece is that if the new Director overreaches, the blow-back from the industry will not be pretty. Again, that's my personal view of his opinion piece, and I've not discussed it with Joe. If you subscribe to the American Banker, read it yourself and make up your own mind. Personally, I'd advise Elizabeth Warren to read it, although she doesn't seem the type to take anyone's advice other than her own. Again, that's my personal opinion only, based upon years of reading her fevered, anti-bank bloviations on her blog and elsewhere.

Mr. Lynyak, along with community bank attorney Tom Bieging, will be panelists on a free August 4th executive briefing webinar on the impact of Dood-Frank on community banks. The panel will be hosted by me, but don't let that put you off. Joe and Tom will doing most of the talking. I'm there to set the table and deliver the occasional drive-by snark. In addition to the link above, there's a link to the landing page for the webinar in the sidebar to the left side of this blog. Registrations will be limited to 500, first come, first served.

And when we use words "complimentary" and "free," that means there's no charge. Don't do what one reader did a couple of days ago, and ask me for a discount. A discount on "free" means I pay you to listen and, as worthless as many of you think I may be, that simply isn't going to happen.

I'm traveling this week, so blogging will likely be nonexistent until later this week, if at all. I hope you all have a good week.

Small Business Lending Bill: Will They Or Won't They?

The sausage-making that's taking place in the Senate this week concerning the $30 billion small lending fund bill, a bill that also contains the CRE loss amortization provision we've previously discussed, is particularly unappetizing. While Senate Small Business Chairwoman Mary Landrieu vows to pass the bill this week, and community bank trade associations are pushing hard for passage, the American Banker reported this morning (paid subscription required), that the bill's prospects, once bright, have lost their glow.

A bill to create a $30 billion small-business lending fund — whose fate has swung wildly between almost certain defeat and imminent enactment — encountered problems again Tuesday as key Republicans voiced objections to the central provision of the legislation.

As recently as last week the legislation appeared to be on the road to easy passage in the Senate, but a vote was delayed by debate over regulatory reform. By Tuesday, however, the legislation's fate was once again unclear, as Senate Majority Leader Harry Reid considered scrapping the fund in the face of Republican opposition.

"The possibility of it being pulled is looking greater and greater," said James Ballentine, director of grassroots and community outreach for the American Bankers Association. "They cannot reach that magic number of 60 because there is not universal support for wanting to invest $30 billion into any program at this time."

The bill needs 60 votes in the Senate to avoid a potential filibuster.

In addition to their false (and cynical) chant of "It's just another TARP," the Republicans also have gummed up the works by trying to add provisions that would extend certain Bush Tax Breaks, set to expire at the end of this year. In addition, Colorado Democrat Mark Udall is trying to tack on an amendment that would more than double the size of the commercial lending cap for credit unions, which, understandably, has enraged community bankers, who have vowed to kill the bill if that amendment makes into the bill. Since the provision of the House bill that the Senate is now considering that concerns commercial real estate loss amortization was added to the bill by Colorado Democratic Rep. Ed Perlmutter, I wish Colorado Democrats would get together and decide whether they want to throw community banks a lifeline with a life preserver tied to the end of it or one with an anchor tied to the end of it.

At this point, it's too close to call, but don't hold your breath.

Thank goodness that the President signed the Dodd-Frank Dr. Terror's House of Horrors Act today and declared that "the “American people will never again be asked to foot the bill for Wall Street’s mistakes.” Now, I can sleep well tonight regardless of what happens to community banks or small businesses.

More Depressing Commentary on Community Banks

Reporter Alain Sherter of Bnet.com recently discussed a concern that I raised last week on the uncertain future of small community banks, and he does a nice job. After noting that last year, 45% of community banks increased their lending to small businesses (while big banks decreased their lending to the same borrowers), he notes some discouraging trends, both short- and long-term.

Of the 90 institutions that have failed this year, all had assets of less than $10 billion, and most were considerably smaller than that. Most of the more than 250 institutions that have collapsed since 2008 also fall in that category.

Although the financial crisis has accelerated the purge, the U.S. banking sector has been shrinking for decades. In 1990, there were more than 12,000 commercial banks, according to the FDIC; now there are roughly 6,700. That still may seem like a lot, but if the pattern continues, as many experts think it will, then the financial landscape could soon find itself bereft of the local lending that supports communities nationwide. After all, it’s not behemoths like Bank of America or JPMorgan Chase that are going to make loans to your neighborhood hardware store and laundromat.

Alain also discusses the fact that many community banks are in hot water because they concentrated on commercial real estate lending. Some readers have criticized me for noting the same thing without calling the many community banks who concentrated on CRE loans either "greedy" or "idiots" or both. Sherter, on the other hand, expresses a viewpoint that I share: CRE was one of the few bones the big dogs left the little dogs to gnaw on.

Over the years, heightened competition from large regional and national banks for business that was once important to community banks, such as commercial and industrial lending, has forced small institutions to focus on commercial real estate, along with residential construction and development. That’s why community banks have such high concentrations of these loans. Indeed, at roughly half of small banks, nearly three-quarters of their total loans are secured by real estate, according to the Federal Reserve Bank of Atlanta. And when those markets catch a cold, local lenders can get violently ill.

I guess all those community bankers were dummies, unlike second-guessers with no skin in the game who stand outside the arena and bleat.

However, Sherter also scores a bullseye (in my opinion) when he legitimately calls out those bankers who tried to grow too quickly, but then, hindsight is always 20/20, isn't it? We're all armchair quarterbacks at this point when it comes to commenting on "woulda-coulda-shoulda" happened during the go-go years. Few of us were prescient enough to forecast where all this was headed in time to head it off, and I have a strong suspicion that those few who raised alarms were dismissed as cranks or, in some cases, outright stepped upon. Still, Alain's correct to state "that putting a premium on rapid growth virtually guarantees errors in judgment."

Whatever the causes and whoever is to blame, at the moment people in D.C. seem less interested in doing whatever they can to ease the pain of the surviving community banks and to help them move forward than they are in enacting War-and-Peace-length legislation dedicated to fighting the last war. To Sherter (and to others, including me), that's a shame.

That doesn’t change the fact that we need small banks. The long-term economic health of the country demands it. But I have my doubts if there’s still a place for such institutions in an industry increasingly dominated by giants.

Private Equity Thaw?

A reader asked me if I thought that last Friday's acquisition of three failed banks by a group of former senior Bank of America executives and backed by what the FDIC considers to be "private equity," as well as the July 9 acquisition of failed Bay National Bank by Bay Bank FSB, indicates a thaw in the FDIC's (and the Federal Reserve Board's) icy attitude toward private equity's participation in failed bank resolution transactions. The short answer is "No."

I think that the FDIC is picking winners and losers among community banks and I think that it's doing the same thing among private equity investors. It's interesting to me that the highest-ranking members of last Friday's acquisition group's management team are former senior executives of some of the biggest of the Too-Big-To-Fail banks. That certainly sends a message to the banking community as to who has pull and who doesn't among the people making the decisions on these deals. Moreover, Bay Bank FSB is backed by Hovde Private Equity Partners, a long-time adviser and investor in bank transactions and an entity with long-established credibility with federal bank regulators. That kind of "private equity" is always going to have a leg up with the FDIC on the "other kind" of private equity, the kind represented by large, well-known New York-based private equity funds that the FDIC thinks don't have a track record, and aren't really interested in, running banks, but rather are interested merely in taking advantage of the current banking crisis to get in, get out, make a 15%-20% ROE in a relative hurry, and then move on the next new thing.

I certainly think that private equity has a role to play in this area (and should play, to lessen the ultimate losses to the FDIC and, therefore, to the commercial banks that fund the FDIC). I'm convinced, however, that unless there are substantial changes in the personnel in charge at the FDIC, or economic circumstances deteriorate even more drastically than expected, certain private equity players who want to play in this game are going to need a new game plan. Frankly, I think it would be smarter for those who want to buy broken banks to first buy a solvent one (as did Gerald Ford and Wilbur Ross) and use that as a platform to begin the bidding process for failed banks. The shelf charters have been successful for a few, but only a few, thus far.

Of course, that's just my opinion today. I could be wrong, and I may change it on a moment's notice.

Banks and Social Media: Banks Lagging Their Customers

Being a blogger about banking law for over six years, I’ve developed an interested in social media use by banks, and I’ve posted about the topic on this blog (when I can tear myself away from the siren call of bashing bank regulators, stealing walkers from the elderly, and stuffing cats in the microwave). In the course of my travels around the country speaking about the legal aspects of this topic, I served on a panel with a smart, engaging speaker named Shari Storm (pictured to the left), a published author of a book on business management principles, mother of three little girls, and also the Chief Marketing Officer for Seattle-based Verity Credit Union. Verity was an “early adopter” of social media as a branding and marketing tool, including the use of blogs that are written by the institution's employees and that are hosted on the credit union's web site. When people ask me to point them to examples of financial institutions that seem to “get it” in the effective use of social media, I always point them in the direction of Verity.

Recently, I became aware of a social media campaign that Shari developed for Verity that involved the credit union’s blog, Youtube.com videos, a contest, and the credit union’s members competing with one another to promote the credit union through social media. I was impressed, and although pure marketing and branding issues are something that I only occasionally address, I asked Shari to give a webinar for BankLawStuff on the campaign and what she and Verity learned about social media through the process, and she agreed. It’s being presented this Tuesday at 11:00 a.m. Central Time. If a reader of this blog isn’t interested in the topic, he or she might pass it along to their institution’s marketing personnel.

Computerworld ran an article Friday about the gap between the desire of consumers to interact with companies through social media and the ability for businesses to do so. Banks and other financial institutions have been notoriously slow to adopt the “new media” as compared to other business that interact with consumers and I don’t see that trend suddenly changing.

"Social media is changing the way businesses, customers and employees interact, and this creates significant opportunities for contact centers and the enterprise as a whole to leverage the integration of these tools into business processes," said Yankee Group analyst Zeus Kerravala in a statement. "As integration of social media improves within the contact center and with unified communications and collaboration, businesses can improve customer interactions and positively impact employee productivity and collaboration."

The study notes that businesses may not be using social networking sites or adopting enterprise 2.0 tools fast enough to satisfy many of their customers.

Yankee and Siemens Enterprise reported that nearly 60% of those surveyed said company outreach through social media would make them more loyal to that company. Most of those surveyed said they want companies to monitor social networks for customer comments and complaints.

What that tells me is that those institutions that have “gotten with the program” concerning social media are opening up a wide lead on those that still start a fire by rubbing two sticks together. I think that gap may only grow wider as banks slug it out for customers in an economy that remains in the doldrums.

Every Death March Starts With A First Step

To commemorate today's passage by the Senate of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act, I thought I'd post a chart sent to me by John Hall of the American Bankers Association:

It's not merely that the Act itself is so incredibly long in comparison to earlier pieces of financial reform legislation that each issued the guaranty: "Never Again," although that's astounding, it's that Congress took so many words to say all that it thought it needed to say on this "comprehensive reform," yet left so many pages of pain yet to be concocted by bank regulators through the rule-making process. According to the US Chamber of Congress, the bill calls for 533 new regulations. If idle hands are the devil's workshop, then federal bank regulators will be holier-than-thou for many moons to come.

Of course, so will bank lawyers, who must "parse the nuances," looking for loopholes, identifying the dragons that must be slain, and doing whatever else it is bank lawyers do when gnawing on a fresh Mastodon carcass. Every bank lawyer and his or her third cousin twice removed "Ernie" will be billing hours like there's no tomorrow, because like it or lump it, bankers simply have to know the road map through this Brave New World and who better to draw that map than a person with an "Esquire" behind his or her name? Oh, sure, the usual suspects among the "consulting firms" will get in their licks, as well, but all-in-all, Dodd-Frank might as well have been named "The Bank Lawyers Perpetual Employment Act of 2010." And as our clients are always fond of saying: "Hey, if my lawyer's happy, I'm happy."

This IS the greatest country on God's Green Earth, is it not?

Speaking of road maps, I'll be moderating a free 45-minute Executive Briefing webinar on August 4, starting at noon Eastern Time, sponsored by Bank Law Stuff, to discuss the expected impact of the new law on community banks. The panelists will be Joseph T. Lynyak of Venable LLP's Los Angeles and Washington, D.C. offices, for an inside-the-beltway view, and Tom Bieging of Denver's Bieging Shapiro and Burrus LLP, counsel to the Independent Bankers of Colorado, for an outside-the-beltway perspective. Although there will be no charge to registrants for the briefing, we'll be limiting registrations to the first 500. I'll post a link to the registration page in the "Bank Law Stuff Webinars" sidebar to this blog once the registration page is up (which will be sometime early next week, at the latest) and we'll also send out e-mail "blasts" to those on the mailing list of our partner in Bank Law Stuff, Bankerstuff.com. If you're interested, check back on the blog.

The upside, in addition to the cost, is that you may glean some nuggets of wisdom from my panelists. The downside is that you'll also have to listen to the author of this blog occasionally babble. You'll just have to hope that the good outweighs the bad.

Some Community Banks' Response To Financial Reform: See Ya'!

Many community bankers are looking forward to the brave new world under Dodd-Frank, which appears certain to pass the Senate in the very near future (perhaps tomorrow), with the same eagerness the crowd in Greeley's saloon at the end of the movie "Unforgiven" anticipated the next movement of the trigger finger of Clint Eastwood's character, William Munny. All things considered, my guess is they all would have preferred to be upstairs with "the gals."

One of the more painful aspects of the new legislation for community bankers is the focus of a recent article in the Baltimore Business Journal. That is the fact that it is certain to add much more expense in regulatory compliance to an already substantial expense burden.

Now, bankers say, they are facing as many as 30 new regulations.

Among the changes: They will have to provide regulators with reams of new information about loans to small businesses and other customer transactions. They will be required to disclose more information to consumers about mortgages and other loans. And banks will see limits on how much they can charge retailers for processing debit card transactions, reducing a significant revenue stream.

“It will be a new world for community banks,” said Kathleen Murphy, CEO of the Maryland State Bankers Association.

The new rules will be on top of 50 regulations already imposed on banks in the past two years, bankers say.

Although bankers admit that it's too early to quantify that additional cost burden, no one thinks it will be minimal.

While consumer advocates (and some community bank lobbyists, who've been patting their own backs until their arms have broken) point out that community banks have made out much better than big banks under the new legislation, big banks have more heft to absorb the additional costs of compliance. That, according to the CEO of the Maryland State Bankers Association, means that many of the smaller banks may very well decide to call it quits and merge with larger banks. That is an expected trend we've discussed previously, and one that will likely accelerate as the regulatory agencies begin their inexorable march to enact the thousands and thousands of pages of new regulations mandated by the 2300+ legislation. Many trees will die, but so will many community banks.

With or without a "hidden agenda," the burden of being a small community bank bobbing on a vast ocean of churning regulations may cause many to hop into the nearest lifeboat that paddles their way, getting out of the water before they drown.

Let The Games Begin

The following is sung to the tune of "Hey, Hey, We're The Monkees"):

Here we come, walkin'
Down the street.
Get very painful looks from
Every banker we beat.
Hey, hey, we're the Bair-ees
And people say we're callous and cruel.
But we're too busy suing
To admit that we're an enormous tool.*

*Either alternative definition provided would be applicable.

After over a year of breathless pronouncements that FDIC lawsuits were "just around the corner," the Los Angeles Times ran a story this week (hat tip to a regular reader who sent me a link) that reveals that the corner has finally been turned. That's not good news for officers and directors of failed and failing banks.

Federal regulators have filed a $300-million negligence lawsuit against four former executives at IndyMac Bank, accusing them of granting loans to home builders who were unlikely to repay the debts.

The lawsuit, filed July 2 in federal court in Los Angeles, is the first professional liability suit that the Federal Deposit Insurance Corp. has brought in connection with the spate of more than 200 bank failures that began in 2008. FDIC spokesman David Barr said Monday that the agency generally has three years from the date of the failure to file civil cases.

Here's the "money" allegation from the complaint:

“HBD’s management pushed to grow loan production despite their awareness that a significant downturn in the market was imminent and despite warnings from IndyMac’s upper management about the likelihood of a market decline,” the FDIC said in its complaint.

The defendants' legal counsel spun the story with a different plot line:

Defense attorneys Michael Fitzgerald of Los Angeles and Kirby Behre of Washington denied that the defendants had been negligent. No one at the company or its regulators foresaw the severity of the housing crash before it struck, they said.  

“The FDIC has unfairly selected four hard-working executives of a small division of the bank … to blame for the failure of IndyMac,” said Behre, who represents Shellem and Koon. “We intend to show that these loans were done at all times with a great deal of care and prudence.”

While "the truth" may lie somewhere in between these parallel universes, I hope that depositions are taken of Sheila Bair and that she is asked about statements like the one she made on NBC's Today show in May 2009: "Even I didn't think things would ever be this bad." I also hope that defense attorneys drill down as to what the FDIC did know about the coming apocalypse and when did they know it. According to some e-mails I've received from an insider, the FDIC may have known plenty a lot earlier than anyone in the private sector did and may have gagged FDIC employees who tried to raise the alarm at a time when the mortgage market was blowing and going and the banking business was fat and happy. Wouldn't it wonderful to have everyone's dirty laundry aired publicly, not merely that of parties with a D&O policy?

UPDATE 7/14/10: Kevin LaCroix posted about this case in more detail and included a link to the Complaint.

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I've altered the "feed setting" of this blog to include only excerpts, which will require readers who subscribe to this blog through an RSS feed and who normally read the entire post in their reader, to click on the link in the feed and visit the blog in order to read the entire post. It's what Housing Wire, Re: The Auditors, and certain other bloggers do. It's part of my effort to make it a little more difficult for content thieves like the scum I wrote about a couple of days ago to violate copyright laws. I trust that won't be too much of an inconvenience.

Is The Small Bank Headed To Extinction?

A business reporter speculates on a subject that we've been concerned about for some time: the prospect of the drastic reduction in the number of community banks in the wake of the current economic recession (and perhaps "double dip" recession). In New Mexico, New Mexico Business Weekly reporter Dennis Domrzalski asks the question, "Are federal regulators on a mission to decrease the number of banks in the United States?"

As regular readers know, my personal opinion is that the answer to that question is "Yes." Other talking heads either agree or disagree. Jerry Walker, CEO of New Mexico's Independent Community Bankers Association agrees, and wonders "Why should they [federal bank regulators] be picking winners and losers?" Well, Jerry, because they can, that's why, and that's the only justification they think they need to give, other than when it comes to picking macro trends that affect all of us, who better than lifetime bureaucrats? Or circus clowns? Or a trained cockatoo? Certainly, the "unseen hand" of the market shouldn't be trusted to pick winners and losers! Nobody has believed that since...oh...November 2008 or so.

Of course, bank regulators publicly scoff at the notion of a "hidden agenda." Julie Stackhouse, senior vice president of supervision at the Federal Reserve Bank of St. Louis flatly denies the very existence of such an agenda, hidden or exposed.

“I can assure you that there is no agenda to reduce the number of community banks,” Stackhouse says. “But with the challenges they are facing with commercial real estate [loans] and with profitability, it is going to be hard for some of the institutions to survive.”

Banks in small, shrinking agricultural communities will have a hard time surviving, as will those in more populated areas with lots of competition, Stackhouse adds.

She says small banks might not have the resources to keep up with increasing regulatory burdens or changing technology, and might consider merging with other banks.

“We have had little consolidation activity in the past few years, and that signals that there might be opportunities,” Stackhouse adds.

I don't know about you, but when a federal bank regulator assures me that something doesn't exist I immediately call my broker or bookie and "go long" on the existence of whatever has just been denied. It's just a little personal quirk of mine, but I've yet to lose money on it.

Many community bankers and their trade representatives and advisors also come down on the side of "hidden agenda" and point to the too-small-to-save bias of the FDIC and other federal bank regulators for the past several years. Karen Thomas of the ICBA contends that the "harshness" that bank regulators have shown toward community banks has led many small bankers to believe “that they are being run out of business.”

Bank consultant Joe Badal declares himself an evangelical agnostic on the issue of the existence or nonexistence of a hidden agenda, but says that motives don't make much difference, because the effect of the regulators' actions is the same whether they are consciously engaged in an downsizing effort or just inadvertently acting like a crazed water buffalo running amok in a rice paddy.

...[H]e says regulators’ actions in requiring banks to write down commercial real estate loans could have a disastrous long-term effect.

“I can’t determine motives, but it makes no sense,” Badal says. “They’re telling every community bank in New Mexico to cut back on exposure to commercial real estate. In most communities, if you can’t do commercial real estate, you can’t do anything. The impact this is having on small banks, in my opinion, is insidious.”

When regulators demand that a bank write down its real estate loans to reflect current market values, they are creating a “self-fulfilling prophecy” that will lead to more bank failures, says Badal, owner of Joseph Badal & Associates Inc.

Badal says once a loan is marked down and a property sold for less than the amount of the original loan, it creates a “comparable” price in the real estate market that appraisers, loan officers and regulators use to analyze other loans and properties.

“Every time they liquidate collateral, they send the comparable down, and that undermines the collateral of every loan in the system,” Badal explains. “It’s an avalanche that grows in size and speed and power every time another bank is taken down. It doesn’t just affect the valuation of the troubled bank, it affects the collateral of every bank and of every lender.”

I hear choruses of "Amen, Brother Badal" singing forth from community bankers across the country.

Taking a more Panglossian view of things is the CEO of a small New Mexico bank, Ron Shettlesworth, who thinks that bank consolidation will inevitably lead to a wave de novo bank start-ups, as happened after the banking and savings and loan crisis of the late 1980s and early 1990s. The problem with that view is that when the wave of de novo bank applications commenced, there was no federal regulatory bias against de novo banks. That is no longer the case. As readers of this blog are only too well aware, the FDIC believes that too many of the failures in the current crisis are de novo banks. Also, as anyone who's been involved in the process can tell you (even those few who ultimately have successfully completed the process), getting a de novo bank charter through the federal regulators over the last several years has been as difficult as getting Lindsey Lohan not to self-destruct, and I don't see that process becoming any easier if bank regulators think that de novo is synonymous with de-lousy. Regulators will fight the last war by making it very difficult to start a new bank so that there are no de novo banks that might fail in the future. If there truly exists an agenda to permanently reduce the number of banks by 25% to 30%, then don't expect a "wave" of de novo banks to again occur as we've seen in the past.

MyWayLending.Com Steals My Blog Posts

People behind a web site that calls itself "MyWayLending.com" have been taking my blog posts as soon as they are published on this blog and, without my permission, publishing them in their entirety on the MyWayLending.com web site. Like this post from July 7, 2010, for example. The content thieves who run that site give my posts my byline, but no indication that the post was originally published on and copied from Bank Lawyer's Blog. A reader of one of my posts at MyWayLending.com would think that "Kevin Funnell" drafted the post for publication at MyWayLending.com. It's akin to me taking an article from The Wall Street Journal written by reporter Damien Paletta and publishing that entire article under Paletta's byline on my blog, without seeking permission from the Wall Street Journal to do so and without any indication that the story was originally published in the Wall Street Journal. This is not "fair use" under US copyright law; it's a violation of the law.

I would have contacted someone at that web site about this, but if you take a look at the site, you'll notice that there is no information available about who is behind the site. There's no "About" or "Contact Us" or any similar tab, no terms of use or privacy policy, and, in fact, no information at all. That's not just odd, it smells extremely fishy, and not "fishy" in the sense of a well-grilled Atlantic Salmon filet with a piquant demi-glaze of morrel sauce, but "fishy" in the sense of the stench thrown off of a school of dead groupers washed up on a beach after 5 days in the hot sun.

I'll do some investigation about who's behind this den of content thieves, such as checking out who're listed as contacts with the domain name registrar. If they're pilfering my content without permission, I suspect that many of the other posts on that site have been "scraped" from other blogs and online publications without permission. The fact that they try to collect personal information from visitors by offering a "free" publication while giving out no information about who runs or owns the site is also a huge red flag that the FTC and/or state attorneys general might be interested in looking into further. In the interim, if any reader knows anything about these clowns, I'd appreciate an e-mail. 

It will be interesting to see how long it will take these jerks to react to the title and content of this post once it's automatically scraped and republished on their site. They appear to be shameless, so I suspect it won't make a bit of difference to them.