Bank Lawyer's Blog

WikiLeaks' Waterloo?

While big-time bloviator and full-time loose canon Bill O'Reilly (supported by ordained minister Mike Huckabee) demands the death of the WikiLeaks leaker, and sneers at the more restrained response by the Obama administration, Fox News' news-fox Megyn Kelly, a lawyer, points out that legal options are limited in "going after" WikiLeaks head Julian Assange. Apparently, many folks won't be satisfied until Luca Brasi pays a personal visit to Mr. Assange and leaves his lifeless body moldering at the bottom of an abandoned mine shaft.

Personally, I don't see why Pfc. Bradley Manning, the Army intelligence functionary who is the accused WikiLeaks leaker and who Mr. O'Reilly and Rev/Gov Huckabee want to see dead, shouldn't have been kicked out of the Army for violation of the US Military's often overklooked "Musical Don't Ask, Don't Tell" policy, which is still enforceable. It bans, among other musical genres, Broadway show tunes, disco, anything by a single-named singer (other than Shakira), and anything by Bette Midler, Liza Minelli, and most especially, Lady Gaga. It's also survived consitutional challenge. In fact, who can forget Chief Justice Roberts' famous edict in the majority opinion in Madonna v. Rumsfeld: "It is a self-evident truth that any singer who wears feathers sucks."

Let's be frank here (no pun intended): the guy brought a Lady Gaga CD to the office, which he erased and used to download the classified information he stole. He even mouthed the words to Lady Gaga songs while he did it, presumably to fool his mates into thinking he was listening to Lady Gaga instead of stealing secrets. Isn't listening to Lady Gaga, much less mouthing the words to her songs, grounds for instant incarceration and a forthwith dishonorable discharge under the Code of Military Justice? If he'd been shackled, gagged, and booted out of the service the minute anyone around him saw the Lady Gaga CD, and certainly as soon as they watched him mouth "P-p-p-poker face, p-p-poker face," the problem would have been solved without the "shocking" disclosure that most of the Arab world wants Mahmoud Amadinejad to take an Israeli missile up his nether regions.

For all those howling for the head of Mr. Assange, it appears that he's about to bite off more than he can chew. According to Andy Greenberg at Forbes (h/t Calculated Risk), and the New York Times Dealbook, it appears Mr. Assange plans to release early next year allegedly damaging information about a large US bank, which might be Bank of America, and its nefarious "practices" (involving something nefarious we'll just have to wait to see). I'm not sure that Mr. Assange understands that when it comes to countermeasures, a large US bank makes the US government look like Mother Theresa in a particularly beatific mood. Sure, the US government can unleash Delta Force, CIA assassins, and [shudder] Hillary Clinton on Assange, but Bank of America or Citigroup or JPMorgan Chase (whoever the big bank turns out to be) have people far nastier and much more lethal: the guys who foreclose on people's homes. Those folks don't care whether you're actually in default, have a loan with them, or even own the house, they're taking it and they'll take your parrot, too. A little thing like "international law" isn't going to be a speed bump in their road to revenge.

So, if we find Mr. Assange trying to swim a Swedish fjord wearing concrete flippers and a mask filled with phosgene gas, it won't be because Sweden wanted him for sex crimes, or the US wanted him for espionage, it will be because he crossed a big, bad American bank and wasn't wearing a cup.

PE and Bank Acquisitions: On The Outside Looking In?

In today's American Banker (paid subscription required), Alexandrs Rozen conducts an extensive interview with Blackstone's CEO, Hamilton James, on a wide range of topics. However, the snippet that most interested me was James' revelation that Blackstone and other private equity big-whigs were finished with additional efforts to try to get into the banking business, thanks to the federal banking regulators.

PE's investment in banks — a lot was made of it on the eve of the credit crisis. Where does it go from here?
It is pretty much over. The FDIC doesn't really want to have PE taking over the ownership of banks. Politically, people worry that "If they [sponsors] control the banks, will they use the banks to do something that serves them?" I don't think that would ever happen, but, nonetheless, it is not worth the political flak of doing that.

So they have set up a set of rules where PE is held to a higher standard than other banks, even foreign banks, which are moving the jobs out of the United States into other countries, and which is an oddity. At least PE would keep the jobs here. But, nonetheless, reflecting the political realities, that's pretty much over in terms of a lot of PE capital going into banking.

James doesn't mention the Federal Reserve Board, but its attitude toward private equity players like Blackstone is similar to the FDIC's.

Ironically (or perhaps not), just last Wednesday, the American Banker ran an article that made a quite different contention concerning private equity investments in banks.

Private-equity firms willing to fund cash-strapped banks are snatching opportunities from more traditional consolidators.

That article related incidences of private equity investors stepping in to recapitalize distressed banks before they failed. In doing so, they're thwarting other banks in better financial condition who would be willing to buy those banks. The article's author, Kate Davidson, also contended that some banks (the story focused on those in the Pacific Northwest) that had increased their capital in order to take advantage of FDIC-assisted acquisitions appear to be running out of opportunities. Future "failure prospects" of an attractive size appear to be raising capital prior to their failure and the remaining banks that are likely to fail are generally too small to make deals worthwhile.

I take away a couple of preliminary thoughts from these stories. First, these trends seem to be signs that the bottom of the bank failure trough is in sight. The FDIC contends that this year will be the high water mark for bank failures (although next year won't exactly be a bed of roses for the 860 banks currently on the the FDIC's problem bank list). Barring a double-dip or some other set-back to the economy generally (which in this day, with the feckless political leadership in D.C., is always a risk), maybe the FDIC is correct. I certainly hope so.

Another thought that occurs to me is that Blackstone's exit reinforces a supposition I expressed in September: there's "private equity" and then there's "PRIVATE EQUITY." Some are winners and some are not. Notwithstanding the fact that Blackstone has been involved with some early successful FDIC-assisted deals (for example, Bank United), it appears that they've decided that the regulators don't view them as the "right kind of private equity" going forward.

The High Cost of Enforcement

Last week, Bank Safety and Soundness Advisor (paid subscription required) ran a disconcerting story about the high cost of enforcement orders to banks that receive them. While bank regulators usually consider enforcement orders the slap up-the-side-of-the-head that many banks need to get them to deal with their problems, in many cases the banks that receive them are smaller community banks in poor financial shape, and the adverse financial impact of the enforcement order adds to the sense that the bank's joystick is frozen in the forward position and that the bank is spiraling toward the ground with little hope of pulling up.

According to bank consultant Ralph Dowling, bankers jaws hit the floor when he tells them that "a $100 million community bank will spend between $750,000 and $1 million in additional expenses, including hiring outside consultants, regulatory counsel and increased FDIC insurance premiums."

And that doesn't even include lost opportunity costs. "This drag on earnings is aggravated and enhanced by lost opportunity costs and the narrowing of margins due to deposit restrictions," Dowling notes. "Standard orders severely restrict new lending activities and place additional strain on customer development and service levels, as well as negatively affect profitability."

Another CEO of a bank that has been under an enforcement order since 2007 estimates that the cost to the bank has averaged $500,000 a year, excluding attorneys fees. There's no telling what the legal eagles add to that figure, but it likely isn't an insignificant amount. As one former state bank supervisor once told me when approving my firm's legal fees (our firm was brought in with the approval of the regulator after the bank was placed under an enforcement order, in order to help them work through their problem assets as well as stay on the straight and narrow path going forward), "You pay for your thrills."

One of the very burdensome costs comes from higher FDIC insurance premiums, due to the fact that the bank is in a riskier category that mandates higher premiums. Attorney Jeff Gerrish, a former FDIC regional counsel, states that many banks are appealing their examination results primarily because higher FDIC insurance assessments are a frightening prospect. I don't think that's going to bring a tear to the eye of any bank regulator, however. Again, "You pay for your thrills."

As to additional indirect costs, one bank's CEO complains that bank officers spend so much time complying with the demands of the regulators as mandated by the order, that they're too busy to fulfill many of their other responsibilities, like actually running the bank and making money. There's no question that's usually the case. However, the banks that are featured in this story appear to be operating with their third, fourth, or fifth CEO, and one suspects that the CEOs now in charge are (or should be) executives with previous experience in managing and attempting to turn around distressed banks who have operated under such regulatory controls and time demands. If not, the banks better get one if they hope to have any chance to avoid the death spiral.

Dowling outlines an "action plan" for any bank that is operating (or appears likely to have to operate) under an enforcement order. I suppose it's only fair that if anyone is interested in reading all of his thoughts on such a plan, they ought to consider paying for a subscription. Nevertheless, I will say, self-servingly, that the number one item on his action plan is to hire "qualified, experienced regulatory counsel." While you won't like to hear everything they have to say, you need to hear it. And while you won't like having to pay their fees, "You pay for your thrills."

Happy Bird Day

This turkey of a blog is off for the rest of the week while its author commits several of the Seven Deadly Sins.

Regardless of whether you eat your turkey left-handed or right-handed, have a Happy Thanksgiving.

And to those few correspondents who seem to feel compelled to respond to the radio waves transmitted from the planet Mongo through the fillings in their teeth, please remember that the tin foil in which the turkey is wrapped can be refashioned into a heck of a festive hat.

Dodd-Frank: The Lobbyist's Mescaline

The ether was wearing off. The acid was long gone. But the mescaline was running strong. Good mescaline comes on slow. The first hour is all waiting. Then about halfway through the second hour, you start cursing the creep who burned you because nothing's happening. And then - ZANG!
---Hunter S. Thompson, "Fear and Loathing in Las Vegas"

If you thought that the lobbying that occurred during the run-up to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act was hot and heavy, the Washington Post's Amanda Becker says that you ain't seen nothin' yet.

The Dodd-Frank Wall Street Reform Act has generated more work for lawyers and lobbyists since being signed into law than during even the frenzied days leading up to its passage in the House and Senate last summer.

That's because a host of federal regulatory agencies are now in the process of trying to write the rules that will turn the law into reality.

Work has begun on drafting 243 rules and on 67 separate studies by the likes of the Treasury Department, the Securities and Exchange Commission, the Commerce Department, the Commodities Futures Trading Commission and other regulatory agencies, according to one estimate by the law firm Davis Polk & Wardwell.

"In a way, during the run-up to the legislation, while it was very active, there was a limit to how much people could really influence the statute," said Covington & Burling's Mark E. Plotkin. "The implementation phase is really industry's opportunity to influence what the final product looks like."

The gravy train appears to be engineered by those law firms with big D.C. offices and ex-government lawyers who know somebody who knows somebody who knows somebody who will "take a meeting."

Some of the attorneys making the most frequent appearances come from the District offices of Alston & Bird; Gibson, Dunn & Crutcher; Patton Boggs; and Skadden, Arps, Slate, Meagher & Flom. Winston & Strawn's Peter Y. Malyshev, who has attended dozens of commission meetings, said the "unprecedented" scope of the rules that must be drafted over the next year has prompted the CFTC to "reach out very actively to both the business community and the legal community to explain the rules' likely impact and what the unintended consequences might be."

Delta Strategy Group's Scott Parsons was one lobbyist who met frequently with CFTC staff. Parsons says Delta's specialty in commodities and derivatives gives the firm a leg up in helping clients through the implementation of Dodd-Frank.

"We were doing derivatives before derivatives were cool," Parsons added.

Imagine a land where "derivatives are cool." Then, imagine that land layered with lobbyists and lawyers. Now, imagine an ICBM carrying a B83 thermonuclear warhead plowing straight into that land.

Yeah, I know. As the Chevy Hemi guy would cry: "Sweet!"

Well, dream on, dear banker, because reality bites, and in the real world of D.C., the fun has only just begun.

Both lobbyists and lawyers say Dodd-Frank work is unlikely to dry up anytime soon. Plotkin reports he recently requested three additional associates to keep up with client demand. Most attorneys estimate the rules will be hammered out over a period that will span not months but years.

Years of billable hours and fat retainers. So it was in the beginning. So it shall always be.

ZANG!

Ending Not With A Bang But With A Whimper

Two years ago, the banking, business, and legal trade papers and blogs were abuzz with the merits of the claims made by Citigroup against Wells Fargo and Wachovia over the machinations of those organizations and the FDIC in the sale of Wachovia first to Citi and then to Wells Fargo. Opinions flew back and forth as to whether the FDIC had double-dealt Citi, whether the bailout bill in 2008 had given the FDIC an iron-clad right to stab Citi in the back, and who would be left standing when the dust finally settled. In a society riddled with ADHD, press and reader attention soon turned to more pressing matters, like Tiger Woods' wife taking a 9-iron to his cranium, Lindsay Lohan's latest rehab relapse, and the eternal debate over which man has the better tan: Angelo Mazilo, John Boehner, or George Hamilton.

Last week, we learned that rather than winning tens of billions of dollars, Citi settled its claims against Wells Fargo and Wachovia for a measly $100 million. As one observer told a reporter in a fit of understatement, "the $100 million amount seemed low relative to the stakes in the dispute. " Heck, $100 million will likely not even cover Citi's legal bills, given the billable hour diarrhea that afflicts large law firm litigation sections when feasting on a massive, tasty carcass like Citigroup's.

Bert Ely, one of our favorite gadflies, made a "most excellent" comment on the difference between the $80 billion in damages claimed and the $100 million paid to settle the lawsuits.

“You could look at it as being the equivalent of a breakup fee,” said Bert Ely, a banking consultant based in Alexandria, Virginia. “That’s not an unreasonable way to do it because in effect Citi didn’t get the deal.”

Not only "in effect" didn't they get it, Bert, but they didn't get "in reality."

From the perspective of Wells Fargo, another observer was right on the money when he said that $100 million is spare change.

“The settlement amount is trivial, I think, a very modest, low amount relative to what Citi was claiming in damages,” said Bill Bradway, the founder of banking consultants Bradway Research LLC. “$100 million in the big scheme of things for Wells is more or less a drop in the bucket.”

Since Citi later needed a big bailout from the Treasury, which now owns 11% of it, it could be argued that Wachovia went to the better acquirer. On the other hand, we'll never know what positive effects on Citigroup the acquisition might have had that would have lessened the amount of assistance Citi ultimately needed from Uncle Sam. There's also the fact to consider that from the impact on the FDIC insurance fund, the unassisted Wells Fargo transaction was much better than the assisted deal that the FDIC had agreed to do with Citi. 

Perhaps one indelible lesson to learn from this is that what seems like such a "big deal" at any one point in time often ends up being worth not more than a few paragraphs of electronic "ink" when it's finally put to bed.

Unfair and Unbalanced

To those readers who write to berate and/or mock me for my occasional typographical errors, I raise in my feeble defense the following: (1) I must squeeze in most of these posts at the end of a work day spent on matters more pressing than the subjects I often deal with here, matters that usually involve the turn of screw on someone's pinky other than mine or my clients'. That's hard work, but if I don't do it, which of the million-plus other lawyers in this over-lawyered society will do it with the same sense of  noblesse oblige that I bring to the dance? Yeah, that's what I thought. (2) Proofreading takes away from billable hours and, as every client knows, there are only 35 billable hours in any calendar day. (3) I often (ok, usually) blog drunk. Isn't that obvious? (4) Most of my time these days is consumed with gaming the "Dancing With The Stars" voting system in order to ensure that my favorite Rhodes Scholar/Teen Activist Bristol Palin continues to advance to toe-tapping, mirror-balled glory and a legitimate occupation as an un-exotic dancer.

Therefore, if the random typos and grammatical missteps annoy you, spend your days reading a dictionary and leave this rag to the trailer trash, crank-heads, and backwoods banjo-pickers who form my most devoted fan base. Sure, they may have to move their lips while they read, but words like "un-exotic dancer" deliver so much more punch when spoken out loud than when read silently.

Bair and Bowman: Bookends

Sheila Bair got warm and fuzzy with American Banker editor Barbara Rhem (paid subscription required) in discussing what she wants to accomplish during the end game of her stellar five-year term as head of the FDIC. No, surprisingly, she doesn't intend to spend the time giving away the balance of the insurance fund to delinquent borrowers who deserve a loan modification. Instead, she wants to wrap up rules for the resolution of the too-big-to-fail banks and "living wills" for the same. That should be a welcome relief to community bankers, or at least to those community banks that will remain standing at the end of her term. Then, she wants to write a book, apparently about her on-the-job training to be the executive director of a consumer advocacy group. Bankers can at least breathe a small sigh of relief from the fact that she says she has no interest in becoming head of the CFPB, although there are worse alternatives. Much worse alternatives.

While Sheila was waxing mellow, the last samurai at the OTS, Acting Director John Bowman, was spitting bile in a speech he gave in Japan. The gist of his comments seems to be that, sure, we may have sucked, but we weren't the only bank regulators who sucked. Lots of them sucked. That's cold comfort to most of us who represent the "suckees."

Bowman also railed against too-big-to-fail.

"Institutions much larger than Washington Mutual - for example, Cititgroup and Bank of America, collapsed," he said. "However, the federal government deemed these larger institutions too big to fail and provided open bank assistance to prevent their failures. As I have said in the past, the OTS did not regulate the largest banks that failed; the OTS regulated the largest banks that were allowed to fail."

At that point, he got down to brass tacks and told us what's really been bugging him: strawberries.

Ahh, but the strawberries that's... that's where I had them. They laughed at me and made jokes but I proved beyond the shadow of a doubt and with... geometric logic... that a duplicate key to the wardroom icebox DID exist, and I'd have produced that key if they hadn't of pulled the Caine out of action. I, I, I know now they were only trying to protect some fellow officers...

He did have some encouraging words for federal thrifts, however.

Bowman also fueled fears that the elimination of the OTS will lead to the destruction of the thrift charter. Bowman said that the Dodd-Frank law eliminates the three main benefits of the charter - branching, preemption and consolidated supervisory authority - while retaining its limitations on commercial lending.

"The law provided uniform branching capability for banks as well as thrifts, weakened preemption authority and put an end to consolidated supervision by transferring responsibility for regulating thrift holding companies to the Federal Reserve," he said. "With the benefits of the thrift charter significantly decreased and its limitations retained, how attractive will the charter be for today's financial services enterprises? Again, only time will tell."

Bowman noted that many thrifts fear being regulated by the OCC.

"For the thrift industry in the U.S., there is an additional layer of anxiety and uncertainty about what the future will be like without a dedicated thrift industry regulator… Will the thrift industry prosper under the supervision of the OCC?" Bowman said.

Bowman said that state regulators are already targeting federal thrifts in an attempt to convince them to change charters.

"States are strongly arguing otherwise and are trying to persuade thrift managers to change charters to become state-chartered banks," he said. "Only time will tell how many OTS-regulated thrifts choose state supervision over the OCC, or decide to stay with the OCC, but eventually abandon their thrift charters in favor of national bank charters. "

John then accepted the "Panglossian Optimist of the Year" award from the Howard Beale Memorial Society, stomped a puppy to death, and stormed off stage screaming something about the OCC and the Seventh Level of Hell.

Meanwhile, the Ben Bernanke Fan Club cranked out a Youtube tribute to QE2.

Haste Makes Waste

When will they ever learn?
When will they ever learn?
-- Pete Seeger

Last week's Washington Post article on the tussle between the FDIC and J.P. Morgan Chase over which entity assumed or retained WAMU's liabilities to investors in mortgage-backed securities sold by WAMU for claims related to alleged misreprsentations by WAMU, such as not telling investors that the mortgages backing the securities smelled like bat guano. The FDIC says Chase assumed the liabilities and Chase says they stayed with the FDIC. According to Wapo reporter Jia Lynn Lang, "the paperwork for the merger was written so hastily over a 48-hour period that it left ambiguous who should cover the cost of WaMu's liabilities."

The dispute is another reminder of the continuing fallout from the extraordinary - and very rushed - steps taken by the federal government to shore up the financial system as it was teetering on collapse. Decisions were made quickly, and the paperwork sealing massive mergers was signed without spelling out every consequence.

Ultimately, taxpayers could bear the brunt of those hasty actions. Experts say the law may indeed favor J.P. Morgan.

"J.P. Morgan has a very good shot of taking back a substantial portion of the $1.9 billion it paid for WaMu, even after having reaped what I think is a windfall," said Kevin Starke, an analyst with CRT Capital Group.

For those of us who were involved in thrift and bank resolutions in the Southwest in the late 1980s, this set of circumstances is deja vu. A number of Southwest Plan deals were bid and negotiated in late 1988 in great haste. Somehow, it's hard to blame the lawyers for the regulators who drafted documents with gaping gobs of ambiguity dripping from them, or acquirers' attorneys for not parsing all the nuances of those ambiguities, when so much of the negotiations and drafting of documents occurred at god-awful hours when sane people would be sawing logs, or at least making love to their significant other(s). It appears that the WAMU case may have involved similar dysfunctional rushed scribbling in the wee hours of the night.

Haste makes waste. It also makes bank litigators happy, sends their kids to Ivy League universities, and buys their spouses Jaguars.

Tremulous Transition

An unnamed source provided Housing Wire last week with further confirmation on how rocky the road to merger is between the OTS and the OCC. According to this source, "It's pretty rocky." Nevertheless, the OCC's deputy comptroller for compliance policy, Ann Jaedicke, is putting the best face on the transition of 700 thrifts and from 600 to 700 OTS employees to their new home.

"We're very hopeful we'll be up and ready to go in July," Jaedicke said.

I'm also very hopeful that the Second Coming won't occur before I make it to my next confession, but I'm not counting on it.

Based upon some vitriolic, off-key reaction to my last post on this topic, I'd say that a number of OTS personnel are feeling the OCC noose tighten and not in a pleasant, "autoerotic asphyxia" kind of way. Expect more spasms prior to July 2011, when this merger is (hopefully) completed.