Bank Lawyer's Blog

Protecting Privilege From CFPB's Grasping Hands

Reed Smith's Travis Nelson recently wrote a pithy dissection of the CFPB's proposed rule to justify its argument that regulated entities be compelled to disclose to it material that is subject to attorney-client privilege. Coming on the heels of the recent FDIC "advice" that officers and directors of banks in distress, and their legal counsel, have only a limited ability, and apparently no right, to review and retain copies of records that might aid them in defending themselves against claims by the FDIC, the CFPB's proposal adds fuel to the fire of critics of federal regulatory overreaching.

The proposal is an attempt to codify the doctrine of "selective waiver."

Under the selective waiver doctrine, the disclosure of otherwise privileged materials to a party outside the attorney-client relationship (in this case the government) would not act as a waiver of applicable privileges to other third parties. Under the Proposal, the provision of documents to the CFPB that are otherwise subject to the attorney-client privilege or work product doctrine, would retain their privileged nature. In other words, the Proposal would provide that the act of producing such materials to the CFPB would not prevent the disclosing party from asserting the privilege as to other potential adversaries, including other governmental agencies. As discussed below, the Proposal raises several important concerns.

As Nelson explains, there's a slight preliminary problem with this "doctrine."

The vast majority of courts have rejected selective waiver.

Well, Travis, it's a brand new day in D.C. The forces that know what's good for the consumer even when he or she does not aren't going to be stopped, or even slowed down, by the speedbump of "judicial precedent." As long as there's a thin reed of plausibility to grasp, the CFPB is hanging on and pushing forward.

Travis takes apart the "legal reasoning" used by the CFPB to support its position.

As the primary basis for its purported authority to promulgate the Proposal, the CFPB claims that the ability to demand otherwise privileged materials from a supervised entity is part of the general examination “powers and duties” transferred from the prudential regulators.

[...]

However, the CFPB fails to recognize an argument that the ability to demand production of privileged materials without destroying the privilege may never have been a “power” of the prudential regulators that could have been transferred.

Citing the national Bank Act, Travis argues that if the OCC already had the power to compel privileged information, why was it necessary to codify that power in the Dodd-Frank Act.

It may be argued that the ability to review an institution’s privileged materials without destroying the privilege never existed prior to the FSRRA, and therefore it could not have been among the “powers” that transferred to the CFPB.

Even scarier is the position of the CFPB that the codification of the selective waiver doctrine in Dodd-Frank somehow created a new power to compel production of privileged material.

The FSRRA provides in pertinent part: “The submission by any person of any information to any Federal banking agency, State bank supervisor, or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such agency, supervisor, or authority shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such agency, supervisor, or authority.” 12 U.S.C. § 1828(x)(1).

The CFPB appears to take the position that under FSRRA, an agency may demand, and the supervised entity may not refuse to provide, privileged materials.

[...]

The CFPB’s view does not appear to be supported by the plain language of the FSRRA. Rather than create a new power of the agencies, this provision only creates a layer of additional protection for the disclosing party. In other words, it does not vitiate the ability of a supervised entity to assert applicable privileges.

Obviously, you can see why those of us who represent banks are concerned. There appears to be a lack of appreciation on the part of the government for the need for banks, their officers and directors, to have "effective" legal representation. The government prefers its subjects abject and supine. I understand that. It's simply that there exist these pesky impediments called the Fifth and Sixth amendments to the US Constitution, one guaranteeing due process and the other assistance of counsel. We know they're a pain to those in power and have been for a couple of hundred years. Nevertheless, we're constitutional junkies and we simply can't kick the habit.

Nelson states that a legislative fix may be on the way. We'll see. We'll also see if November changes anything. If not, there's always the advice of former UN Secretary-General Butros Butros-Ghali: "The best way to deal with bureaucrats is with stealth and sudden violence."

"Heavy-Handed" Regulation Impeding Progress

Another slap-happy bank CEO ventured into no-man's land last Friday and fired off a burst at the federal banking regulators and everyone's favorite punching bag, Dodd-Frank.

Kelly King, CEO of Winston-Salem-based BB&T, has a simple answer for questions about problems in the banking industry: government regulations.

Speaking at a luncheon in Charlotte on Friday, King said heavy-handed regulation and oversight from federal rule-makers has crippled the nation's commercial banking industry ability to extend credit and help the economy recover.

His remarks were the keynote address for Johnson C. Smith University's    fifth annual Free Enterprise and Capitalism Luncheon, sponsored by BB&T.

"The banking system is really gummed up," King said to a crowd at the Charlotte Center City Hilton. He said lawmakers rushed to fix the financial industry after the 2008 crisis and acted out of emotion instead of reasoned thinking. He said the Dodd-Frank legislation includes 2,400 pages of regulations that are to blame for 95% of borrowers' complaints about not being able to access credit.

"Maybe one page was good," he said of the law. "The rest is just a mess."

I need to write Kelly a letter and find out which page was the one good page. I read the whole thing and it all looked like a steaming heap of seagull guano to me. In fact, it still does, other than entertainment value provided by the CFPB.

I think Kelly might be oversimplifying when he blames the entire economic meltdown on the "shadow financial system." It's true to say that relatively unregulated entities aligned themselves with Wall Street investment bankers and rating agencies to form an unholy perfect storm from the depths of Hades, but commercial banks and thrifts, particularly large ones, were in the mix, too. So were cynical politicians and somnolent regulators. In addition, Kelly's view leaves out of the daisy chain of bad actors all those homeowners who thought they'd hit the home equity jackpot and borrowed way more than they could hope to repay without real estate prices continuing to spiral up into the stratosphere.

In other words, there are more culpable parties than there are fingers and toes on the average humanoid.

However, his condemnation of Congress rings a clear tone.

...[V]oters must elect lawmakers committed to American ideals of free enterprise, fairness and equal opportunity. King, who identifies himself as a "Blue Dog Democrat," said the current Congress is too divisive to make progress.

"They have absolutely failed to lead," he said. "And I don't mind throwing the whole bunch into the same bucket."

The bucket should be lined with concrete and tossed overboard directly over The Mariana Trench. Also, throw into the bucket the friends and family leaches those politicians pay to "work" for them. If the bucket slams into James Cameron's sub on the way down, you'd have yourself a heck of a trifecta.

Not Cancelable? Not Really

A recent story from Longmont, Colorado, contained some disturbing news about the consequences arising from last year's failure of Longmont-based (and ironically-named) First Tier Bank. No, it's not the fact that the bank's failure resulted in a developer losing the right to additional funding draws under his acquisition and development loan with the bank and the letter of credit that backed his obligation to the city to put in the top 1-1/2 inches of pavement on a residential development's streets (a condition for the City of Longmont to accept their dedication as public rights-of-way). Rather, it's the implications of this statement by the developer's CFO when the city tried to draw on the letter of credit of credit after the bank's failure and the FDIC told the city to take a hike.

"I didn't think you could cancel a letter of credit," Knirk said. "It says it's not cancelable. But they did. And we had no way of doing anything about it."

Dude, seriously? You had no idea that if a bank fails, the FDIC can reject contingent obligations such as those under a standby letter of credit?

John Podvin and Erin Burrows of Haynes & Boone wrote an article for the The Banking Law Journal a couple of years ago entitled "Revisiting The FDIC's 'Superpowers'." Reading that article could have saved the developer and the city a lot of surprise and (perhaps) frustration. As Burrows and Podvin note:

Virtually any type of contract to which the bank is a party can be repudiated, including financial instruments issued by the bank (such as loan agreements, bonds, certificates of deposits and certain letters of credit), leases, employment contracts, and employee benefits, to name just a few.

The subject matter is more complicated than that (lawyers are involved, after all), but that's a good basic starting point for any borrower or letter of credit beneficiary that is dealing with a bank that is in a potential death spiral. It's a good idea to involve knowledgeable counsel at an early stage and start looking for means to protect yourself, including securing alternative lenders. In the case of the development in Longmont, I'm guessing (because the article doesn't enlighten us) that the developer didn't have an alternative lender to which it could turn to take over the unfunded loan (and the letter of credit) obligations.

On the other hand, the city is willing to step in and finish the streets. The developer will have to find another source to fund the cost of the improvements and pay back the city or the city will slap a tax lien on the property and, eventually, foreclose on that lien, if necessary. The developer says that this alternative does have a silver lining.

[Developer Kiki] Wallace said there is one consolation. The city got better prices on the finishing work than he could have.

"Accidentally, I came out better, because the city has more purchasing power than I do," he said. "I couldn't have planned it. It's not like they go out planning to save developers money. The circumstances just dictated the situation here."

The developer assures the reporter that the last thing the developer wants to do is to "stiff the city," and that it plans to pay the city back. I hope that happens. It's always refreshing in times like these to read about a rare "lemons-to-lemonade" outcome.

I'm sure that whatever happens from hereon, both the developer and the city are going to treat letters of credit that state they are not "cancelable" with a healthy does of caution.

Once More Into The Breach

I'm traveling the next two weeks and blogging, therefore, will be sporadic. While I'm gone, I'd like to post a portion of my Disclaimer, since no matter how much I write about this topic, a few readers remain utterly resistant to the concepts embedded within it.

I am providing the content on this blog solely for the reader's general information. This blog contains my personal commentary on issues that interest me. This is NOT a newspaper; it's a BLOG. Unless otherwise stated, the views expressed on this blog are mine alone, and not the views of any law firm with which I am in any way associated or any other member of any such law firm. Nothing on this blog is intended to be a solicitation of, or the provision of, legal advice, nor to create an attorney-client relationship with me or any law firm. You should seek professional legal counsel authorized to practice law in your jurisdiction before acting on any information contained on this blog. I expressly disclaim any and all liability of any kind or nature with respect to any act or omission based wholly or in part in reliance on anything contained on this blog.

As I've said before, I wish I didn't have to include such stilted nonsense, but I'm a lawyer, so I simply can't help myself.

What you read here are my personal opinions, not legal opinions. If you don't like my personal opinion on any specific matter, then please feel free to move on down the road. Cyberspace is filled with white noise, and I'm sure you'll find some on a frequency that pleases your ear and floats your boat.

Whatever you do, don't tell me how much you "object" to one of my fundamental principles, such as moral, religious, or political beliefs. Instead, scour the planet (or other planets) for a sentient being who actually cares. Mother Teresa has passed on, but you'll surely find, somewhere, a suffciently empathetic soul to listen. That soul is not to be found in this part of the universe, however.

Apparently, I can't repeat this position often enough.

No Access, No How?

Yesterday's financial institution letter from the FDIC (FIL-14-2012) has raised the hackles of lawyers who represent officers and/or directors of banks that are "in distress." Last year, the FDIC got into a claymation Celebrity Deathmatch with a few law firms that, according to the FDIC, were putting the records of failing banks on a thumb drive and waltzing out the door. The firms represented the management or directors (or both) of banks that had one foot in the grave and the other on a banana peel and were trying to help their clients preserve records of the bank that would likely be useful in defending the officers and directors against later claims by the FDIC as receiver for the failed bank that the clients had breached their fiduciary duties to the bank.

One thing the FDIC loathes is giving potential sources of blood money a fair shot at mounting an effective defense. I mean, it's not as if the FDIC has enough arrows in its quiver already with which to impale the livers of its targets, including playing with house money when it comes to gambling on litigation outcomes. No, if officers and directors of failed banks have access to records that can refresh their memories of past events, they might actually be able to keep from becoming quivering masses of protoplasm when words like "negligent" and "grossly negligent" are whipped their way. It's tough to put a boot up someones posterior if they refuse to stand still and take it like a victim.

Thus, the FDIC was OUTRAGED that copies of these records, most of which, arguably, are owned by the bank (and the FDIC as receiver steps into the shoes of the bank when it fails) were falling into the hands of legal counsel for the officers and directors. Litigation ensued (some of it initiated by the accused), settlements were negotiated, and things, we thought, had quieted down. Then, suddenly, the FDIC issues a warning that it's mad as hell and not going to take it anymore. An objective observer might inquire as to what law firm most recently stepped in something unpleasant?

Regardless of the impetus for the timing of the issuance of the FIL, the immediate reaction was negative (paid subscription required).

David Baris, a Washington-based attorney who runs an association of bank directors, called the guidelines "threatening" and said if the FDIC wants to officially block access to financial institution records it should do so with a proposed rulemaking or through new federal legislation. He said most state laws "permit bank directors to access and make copies of bank records that they need to do their job or defend themselves for what they did."

"The FDIC is going about this in entirely the wrong way," said Baris, a partner at BuckleySandler LLP and executive director of the American Association of Bank Directors. "If they want to change a fundamental right of a director to have access to and copies of bank records the FDIC should either go to Congress for a law to be passed or at least go through rulemaking proceedings under the Administrative Procedures Act."

He added that despite FDIC claims that the agency will make documents available through formal agreements, it is still unclear when the agency will allow access and when it will not.

"The problem is we don't know what those 'appropriate circumstances' are, and there is no assurance — and the FDIC is not providing any assurance — that the records will in fact be available to the director," Baris said.

I understand why wholesale, batch copying of such documents as loan files and suspicious activity reports is of concern. I also understand that examination reports (ROEs) are considered "information of the agency" and need to be accorded confidential treatment. However, I share David's concern that directors of banks have rights under state law to have access to the records of the bank, and that when the directors' monthly board packets contain such items as copies ROEs, under the FDIC's position, not only can't the director retain that part of the board packet, but, applying strictly the regulations cited by the FDIC, the directors' legal counsel could not even review (much less copy) the ROE in order to advise the director with respect to its contents. I suppose a director, the attorney, or the bank could request the permission of the FDIC to permit the director's counsel to review the ROE, but what are the odds that permission will be granted? The same odds you would have given on Lehigh thumping Duke last week, right?

Directors' counsel shouldn't have to wait until a bank fails and then negotiate a confidentiality agreement with the FDIC in order to have access to documentation necessary to properly advise his or her clients, which is what the FIL appears to be requiring. If that's not the intent of the FIL, then how about explaining what the limits might be?

I have to agree with David: this matter deserves a lot more clarification.

Pandit Gives Some Love To Dodd-Frank

Citigroup CEO Vikram Pandit was saying nice things about Dodd-Frank not long ago, which makes me wonder if he's off his meds again.

Speaking to a packed ballroom at the Waldorf-Astoria hotel in Manhattan on Wednesday, Mr. Pandit, the chief executive of Citigroup, championed an idea that most Wall Street titans would shun: regulation is good.

Banks, he said, deserved new rules after Wall Street nearly collapsed in 2008. “There needed to be changes,” Mr. Pandit told analysts, investors and fellow bankers at the Citi Financial Services Conference.

[...]

In response to a question from the audience about the toll such sprawling new regulations would take on Wall Street, Mr. Pandit said he supported “a lot” of the regulatory crackdown.

Although he bashed the Volcker Rule, he apparently is fond of the demon seed of Lizzie Warren.

On the regulatory front, Mr. Pandit has taken a particular liking to the new Consumer Financial Protection Bureau, the centerpiece of Dodd-Frank.

“We need to make sure consumers have more control, more choice,” Mr. Pandit said on Wednesday.

And more regulation ensures more choice how?

[crickets chirping]

Never mind. New York Times reporter Ben Protess assumes that all this air-kissing for Chris-Barney is "perhaps because his bank relied so heavily on taxpayers to stay afloat at the height of the financial crisis." Perhaps.

Or maybe he'd just had great sex with the spousal unit and was feeling "up."

No matter. Sooner or later someone like Sheila Bair will appear out of the federal regulatory woodwork and rain on his feel-good parade. Then, instead of mash notes to massive regulation, maybe Mr. Pandit can treat us to some more of those 2 am obscenity-laced tirades that so entertained us once upon a time.

Community Organized Breaking and Entering

An irate reader sent me this article last week, which, he asserted, showed evidence of "open criminal activity" that Chicago city officials were tacitly permitting. To make the long human-interest story short, non-profit groups allied with the Occupy Wall Street movement have been looking for abandoned homes that may or may not be in the process of a bank foreclosure and helping homeless people move in and treat the property as if they owned it.

The Occupy Wall Street movement turned its attention to the housing crisis last fall, and groups around the country have worked to keep people in their homes, place the needy in properties that are seemingly abandoned and rid neighborhoods of blight. The size of the movement isn't clear because most go unpublicized.

Mortgage servicers, reeling with hundreds of thousands of foreclosed homes, aren't necessarily giving in. But they have to tread carefully in their dealings with consumers and activists, lest they risk more national media attention and another black eye resulting from news accounts of bankers putting families out on the street, regardless of whether they have a legal right to the home.

The individual instance that Chicago Tribune reporter Mary Ellen Podmolik chose to focus upon demonstrates the public relations risk of trespassing, breaking and entering, and, depending what the squatters do once they're inside the home, committing what could arguably be considered burgary. In this case, it turned out the home was not owned by Bank of America, as the "facilitators" of this illegal occupation supposed, but by a homeowner who is trying to save his home from foreclosure.

And that is worrying to well-established groups like the Chicago Anti-Eviction Campaign, which plans to significantly ramp up the visibility of its "live-ins" prior to May's NATO summit.

The anti-eviction campaign, which trains groups like Liberate the South Side in home takeovers and has participated in seven since June, calls the situation a public relations "nightmare."

A spokeswoman for Liberate calls it a "calculated risk."

In Texas, if you break into a person's home, the "calculated risk" you'd be taking would be of suffering consequences much more deadly than "a public relations nightmare." It would be more like "A Nightmare On Elm Street," only with a lot more double-ought buckshot flying around.

A spokesperson for the "liberators" believes that when it comes to law breaking, it's all relative.

She sees the work as a move toward economic justice and away from the neighborhood blight that has, she said, unfairly affected communities of color. "We don't feel like we're breaking the law compared to what (banks) are doing to everyday families."

I get emails from folks, including attorneys, who have consumed gallons of the Kool-Aide this relativist educational system has been pouring down their ethically-parched throats for decades. The argument generally takes the line that because banks do X, it's proper for homeowners to do X. If your personal code of conduct is based upon what what a bank does, you're doomed for eternity. "I'm not as bad as a bank" is setting the bar awfully low, whether your personal system is based on divine revelation, reason unaided by first principles, or what you had for breakfast this morning.

In this case, the occupiers notified the Chicago alderman who represents the neighborhood where the home is located in advance of the takeover. That paragon of probity wasn't available for comment, nor were any member of her staff. I can't imagine why.

The realtor for the property, who's working with the owner and the bank to try to sell the property, has urged the owner to call the cops and have the occupants "removed." The owner refused to do so, apparently out of compassion, but has finally gone to court to have the family evicted, because the bank has started foreclosure proceedings and thinks that offers of one-half the already depressed listing price (due to the presence of the squatters) isn't in the borrower's or the lender's best interests.

Legally, the issue of Smith's occupancy sends attorneys to their law books.

She isn't the legal occupant of the home, but it's a different situation than, say, a homeowner who returns home to find someone in their house and calls the police. In this case, community members know she's been there for some time. The owner would have to try to evict Smith under the state's Forcible Entry and Detainer Act, designed to protect tenants from quick, forcible evictions, said Mark Swartz, legal director of the Lawyers' Committee for Better Housing.

"They're doing (the occupation ) in the light of day," Swartz said. "It's a very clever strategy."

It's also powerful advocacy, Swartz said, but added, "There's a great risk here. We need to be concerned about the people. We need to be concerned about the laws being followed. Organizers have a whole different toolbox than attorneys. I think these people believe they are advocating for a more humane way."

Timothy Hufman, an attorney with the Legal Assistance Foundation of Metropolitan Chicago, isn't so sure a tenancy has been established, because it could boil down to a case of he said/she said between Dodd and Smith.

"If the owner says, 'I never told them they could stay there,' they're screwed," Hufman said.

As well they should be. I don't know why you'd have to "run to your law books" over this issue, unless you're using your Black's Law Dictionary to press cocoa leaves and you need a quick hit.

Also, I don't see the daylight occupation of a house in full view of the neighbors as being "clever" at all. We have criminals in North Texas who break into homes in broad daylight all the time, thinking they can make a quick in-and-out before the neighbors can react and call the cops and/or the cops can react and make it to the house. If someone is unexpectedly home, sunlight makes it easier to draw a true bead on the miscreants as you yell "Freeze!" in the nanosecond before you pull the trigger...repeatedly. In the land of The Castle Law and concealed carry, I'd suggest that strategy is something less than "clever."

On the other hand, Texas and Chicago might as well be on different planets, so perhaps open lawlessness plays a lot better in The Windy City than it would in The Big D. From everything I've read and heard, corruption runs wide and deep in Blogoland, so perhaps citizens of that region have become anesthetized to its occurrence. We've got a proud tradition of incidents of a similar nature in some parts of Texas, of course. It simply hasn't become so widespread or brazen.

At least, not yet.

Hat Tips

Once is a blue moon, I like to give a special shout-out to other lawyers whose work I admire, instead of simply stealing it and claiming it as my own. I realize that puts me at a competitive disadvantage versus Gen Y, but I figure what I lack in pilfered work product I can make up for in the sheer volume of hot air I vent.

The first hat tip goes to old friend Joe Lynyak, who's published a client alert entitled "Responding to Capital Directives and Related Enforcement Actions by Banking Regulators." As long as community banks continue to suffer, this topic will be current. As Joe observes, this problem isn't disappearing tomorrow.

In the past four years, the FDIC has closed approximately 400 insured institutions—as of January 1, 2012, the FDIC has indicated that there were over 800 banks on its "problem bank list." The difficulties experienced by many of these institutions are summarized in this analysis— and may provide useful guidance when attempting to resolve capital issues in the next few years.

A version of Joe's article will appear in the April issue of the Banking Law Journal.

Another bank lawyer whose work I admire is former OTS attorney Jerry Comizio. He and Amanda Jabour have written a well-reasoned critique of the arguments supporting and opposing Richard Cordray's recess appointment as Director of the CFPB. In a society suffering from perennial ADHD, this might seem like old news. However, the authors point out the "legal issues surrounding the appointment have significant implications for all institutions regulated by the CFPB." It's refreshingly free of partisan posturing, as well as any Bank-Lawyer's-Blog-like snark. I highly recommend it for those who care about the issue.

Finally, Kevin LaCroix asks the question "Is the FDIC Ramping Up Its Failed Bank Litigation"? He answers his own question and the answer is "yes." Again, this is an issue that is likely to linger, and, in fact, increase in importance over the next few years. Kevin is all over it, and if you're not already following his D&O Diary blog, you should be.

Out One Pocket, Into Another

The always provocative Junior Deputy Accountant points the way to another amusing statistic (courtesy of the always Fair-and-Balanced Fox News).

The Government Accountability Office says in a new report that banks that have repaid the Treasury Department's TARP bailout program did so with funds they received from other federal rescue programs.

Robbing Pedro to pay Pablo is a time-honored practice in our nation's capital, so the Treasury Department wasn't exactly thrown for a loop when this issue was raised.

A Treasury spokesman said that Congress specifically required that banks who participate in TARP could also participate in the Small Business Lending Fund. He also noted past comments from Assistant Secretary for Financial Stability Tim Massad, who said “we will continue to work to wind down the program in a way that ensures financial stability and protects the interest of taxpayers.”

The GAO adds that this issue of round-tripping federal bailout money arises with small banks, as the government essentially replaced their TARP funding with the new federal Small Business Lending Fund enacted in 2010, which GOP Congressmen have dubbed “TARP 2.0.”

Yes, that great small business lending fund that did so little for so few, at least provided a way for Treasury to make it seem like it was getting a load of TARP capital paid back for the American taxpayer when all it was doing was providing an opportunity for some TARP-takers to jump from one tar(p)-pit into another.

"Look! Over here! See this shiny object? Don't look away while my minions short-sheet your bed."

And just how are those "small banks" who still have government capital sitting on the books looking these days?

The GAO adds that, as of November 30, 2011, the number of banks and companies “that had missed their quarterly payments rose to 158, a marked increase from 8 in February 2009,” even though the TARP program “had fewer participants.”

And the GAO found that the number of companies in the program “designated as problem banks — that is, demonstrating financial, operational, or managerial weaknesses that threatened their continued financial viability — also rose from 47 in December 2009 to 130 in December 2011.”

The GAO warns: “Institutions that continue to miss payments and problem institutions may have difficulty ever fully repaying their CPP investments.”

Oh, so, everything's just fine, then. Move along now. Nothing to see here.

For those squirrels who just can't seem to get enough TARP acorns to munch, you can access the entire GAO report here.

Examiners Second-Guessing Community Banks On Executive Compensation?

A recent article in Bank Safety & Soundness Reporter (paid subscription required) claims that while Dodd-Frank focused federal bank regulators on incentive-based compensation at the largest banks, bank examiners "are using safety and soundness criticism and the threat of formal action to micromanage not only the incentive plans, but also the base salaries of bank executives and directors." And they're targeting banks of all sizes, not merely the biggest.

"We are seeing increasing scrutiny by the regulators on senior management compensation," says Thomas Bieging, a partner with Bieging, Shapiro & Barber, LLP, Denver, Colo. "The issue is not just incentive compensation, which has been addressed in Dodd-Frank, but rather base or salary levels.  The attitude seems to be that if the bank declined under the existing senior management’s watch, then their core compensation should be adjusted downward or increases severely limited."

"Examiners will continue to pressure bank boards to take action – to reduce or limit core compensation – even when presented with a compensation study from a third party showing compensation levels to be within the median range for the bank’s peer group," he adds.

Your managers may have held the bank together during tough economic times. Your board may want to recognize that effort and managerial skill. It doesn’t seem to matter, Bieging says, since examiners "attribute little or no value to the fact that senior management kept the bank afloat during turbulent times."

[Full Disclosure Alert: Tom Bieging is a partner in the law firm with which I have an "Of Counsel" relationship.]

According to Bieging, boards who appear to be ignoring the examiners on this issue are being threatened with being cited for engaging in an "unsafe and unsound banking practice."

Former FDIC lawyer Jeff Gerrish states that he's seeing even small banks being pummeled over base compensation.

"We have one client at a bank around $300 million who is making around $600,000. The regulators decided that this was excessive."

It’s not an easy case to justify salaries like this to examiners who, as a practical matter, make a lot less than that, Gerrish adds.

"If a bank officer makes $300,000-to-$500,000 and the bank examiner makes $80,000 per year, that’s a problem right there."

[Must restrain fist of snark! Must restrain fist of snark!}

Man, that was painful.

Let's just say that comparing the CEO of a bank to a bank examiner for salary purposes is--to steal a phrase from Irina Dunn--comparing a fish to a bicycle.

In this area, it appears that national banks may be in a comp/clamp-free zone.

OCC examiners have shown little interest in second-guessing board decisions about salary, says Peter Weinstock, a partner with Hunton & Williams LLP, Dallas, Texas. That has not been the case with their colleagues in the FDIC and Federal Reserve, he adds.

"For over twenty years, the OCC has been principles-based [in regards to salary]," he says. "If the board is doing what they’re supposed to do, and they’re free of self interest, the OCC will tend to defer to the board. They’re least interested in micromanaging salary. The Federal Reserve and the FDIC are much more interested in evaluating performance and comparing performance against what the compensation is relative to the rest of the industry."

The problem is that if the bank's ratings fall, scrutiny on all areas of the bank increases, and executive compensation is apparently one of the hot buttons. Micro-managing percentage increases in base compensation and appropriate percentages of incentive compensation seems to be part of pain that a bank should expect to experience. However, even for "good banks," Bieging sees a need for more "backup."

"We’re seeing banks that aren’t in this situation setting up compensation committees and looking for more data to support their conclusions at the board level," Bieging says. "They’re looking at various surveys out there to see where they stand, on a regional and national basis. It’s an appropriate thing to be doing and it’s becoming a more common practice."

As in so many areas of the banking business these days, killing scores of trees so you can leave a paper trail is not an option but a necessity.