Bank Lawyer's Blog

You've Got To Be Kidding

I've been traveling the last few days, so last Saturday I scheduled for later auto-posting a couple of blog posts I'd written earlier, and I didn't get around to reading my blog-related e-mail until I'd hacked my way through all the work-related e-mails today. I discovered that at least one reader thought my post of Monday evening represented my personal opinion that all the blame for the current dearth of commercial lending by commercial banks was solely the fault of bank regulators.

The views expressed in Monday night's post were those of the two bankers who were quoted, and of some other community bank executives who have shared that same view with me. I didn't intend to state that it was my personal view that restrictive regulation was the sole cause for the current difficulties banks face in making commercial loans. What I intended to do was to find a news article that would allow me to end the post with the embedded Youtube video clip of the massacre scene from "The Road To Perdition" in which Paul Newman bites the dust.  As far as I'm concerned, like George Bush aboard the USS Abraham Lincoln, I can proudly proclaim "Mission Accomplished." Any misunderstandings on substantive issues are merely collateral damage.

As I periodically warn readers, anyone who ventures here with the expectation that anything I say on this blog should be taken with absolute seriousness is bound to be bitterly and profoundly disappointed.

And since we're completely off-topic on anything to do with banking or the law, is it just me or does anyone else yearn to see future "Dancing With The Stars" contestants Nancy Grace and Ron Artest engage in an Ultimate Cage Fighting tussle that puts them both in traction? I assume it's just me.

Choke Hold

I'm not certain how many readers are aware of it, but two Colorado community bankers sat before a congressional subcommittee last Thursday and gave voice to a proposition that many of their brethren also believe but are reluctant to bring to the public's attention: regulators are killing off the commercial lending business.

Jay Davidson, founder and chief executive of First American State Bank in Greenwood Village, said regulators have become so risk-averse that community banks that make loans to small businesses have almost quit making them.

As a result, said Davidson, banks are "not fulfilling their obligations to assist in the economic recovery, and therefore small-business transactions, expansions and investments are not occurring."

[...]

"Life does not exist without risk," Davidson said. "Bankers don't like risk. But you can't make a system totally without risk. Now we run our banks to regulatory standards. We'd like to run it to business standards."

Davidson and David Brown, president of Southeast Denver Centennial Bank in Centennial, Colorado, made the following allegations:

• regulators are requiring higher capital levels, which reduces the amount of money available to lend (because community banks are having trouble raising capital in the current environment).
• the increased regulatory burdens of Dodd-Frank and the CFPB are increasing compliance costs and, as a result, banks are cutting costs elsewhere, including downsizing.

Brown complained that "he receives so many e-mails explaining the regulations that he could spend two hours a day trying to comprehend them." I guess I'd better cut down on those gratuitous e-mails.

Davidson and Brown (sounds like the name of a law firm, doesn't it?) showed some moxie, whether or not you agree with them (I expect that their primary regulators would take issue). Unfortunately for Mr. Davidson, as the video embedded below reveals, last Friday evening while leaving his favorite water hole "O'Neills" with his SBA lending crew, they were set upon out of the gloom by the bank's primary federal regulator's chief examiner, who took exception to Mr. Davidson's testimony with extreme prejudice. Notwithstanding Mr. Davidson's final words of bravado ("I'm glad it was you"), we feel fairly certain he was anything but glad that it was him.

You'll notice that, as is the case in many instances where bankers speak truth to power and pay the price, other bankers look down upon their cooling carcasses and thank their lucky stars that it was the other guy who spoke up. Well, as Jay so aptly put it, "Life doesn't exist without risk."

Unfair and Unbalanced

Every once in awhile, you find a rant worthy of notice. Compliance expert Nancy Derr-Castiglione's recent "end-of-my-rope" sceeed in the ABA Banking Journal qualifies.

Nancy's bottom line: consumer compliance disclosures currently required by federal and state law in connection with most loan transactions are so dense and so voluminous that they amount to an "unfair and deceptive trade practice" under Section 5 of the Federal Trade Commission Act. Obviously, Nancy's got her tongue planted in her cheek, yet not so far in that you don't take her seriously.

She has a few suggestions:

•   Put a moratorium on any new disclosures
•   Eliminate unnecessary disclosures
•   Shorten or reduce existing disclosures

Here's one she didn't suggest but that others have suggested for quite some time:

•  Keep the %$#*(& lawyers out of the room.

Omaha's White Knight Rides To The Rescue Again

Today's news that Warren Buffet's Berkshire Hathaway was investing a cool $5 billion in Bank of America's preferred stock came as a shock to this blogger. I realize that Buffet had previously come to the rescue of the great vampire squid wrapped around the face of humanity, i.e. Goldman Sachs, with an investment in its preferred stock that also paid a 10% dividend, so rescuing "the bank that can't foreclose straight" isn't a stretch. I mean, a yearly yield of $500,000 million sure beats what the average retiree gets on Bank of America's crappy CD interest rates (an APY on a 5-year CD currently being in the neighborhood of 1.5% to 1.6%), so it's a good deal for Berkshire Hathaway and a public confidence boost for B of A. For Buffet and the bank, a win-win.

No, it wasn't the terms of the deal that shocked me. It was the fact that I thought that Warren had immolated his entire fortune earlier this month just because he's getting old, his kicks are getting harder to find, and he thought he'd do something really loony that would get him some quality air time before he sucked the tailpipe.

I guess the press reports I read were mistaken.

 

On a grimmer note for America's favorite bank, as well as for other large loan servicers, a panel of advisors assembled last week by Bloomberg Television confirmed JPMorgan Chase's Jamie Dimon's prediction that we discussed yesterday, that "the ongoing litigation between banks and their investors in soured mortgage-backed securities sold during the housing boom...will go on for years." The experts also concluded that "most of the pressure will land on Bank of America" because of the tons of toxic waste it inherited from Countrywide. Thus, while big bankers can expect years of misery, their litigation defense counsel can expect years of billable hourly bliss. It looks like BofA has been hit by that ancient gypsy curse, "May you be buried by a blizzard of barristers."

Judge to FDIC: Stick Around

Lately, it's been tougher for a federal banking agency to win a motion to dismiss than it has been for Libyan rebels to find Gadhafi (despite having within their ranks several experienced players of the game "Where's Moammar?"). A couple of days ago, we discussed the OTS losing a motion to dismiss a complaint filed against it by United Western Bank. Today comes word that another federal district court judge won't let the FDIC worm its way out of a $10 billion lawsuit filed by a very honked off unit of German bank Deutsche Bank AG over some odoriferous toxic waste the late, great Washington Mutual originated and pooled into a slag heap that backed some perfumed securities for which the Deutsche is the trustee. Last November, we discussed how Chase and the FDIC disagreed about whether Chase assumed liability for the sludge when it forked almost two billion dollars for Wamu and bought most of the failed thrift from the FDIC. The purchase and assumption documents are less than crystal clear on the point, and according to some wags, that's because the deal was put together too quickly.

The judge said last week that it would be "improvident and premature" to dismiss the suit against the FDIC until a decision is reached over whether the alleged WaMu liabilities stayed with the FDIC or were transferred to J.P. Morgan.

J.P. Morgan bought WaMu but says it left behind the liabilities at issue in the Deutsche Bank lawsuit. Judge Collyer had already rejected the bank's bid to dismiss the suit in May.

According to the FDIC, J.P. Morgan took on the liabilities attached to the mortgage loan securitization trusts when it bought WaMu.

Deutsche doesn't care which one of the two defendants pays, but it wants its pound of flesh from one of them.

I haven't seen in any of the discussion of this mess any criticism that perhaps former FDIC Chairman Bair might have tarnished the sheen on her halo over this debacle. I guess St. Sheila's beatification process is still on track with the Vatican.

As to Chase's Jamie Dimon ("The Banker Americans Hate Less Than Most"), his bank paid $1.9 billion to the FDIC to acquire all of Wamu (well, almost all: not, Chase claims, liability for the particular pile of goo discussed above). I realize that Chase didn't have a California presence prior to picking up the Wamu branch network. I also realize that, according to a letter from Dimon to Chase's shareholders last April, Chase still expects to make a profit from the Wamu acquisition. Still, when Chase has to set aside $2.1 billion to cover expected mortgage buyback losses from Wamu and when Dimon confesses in a conference call that "it’s going to be a long ugly mess" that "we will be talking about this for every quarter over the next three years," you know that he must occasionally wish that Chase hadn't beaten out Citigroup for the lovely carcass of the beached whale named "Wamu."

Payday Lending "Crack Down"

Color me "Not Shocked" by the news that when it comes to "cracking down" on payday lenders, the municipalities leading the crack down are located in the San Francisco Bay area and in the last hippie commune south of the Red River: Austin, Texas. In the land of fruits and nuts, cities are engaging in such tactics as limiting the distance between payday loan shops, while in Left Texas, payday lenders are now required to (gasp) register with the city and are subject to other minor restrictions on their activities, and may also soon be subject to "spacing requirements." I doubt that any of these ordinances will do much to slow down money-making by payday lenders, but they obviously give city officials a warm and fuzzy feeling that they're doing something to save those folks too beaten down and/or ignorant to save themselves.

No word yet on what these same municipalities will do about the new 75-cent surcharge on bank customers' use of the word "bank."

United Western Bank Wins Round One

God bless the institution of the US federal district court.

When we last looked in on the litigation between Denver's United Western Bank and the OTS, the OTS had filed a motion to dismiss the complaint filed by the bank, alleging that, because the former board of directors of the bank had not formally approved the filing of the complaint, the court lacked subject matter jurisdiction to hear the lawsuit. In late June, the judge told the OTS that the lack of a formal board resolution on the issue was not a fatal defect and denied the OTS' motion to dismiss. The following is one of my favorite passages from the court's opinion:

While the statute fully authorizes OTS to decapitate the bank, it also grants the severed head one final request -- to ask to be reattached. It is no defense that the head did not put it in writing.

You have to love the wisdom of the founders, who put federal district court judges beyond the reach of every day interference from the other two branches of government. While a rogue federal district court judge can constitute an unholy terror, more often they act as the first line of defense against the abuses of government power.

The court dismissed all plaintiffs other than the bank and all defendants other than the OTS and its director, so the focus now will be solely on the actions of the OTS and its legal justification for placing the bank into a FDIC receivership. As I've pointed out previously, surviving a motion dismiss is only the first step in the bank's quest for "justice." However, in this case, it's a very important one. As I also previously stated, I hope "we get a chance to look inside the mind of the OTS as to why it really took this bank down while a recapitalization effort was in the works." That trip through the looking glass may be an interesting journey.

In the end, even if the bank "wins," the conundrum will be "win what?" The bank's deposits and most of its assets were sold to another bank, which has integrated those assets and liabilities into its own organization. One wag said that any remedy that seeks to restore the bank to its owners would be like "unscrambling an egg."

Well, let the unscrambling process unfold! We'll be watching with interest.

A Pat On The Back And A Slap In The Face

Cam Fine, the CEO of the ICBA, had a short, bitter post last week about the Federal Reserve Board's recent decision to announce that it's keeping interest rates low through the middle of 2013. Cam called the action "a backdoor bailout for the Wall Street mega-institutions and the back of the hand for our nation’s community banks." His point is that while the nation's biggest banks make money on large volumes of transaction fees, community banks generally make their money on the spread between deposit rates and loan rates.

But with the Fed setting rates at nearly zero percent and slack credit demand, how are community banks supposed to make a viable spread on their funds?

Good question. At least Cam didn't call Bernanke a traitor.

The pain isn't confined to community banks, unfortunately. As the New York Times (via HuffPo) pointed out a year ago, the historically low interest rates on deposits are beating the stuffing out of retirees.

As a result, savers have been put in a bind. Whereas three years ago it made sense for retirees to live off annual interest from a standard certificate of deposit, that's now nearly impossible. The highest rates these days, the NYT notes, are around 1.5 percent, yielding only $7,500 a year on a $500,000 deposit, compared to rates above five percent in 2007.

The low rates are supposed to stimulate growth, the idea being that both people and corporations would borrow money and spend their way out of debt and out of the recession.

But if the Times' men-on-the-street are any indication, the low rates can actually have the opposite effect. Retired AT&T engineer Marcel Lonneman said his colleagues are reluctant to take out loans because they think the rates will fall still further. It's analogous to the evils of deflation, when people don't spend money as they wait for prices to hit bottom.

Things are even worse today. A check this evening of the national 1-year CD rate on Bankrate.com shows it's dipped to 0.42% APY, with the highest rate listed of 1.27% APY. Frankly, folks, that's pathetic.

Yet more reasons to justify the healthy consumption of Jack Daniel's Black Label with just a splash of H₂O.

Loan Buybacks A Moving Target

When we discussed yesterday the alleged "backdoor bailout" of Bank of America by Fannie Mae, we neglected to mention that what the right hand giveth, the left hand taketh away. According to a recent public filing by B of A, expected repurchases of mortgage loans forced on B of A by Fannie Mae and Frediie Mac are up from the $2.8 billion forecast at year end 2010 to $7.8 billion.

As one expert noted, B of A seems to be flailing around in its attempts to get a handle on how bad its ultimate repurchase liability might be.

“Yet again, another line in the sand from Bank of America turns out to be fungible,” Tony Plath, a finance professor at UNC Charlotte, told Bloomberg News. “I don’t think it’s anything nefarious, it’s just that they don’t know what the magnitude of losses in that portfolio will be — and until they do, none of their numbers have credibility.”

When you originate and sell garbage (as noted yesterday, much of it originated by Countrywide), your ultimate financial well-being may ultimately stink.

And speaking of garbage, Fannie Mae has a negative net worth of $5.1 billion and is asking the US Treasury to pony up that amount. Including this latest injection, Fannie and Freddie have sucked $170 billion out of the US Treasury so far, and there's no end in sight.

Any time anyone starts carping about TARP, I'm tempted to throttle them. The federal government has burned through plenty of dollars on the mortgage mess, but don't look at commercial banks for the black hole. Start with Uncle Freddie and Aunt Fannie.

Fannie Mae Fools No One

My friend Francine McKenna, author of the Re:The Auditors blog, has been all over the risk to mortgage loan originators of loan repurchases for years now (as have the quarter-wits at this blog). In a recent column for Forbes, Francine opines that Fannie Mae's recent agreement to purchase from Bank of America the servicing rights to $73 billion in mortgage loans fooled no one. Francine calls it a "backdoor bailout" by Aunt Fannie of B of A. Her reasoning (on which other observers agree):

• Why would Fannie purchase servicing rights merely to transfer them to another servicer (since FNMA doesn't service loans itself)?
• The portfolio of loans to which the servicing rights apply has a 13% default rate, making it likely that a lot of the loan servicing income may evaporate.
• The purchase price of $500 million seems high, especially in light of the fact that it appears to represent the judgment of B of A that the value will continue to deteriorate. Francine quotes another Forbes author, Abigail Fields: "If the rights were really worth $500 million, wouldn’t a private company pay that for them? Instead, it sounds like Fannie Mae is doing a bailout two-step, one to B of A and one to whomever takes these rights off Fannie Mae’s hands."
• Fannie itself sought $5.1 billion in additional bailout money from the US government (i.e. the US taxpayers) last week, so whose $500 million is it being given to B of A? Yes, that's correct: the chump staring back at you and me from the mirror.

Francine also wonders how much of the portfolio of loans consist of losers sold to Fannie by Countrywide that Fannie put back to B of A earlier. She notes that AIG and the Federal Home Loan Banks are also suing B of A to repurchase allegedly less-than-stellar loans originated by Countrywide. No wonder B of A executives said that they wished the bank had done something more lucrative than buying Countrywide, like betting a few billion on Charlie Sheen's triumphant return to Two-and-a-Half Men or Lady Gaga entering a Carmelite nunnery. On the other hand, its nice to know that when Fannie forces you to buy back loans with one hand, it's softening the blow by buying some potentially overvalued servicing rights to some of those same loans with the other hand.

As we prepare for yet another "Bank Fail Friday" in a couple of days on which more too-small-to-save community banks will bite the dust, at least we can all sleep well at night knowing that our hard-earned tax dollars are snaking their way through the unholy umbilical cord that tethers Wall Street and Washington, D.C., straight into the deserving maw of America's largest TBTF behemoth.