Bank Lawyer's Blog

Internet Banking Authentication: A Bad Moon Rising

Much blathering has occurred in trade publications recently (some of the blathering expectorated by this blog's author) about the dire implications to banks of the recent federal district court decision in Experi-Metal v. Comerica Bank followed by the recent supplement to the FFIEC guidelines on authentication in an internet banking environment. In the Experi-Metal's case, the judge found that Comerica Bank had not acted in "good faith" under the definition of "good faith" found in Article 4A of the Michigan Uniform Commercial Code. That definition incorporates a subjective ("honesty in fact") and an objective ("commercial reasonableness") standard, and while the judge determined that Comerica Bank met the subjective portion, he determined that it failed the objective portion based upon the specific facts of that case. The judge rejected the bank's expert witness testimony, notwithstanding the widespread reputation and high esteem of that particular expert among those of us who practice in this area. As I read the opinion, it appeared to me that the bank complied with the FFIEC guidelines prior to their recent supplementation, which is the standard that should apply to decide this case. In my view, based solely upon my reading of the opinion (I didn't hear the evidence or read the briefs), the judge seemed disposed to disfavor the bank. Then again, I'm a tool of capitalist oppressors, so I'm undoubtedly biased myself. Comerica Bank has announced that it's appealing the judgment and from my standpoint, I'm not going to panic about this decision until the last appeal is exhausted.

That hasn't stopped others from panicking, however. One famous pundit flatly stated in the trade press that as to some court cases that are pending in this area, the judges will have to render decisions in favor of the customers based upon the newly issued supplementary guidance. I could not disagree more. The supplementary guidance shouldn't be applied retroactively to judge the commercial reasonableness of conduct during a time before it was issued. In fact, the FFIEC is giving banks until the end of  2011 to start complying with the new guidance, which tells you clearly that the "experts" on online banking authentication and security think it is "reasonable" that banks be given some lead time (albeit not much) to get up to speed. Therefore, if I was defense counsel in one of these cases, I wouldn't be tossing and turning all night worried about how the supplementary guidance was going to torpedo my case.

That said, it's pretty clear that banks need to get off the dime and get cracking on meeting the supplemntary guidance. The plaintiffs' tort bar is licking its chops, and come January 1, 2012, those vultures fine men and women will be looking for victims negligent banks to squeeze every dime out of them they can sue on behalf of business clients that can't walk and chew gum at the same time are victimized by the customer's a bank's bad online security practices.

Bits And Pieces

I'm on the road again this week on "bidness," so posting will be light. Here are some links to the work products of others to keep both the geeks and the non-geeks occupied.

The first is a link to the work product of Joe Lynyak and Maura Marcheski at Venebale LLP. It's called the CFPB Monitor, and it links you easily to various sections of the Dodd-Frank Act that deal with the CFPB and from the sections of the Act to proposed and final regulations and other materials applicable to the content of those sections. Check it out. I'm sure Joe and Maura would be happy to receive your feedback.

Next is a link to commentary by Jones Day on the use of value appreciation instruments in FDIC-assisted resolution transactions of insolvent banks (hat tip to Larry Martin). A valuation appreciation instrument was most recently employed in the resolution last Friday evening of Colorado's Bank of Choice. It has not been used often, but is a technique that can give bidders a leg up. To those of us who practice in this niche, it's very informative.

Finally, because I always enjoy serendipity, I'll post a video I tripped over on Youtube while searching for something else. I've previously posted videos by business students at Columbia University as part of their annual "follies." It's nice to discover something done by some local law school students as part of their own follies. This one was put together by students at SMU's Dedman School of Law in Dallas. I got a kick out of not only the production values (which are professional quality), but the voice of the female singer. She's wasting her time chasing big law. Not that any law student ever listened to reason. If they did, they'd all be in business or medical school.

We Should Have Seen It Coming

Shortly before she left office, Sheila Bair gave an interview to the American Banker's Joe Adler (paid subscription required), in the course of which she admitted something she's admitted before.

"As bad as I knew subprime and the nontraditional mortgages were, I never thought it would have led to this global, on-the-brink crisis that we experienced in the fall and early winter of 2008," she said.

This is essentially the same admission she made to NBC Today host Matt Lauer a couple of years ago. No matter how smart we think we were, few of us saw this coming. That fact makes the observations of Bryan cave's Walt Moeling (contained in the previous blog post linked above) as perceptive today as they were in 2009.

“It’s hard to get around the fact we’re in an unprecedented economic downturn,” he said. “The regulators, including the FDIC, were telling everyone to prepare for a 100-year flood, and the 500-year flood is the one we got.”

Notwithstanding the foregoing, those of us who represent community banks that are in distress have  seen a consistent pattern of accusations by federal bank examiners and supervisory personnel that senior management and directors of community banks that have suffered because of concentrations of credit in commercial real estate, were, solely because of those concentrations, negligent in the performance of their fiduciary duties to their banks.

However, as we continue to wallow in an unprecedented (since the 1930s) period of economic malaise, we think the regulators are starting to see some weakness in that line of reasoning. We've seen some subtle shadings in the accusations against bank direcdtors and management that we think are influenced by the fact that if push comes to shove, a trier of fact is going to have a tough time finding "gross negligence" or even "ordinary negligence" (in states where that standard applies) applies to the conduct of some of the boards of directors and senior management of community banks with CRE concentrations. Instead of continuing to argue that the failure to anticipate the depth and severity of the economic downturn and the ripple effect of the collapse of the subprime mortgage market on the rest of the economy (including commercial real estate) was "grossly negligent," we've seen cases where the regulators allege that when the depth of the downturn became evident, senior management and directors were grossly negligent in not reacting swiftly enough and/or effectively enough to address these concentrations or the otherwise deal with the problem CRE loans.

I think the regulators are going to have a tough time if they sue directors or senior management on that basis, except in the most egregious cases of failure to act or failure to act with alacrity and/or coherence. Once the train started rolling down hill, taking fast action might have saved some assets, but not most. In case the "experts" within the regulatory agencies didn't grasp the fact, once Lehman Brothers was allowed to fail and all hell broke loose, the Epic Fail train had already pulled out of the station. Banks might have made themselves feel better by putting lipstick on their pigs, but other banks or buyers weren't fooled into thinking that they might be buying or lending on the value of anything other than something out of which bacon is made.

Then again, much of what we see these days appears to be designed to deflect blame from the regulators themselves for not foreseeing what any reasonable person would admit was not foreseeable (other than those few short-selling protagonists of "The Big Short"). It couldn't be that most of us were caught, like grazing bovines, staring dully and uncomprehendingly at a tractor plowing a field in the distance, as a stampede of crazed water buffalo bore down on our backsides. No, in the brave new world, somebody has got to take the fall for the unforeseeable, and that somebody sure as hell is going to be "the other guy."

Cordray Is DOA?

The ranking Republican on the Senate Banking Committee, Richard Shelby, said today that President Obama's nomination of Richard Cordray as Director of the CFPB is "DOA" until the president agrees to structural changes to the CFPB which, according to Republicans, will make the bureau more "transparent" and "accountable" and, according to to the CFPB's supporters, will gut it like a large mouth bass you're about to filet. I hate to see Cordray put in "Jeopardy" without proper recognition of his previous accomplishment of being a five-time undefeated champion on that game show in the 1980s. After all, if you're going to execute someone, you should at least accord him the decency of proper eulogy that highlights his finest moment.

I got a kick out of the huffing and puffing by pundits on the left about the Senate Republicans' use of "strong arm tactics" in connection with the Cordray nomination. The pundits think it stinks that the "Repthuglicans" would use the "advise and consent" privileges of the Senate to force changes to legislation, rather than focusing solely on the qualifications of the nominated official. They forget that strong arm tactics were used by Congressional and Senate Democrats to ram the law that created the CFPB down our throats in record time, well prior to the completion of work by a commission established by Congress to determine the causes of the financial system crisis, which you would think would be a logical prerequisite to the commencement of an intelligent lawmaking process on the subject. Instead, we have Dodd-Frank, 2300 pages of murkiness and byzantine overreaching by the federal government, all in the name of "reform," which will be igniting the flames of unintended consequences for years to come unless, after 2012, subsequent Congresses dismantle its less well-considered components.

None of this is anything less than dysfunctional, of course. It's nasty power politics, and there are no guys or gals wearing white hats, that I can see, regardless of party affiliation. But it's the only game in town, if the town is Washington, D.C., so we live with it, don't we? Until, a year from November, when we again go to the polls, hold our noses, and hope for the best.

CRE Loss Amortization "Zombies"

In April, we discussed round 2 of the efforts of Rep. Ed Perlmutter and a bi-partisan group of Colorado representatives to push a bill through the US House of Representatives that would allow commercial banks under $10 billion to write off losses on commercial real estate loans and OREO over an extended period of time. Round 1 ended last year in initial victory in the House and ultimate defeat when Democrats in the Senate stripped the provision out of the small business lending act before it was passed.

The American Banker (paid subscritpion required) focused on the story this week and labeled the bill a "kick the can" effort. That's a true statement, as evidenced by the cheerful agreement of the bill's sponsors. They want to give community banks the same opportunity to gradually recover as real estate markets recover as folks in the current administration and federal banking regulators like Sheila Bair advocated giving residential loan borrowers.

As we predicted, American Banker reporter Robert Barba picked up all kinds of static about the proposed law from federal bank regulators, who raised the "zombie bank" meme. One opponent argued that the same scheme didn't work in the late 1970s and early 1980s "for savings and loan associations." I was in-house counsel for one of the largest savings and loans in Colorado from 1977 to 1981, when I left to join the law firm that represented the Colorado Savings and Loan League and many savings and loans in Colorado and surrounding states. I subsequently was a partner in two law firms, one regional and one national, where I represented scores of savings and loan associations and a lobbying group that helped add the forbearance provision to the Competitive Equality Banking Act of 1987. I don't know what the person making this allegation was doing during that time period, but there was never a 10-year (or even 7-year, as was the case with ag banks) amortization period for CRE losses in the late 1970s and early 1980s that was allowed for s&ls.

So, no, the loss amortization scheme during that time period didn't work because it never existed. There was a concept that was tried called "supervisory goodwill," which involved extended amortization of the "negative goodwill" that was created when a healthy savings and loan took over a broke one with a negative net worth. If what this "expert" is addressing is that issue, then the "zombie" banks that he's referring to became "zombies" only when Congress wiped out the extended amortization period in August 1989 with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act. With their capital accounts devastated, most of those savings and loans sued the US government in the US Court of Claims and most won big money from the government for breach of contract. They weren't zombies, they were pissed off plaintiffs.

If what the critic is referring to are the forbearance plans allowed by CEBA, only a few were approved, and when Senator Proxmire criticized them on the floor of the US Senate, the Federal Home Loan Bank Board suddenly determined that the subject banks weren't living up to their forebearance plans and yanked its approval for those plans. Those banks subsequently died, but they were few in number and they were not beneficiaries of an extended amortization of CRE losses.

So-called "zombie s&ls" were the result of the fact that the losses suffered by savings and loans on CRE were so massive that the Federal Savings and Loan Insurance Corporation didn't have the funds to resolve them, other than to let them stay afloat in a lake of insolvency while awaiting a miracle, which the FSLIC and its operating head, the FHLBB, tried to concoct via creative solutions like The Southwest Plan, which involved less immediate cash outlays but the issuance of a bunch of notes that the FSLIC couldn't pay when the bill came due without a bailout from Congress. Congress punished both entities by abolishing them, shifting FSLIC's fund into the FDIC and creating the OTS (which officially dies tomorrow). Zombies were not created by a 10-year CRE loss amortization scheme.

As to another criticism of the bill, that such banks wouldn't be able to raise capital because the financial statements of these banks would deviate from GAAP, it must be based on conversations with an entirely different group of private equity players than I have been talking to. Banks would still have to calculate the loss under GAAP, but would not have to recognize it immediately for regulatory capital or earnings purposes. Instead, they would take the hits in installments over a 10-year period. Financial statements would be required to show both GAAP and regulatory accounting calculations. Unless your ability to read a financial statement is at the level of a not-so-smart Rhesus monkey, you should be able to easily determine the gap between GAAP capital and earnings and regulatory accounting capital and earnings. The critical determination will be whether the initial determination by the bank of the amount of the "loss" with respect to each CRE asset was "correct," but you've got that crap shoot with all banks who have CRE in their portfolio, whether they recognize the loss immediately or not. In fact, extended amortization of the loss may actually encourage banks to take a more healthy "loss" than they otherwise would have taken, because the result isn't instant obliteration.

Reasonable people can disagree on these issues, and obviously do. I just wish the critics would get their facts straight and quit raising bogus arguments.

Of course, none of these arguments will make a whit of difference. In the end, I don't see community banks having enough clout in D.C. to win this war this year anymore than they had last year. I admire the gang from Colorado for trying, however. At least in one state, the legislators are listening.

Obama Opts For "The Enforcer" Over "The Creator"

If the bitter comments made by correspondents in e-mails I received today about the White House kicking Richard Cordray upstairs to the top job at the CFPB is any indication of the sentiments of community bankers and credit union directors and senior management generally, the announcement went over like a lead balloon. I take that back. It went over with the sound of a watermelon hitting the sidewalk after being dropped from the roof of a high-rise.

Here's a sampling.

From the chairman of the board of a community bank:

Is it two years and then a run at the OH governorship or will the siren song of DC (and the prospect of an unlimited budget to persecute...er..prosecute all perceived enemies of the working class - not self employed plumbers who challenge presidential candidates but, you know, the real working class) be too strong?

Not that there is the possibility of a good choice. DC would only choose a well credentialed TBTF banker who would have no concept of either the value of smaller institutions or the harm caused to consumers (folks we call friends and neighbors) by the protection racket. TBTF bankers understand only too well the logical (and obviously therefore well deserved) competitive edge that regulation hands to the big and bureaucratic. And to be fair, most TBTF bankers haven't had to think about the consumer in years.

Community bankers who think the CFPB will be going after payday lenders and independent mortgage brokers are good examples of the triumph of hope (hype?) over experience. The CFPB and the trial lawyers who love it will go after institutions with yankable federal and state licenses, identifiable capital, reserves, D&O insurance, and wealthy board members who can pay civil penalties, not judgment proof strip mall financiers. Nobody ever expects the Spanish Inquisition.

No, nobody ever expects the Spanish Inquisition, but when it fortuitously appears, the Torquemedas among us take full advantage of the availability of racks, wheels, bamboo splinters, and feral weasels to make their victims lives a living hell. Community banks who think that the CFPB will forget about them while they focus on easier pickings might want to recall the words of Martin Neimoller:

First they came for the Jews and I did not speak out because I was not a Jew.

Then they came for the Communists and I did not speak out because I was not a Communist.

Then they came for the trade unionists and I did not speak out because I was not a trade unionist.

Then they came for me and there was no one left to speak out for me.

This from a caustic credit union commentator:

Check out www.whitehouse.gov/blog/2011/07/18/big-week-new-consumer-agnecy for Warren's parting shots. She apparently plans to be rabidly partisan until the bitter end.

I don't know how "rabid" Liz might be, but there's never been a doubt in my mind that she and her cohorts at the blog she used to write for (and may again, once Cordray tells her to keep her phone line open so he can call her whenever he needs her, then immediately forgets her number) have been a bit "fevered" in their bank-bashing. I suppose her comment in her "op-ed" piece regarding the opponents of the CFPB tests some folks' gag reflex.

I remain hopeful that those who want to cripple this consumer bureau will think again and remember that the financial crisis -- and the recession and job losses that it sparked -- began one lousy mortgage at a time.

I hate to break the news to Liz, but the CFPB isn't going to prevent "lousy mortgages" from being made in the future, other than by helping to make it more expensive to make mortgages, thereby limiting both the number of lenders willing to make them and (because of their increased cost) the number of borrowers who can qualify for them. The dream of transparent disclosure has been around, literally, since the 1960s, and notwithstanding layers of laws and regulations administered by even denser layers of bureaucrats, the dream remains simply that: a dream. Yet, this grand scheme will finally untie the Gordian knot and ensure a fair deal for the average Joe and Jane because we'll now have a federal bureaucracy with real teeth and a visionary fine-tuning its DNA. Not much accountability, not much effective oversight to restrain it if it abuses its power in ways entirely predictable to anyone who ever read Lord Acton. But to hell with all that, because this massive, powerful federal agency is finally going to achieve utopia here on earth where all previous efforts have failed. This time, by gum, the bureaucrats are going to get it "right."

Let's say the CFPB succeeds in its quest to make the terms of loans perfectly understandable to even the dimmest bulb in the evolutionary lamp store. No moral human being thinks it's just fine to "trick" or defraud people, so if the CFPB succeeds, then the days of "lousy loans" are done and gone, right? If the CFPB effectively requires every maker of a "lousy loan" to place in block letters at the top of the page "YOU ARE ABOUT TO EAT A CRAP SANDWICH," nobody who clearly understands the terms of a such a stinker is going to down it, correct? Where there's a need to borrow and a willingness to lend, many are they who shall be willing to serve their fellow man the sandwich and many are they who shall be willing to munch it while washing it down with a hearty glass of motor oil (10W40), both parties assuring one another that it tastes like chicken. It's basic human nature, a nature governments have never been able to effectively "reform," although they certainly have been able to twist it. As Wittgenstein observed, "Nothing is so difficult as not deceiving yourself."

I doubt that Liz is a fan of Wittgenstein, though. Hegel, maybe. Perhaps Marcuse, since she's a child of the '60s. Whatever her philosophical influences, it's obvious that she and her supporters are convinced that only through the application of massive centralized bureaucratic power at the federal level can human beings be made free from the injustice of a "lousy loan."

She ends her piece for the White House blog with a cry meant to rally her followers.

We got this agency by fighting, we stood it up by fighting, and, if takes more fighting to keep it strong and independent, then we can do it.

Keep fighting, Liz, because you haven't seen anything yet. 2012 is right around the corner.

The ancient Greeks had a word for this: hubris.

Chair Bair Goes Charitable

A few readers asked me why I haven't commented on Sheila Bair's announcement that she's joining The Pew Charitable Trusts in September. I suppose because her joining a public policy charitable organization (one conservatives love to label "liberal" but which maintains that it is rigorously nonpartisan) comes as absolutely no surprise to me. Notwithstanding the fact that one wing-nut feminist writer at Slate once lumped me into the same coal basket that contained Hank Paulson and Tim Geithner as Bair-baiters who disagreed with Ms. Bair solely because she's a woman, I think Ms. Bair has been consistent since the early days of her reign at the FDIC that she was a consumer advocate and proud of it, seeing no difference between the interests of consumers and banks. I think that other than an endowed chair in the school of social work at some bright blue university on the Left or East Coast, The Pew Charitable Trusts is the perfect nesting place for Sheila Bair. In fact, I wish she'd lodged there in 2006 and left the FDIC to someone who would have been as concerned with forbearance for community banks as she was for forcing through breaks for residential loan borrowers who borrowed money they couldn't pay back.

The Wall Street Journal opined that by avoiding the "revolving door" from regulator to a cushy job with the banking business, Sheila deserved some kudos. To some extent, I agree. On the other hand, it would have been uncharacteristic of her to want to learn something about how banks actually operate from the inside out. She didn't have that experience prior to manning the helm at the FDIC, so what good would it do her now, other than provide her with a few embarrassing "aha" moments that would have been more valuable had she been struck by them during the period July 2006 to July 2011? Plus, as an "advisor" to the nonprofit charitable organization, I'm sure she'll be left with plenty of time for one of her favorites activities: giving speeches and appearing on television news shows.  A bank, being a profit-making enterprise (as much as some inside and outside the government seem to view them as public utilities), might have forced her to cut down on the public palaver and do some actual work that adds to the bottom line.I think her tenure at any bank would have been short and she would have journeyed back out the revolving door in short order.

I realize that the Obama administration has announced that Sheila's being replaced by FDIC veteran Martin Greunberg. I don't wish Mr. Greunberg ill , but I wonder if there's any chance we could put trigger locks on the NRA and refloat Diana Taylor for FDIC chairman? After all, the Care Bair was second choice to head the FDIC in 2006 and got a shot only after the "unofficial first lady of New York City" was mowed down by the gun nuts because her main squeeze, New York Mayor Michael Bloomberg, is a gun control advocate. Actually, Ms. Bair got the job despite my floating the name of my second choice, actress Joanne Pflug, a suggestion the Bush administration imprudently ignored.

Resurrecting Ms. Taylor from a life of living hell on the arm of a man half her height (albeit with a bankroll equal to combined GDP of Eastern Europe) would provide me with another five years worth of gag posts (one of which led a Wall Street Journal reporter to phone me and ask if Ms. Taylor really had a restraining order on me for stalking her), which is always a welcome prospect to someone who (as one frustrated credit union compliance officer once complained via e-mail) doesn't get down in the weeds and dish out free stuff to folks who would otherwise have to pay for it.

In fact, since we've (ok, I've) opened the door to dream replacements for Sheila Bair, let's take the kid gloves off and roll out our honor roll. Any one of the following make my personal list:

 

Halle Berry

 

                                                        Catherine Zeta-Jones

 

 

 

 

Sofia Vergara;

 

Malin Ackerman (as long as she agrees to wear that outfit from Watchmen and also agrees never to open her mouth to use it to speak); and

Any of the professional female dancers from Dancing With The Stars (with a slight nod to Cheryl Burke).

 

 

 For animal lovers, I could live with that dog who worries about a cat burglar stealing his bone in the Travelers Insurance commercial.

 

 

 

Unleash The Hounds

On Flex-Day Fridays in July and August, blog readers (especially among the regulatory agencies) are few and far between. So, let's keep it short today with this brief note of good cheer, via Housing Wire:

More than 100 Consumer Financial Protection Bureau staff members are ready to contact the nation's large banks when the agency's regulatory authority kicks in next week.

[...]

CFPB examiners will spend the first few weeks studying the banks' structures, operations, risks and business strategies. Once the CFPB coordinates its regulatory efforts with those of federal and state agencies, it will begin its first round of bank examinations. The agency is overseeing banks that have at least $10 billion in assets.

[...]

Once its fully established, the CFPB will have hundreds of experienced banking examiners working in satellite offices out of New York, Chicago, San Francisco and Washington D.C.

With private sector unemployment expected to remain high right through the end of next year, it's great to know that the federal government is adding boxcar loads of regulators to scour the earth for evil-doers and to root them out from under whatever rocks they're currently dwelling. And to think concerned citizens used to worry about the OCC's need for lebensraum! The OCC's preemption efforts make it look like a comparative pansy compared to the blitzkrieg the CFPB's getting ready to throw down. I can hear the dulcet tones warbling from the maw of Liz Warren as the clock strikes 12:01 am on July 21, 2011: "At my signal, unleash hell!"

Yeah, baby! Come next week, bankers everywhere will be shouting, "Who let the dogs out?"

More Warren "Grilling": Why?

Apparently, House Republicans are preparing to slap Liz Warren around tomorrow at a hearing, this time trying to pin her down on what the CFPB is going to do next week when it launches into space without a properly appointed pilot. Given the nastiness of the back-and-forth the last time Liz sparred with House Republicans, expect both sides to bare their fangs.

All of which is so much additional hot air blasted into the atmosphere of a city already filled to the brim with gas bags the size of the Hindenburg. The Congress and the President can't seem to keep the country from a potential federal credit debt rating crisis because neither side wants to appear to its respective nut roots base to be less than well-endowed with partisan zeal (although a convoluted compromise that would have made Rube Goldberg proud is in the works). Simultaneously, the majority party in the dysfunctional House of Reprehensibles thinks its a great time to bash Liz (The Consumer Advocate) Warren in the interest of pure political theater. 

One of the sad aspects of the bashing is that all it does is feed the feelings of mutual hatred on both sides of the political divide, and all to no purpose. As readers know, I'm no fan of the side of the political fence on which Aunt Liz stands. Yet, here are some hard facts of life that her opponents better face: she (and President Obama) have "faced you" for the last year and she may be slam dunking it on your head again in the near future. Liz has been the de facto director of the CFPB for the last year. If, as many suspect, the president uses a recess appointment to make her the de jure director, she'll be the director of the CFPB until the end of 2012.  That's two and one-half years that she'll have had to set up the CFPB, employ its critical personnel, set the tone, and make life a living hell for every lender they deem to be "evil." And you evil-doers out there know who you are. Just look in a mirror.

Unless the president blinks and appoints someone other than Warren (who the Republicans have threatened to block anyway), Liz will have won this game. If I were making book, I'd set the odds in favor of Liz. That being the case, I'd say that Liz-bashing serves no useful purpose and that we all would be better off thinking about another tack to take to prepare for, and deal with, a Warren-led CFPB for the next eighteen months. Name calling and brow beating are getting old, even to those of us who bear no love for Ms. warren or the CFPB.

Hoenig: One More Shot At Dodd-Frank

When I described a speech last month by retiring Kansas City Ferderal Reserve Bank president Thomas Honeig as his "parting shot," I spoke too soon. In a recent breakfast diatribe in Denver, Hoenig kept the hits on Dodd-Frank coming.

He isn’t a big fan of increased government regulation, either. He called the Dodd-Frank Act “2,300 pages of complexity. I don’t find Dodd-Frank satisfying.”

Though Dodd-Frank was intended to rein in large financial institutions, “community banks and regional banks will suffer the most” from its enactment, he said. “It gives the largest financial institutions a competitive [cost of capital] advantage.”

Hoenig said the largest financial institutions don’t need the government to help them get a competitive advantage.

In 1913, when the Federal Reserve was created, the five largest financial institutions controlled the financial equivalent of 2.5 percent of the U.S. gross domestic product, he said. In 1980, they controlled about 14 percent of GDP.

After the financial crisis in 2008, the five largest financial institutions now control the equivalent of 60 percent of the U.S. GDP, Hoenig said.

“So they are 20 percent larger after the crisis,” he said. “This says the consequence of bad management is that they’re 20 percent larger and too big to fail.”

He called the growth of large financial institutions “a threat to capitalism. You have to break them up. Commercial banks need to be separated from investment banks.”

Hoenig's words about the threat to the future of community banks seems to be supported by what's happening in Florida, one of the states most devastated by the economic collapse. According to Florida investment banker Benjamin Bishop Jr., "[a]s many as 50 of Florida’s 225 community banks could disappear by the end of 2012," doomed by either too many toxic loans or by the fact that they're too small to save.

The result, according to a report by Raymond James & Associates, Inc., is an expected step up in assisted acquisitions over the next few years. As many potential sellers among community bank owners remove their heads from the sand on pricing, I expect that unassisted acquisitions will also increase.

The growing presence of larger banks with more resources will impact community banks’ abilities to compete, Bishop said.

Rising expenses for regulatory compliance, including the cost of exams and insurance premiums paid to the Federal Deposit Insurance Corp., also will pressure community banks. Offering more personal service traditionally has been a selling point for community banks, but Bishop questioned whether that would remain a high value as older community bank presidents retire.

Bishop said the most vulnerable community banks are those at which the value of a bank’s nonperforming assets equals or is greater than its tangible common equity and loan loss reserves — the so-called Texas ratio, a controversial measure of financial stability. There were 48 Florida banks that met that criteria as of March 31, according to a Ewing report, while the Raymond James report put the number even higher, at 70.

Community bankers who understand the pressures will “put into their business plans a recognition that they have to be part of a larger banking organization,” Bishop said. Organic growth, or expansion due to increased customers or sales, is tough in the current economic climate, leaving M&A as the remaining option for growth.

That might sound like an investment banker drumming up M&A business, and it is. It's also a pretty savvy analysis of what's in store for community banks in Florida and elsewhere.

Dodd-Frank: the gift that keeps on giving. Unfortunately, as always, only the rich (and lawyers) will get richer.