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Over the weekend, I had a chance to read the opposing motions for summary judgment filed by United Western Bank and the OCC in the lawsuit filed by the bank to overturn the order of the Acting Director of the OTS to place the bank into an FDIC receivership in 2011. Late last week, the bank filed a motion to strike the OCC's entire statement of facts on the grounds that it was a back-door attempt to circumvent local rules on the length of pleadings in this particular type of case. However, I'm basing my personal bloviations on the entire motion and accompanying statement of facts filed by the OCC.
In my comments on the plaintiff's motion, I stated that I thought that the OCC would have to rebut the facts as alleged by the plaintiffs in some detail , not merely focus on the high bar the law sets to overturn the decision of the OTS. The OCC did that, although we'll see what happens to those "facts" when the judge rules on the plaintiff's motion to strike. Regardless, the judge has access to the entire administrative record and isn't bound by a party's selective inclusions, omissions, and spin. Unfortunately, at this stage, I am.
Given my personal experiences in dealing with the OTS, the FDIC, the FRB, and the OCC over the past five years, and with the OTS in connection with a strikingly similar situation ten years ago, I believe the plaintiff's allegations that there were no serious criticisms of the bank's business plan, which involved a focus on institutional deposits as a major source of low-cost funding that the bank used to invest in mortgage backed securities and other mortgage-related assets, until the economy slowed and then crashed. Although earlier reports of examination (ROEs) may have mentioned the liquidity risk posed by a concentration on such funding sources, I suspect that the ROEs also stated that the bank was aware of and adequately managing that risk. It wasn't until the economy tanked that the senior management and directors of the bank transformed themselves, in the eyes of the OTS, from geniuses to cud-chewing bovines. At that time, the business plan suddenly made no sense, was unsafe and unsound, and had to be changed as quickly as possible in the face of the worst recession since the 1930s. While the bank's management and board was trying to steer the bank in a new direction, you can't turn an aircraft carrier as quickly as you can a cigarette boat, especially when the current is flowing strongly against you and icebergs are bearing down from the windward side.
Of course, that wasn't the concern of the OTS. It's concern was the fact that the bank's risk profile had suddenly turned unfavorable because of outside circumstances, and that if it failed, the OTS supervisory personnel responsible for overseeing the bank might be criticized by the Office of the Inspector General of the FDIC for not acting forcefully enough, early enough. Bureaucratic butt-covering trumped all other considerations. From then on, the OTS made sure that it didn't cut the bank any slack. That attitude led to aggressive mandated writedowns in the value of securities and other real estate-related assets, increases to reserves, and hits to capital.
I also accept the plaintiff's allegation that the OTS decided long before the bank actually failed that it was doomed, but allowed the bank's management to go through a Chinese fire drill of ultimately fruitless capital-raising and liquidity-stabilizing efforts in order to give the ultimate dropping of the hammer on the bank's head a patina of inevitability. Although it's not alleged in any of the pleadings, and I have no information from outside sources, I suspect that the OTS personnel with decision-making authority may have decided that they simply didn't "like" the ownership and senior management of the bank, didn't want them in "the business" any longer, and weren't going to approve any recapitalization plan that involved any concessions on the part of the OTS (such as waiving certain conditions of the Cease and Desist Order and agreeing to a non-standard holding company guarantee). I think that if it had desired to do so, the OTS could have worked with the bank to structure a recapitalization plan, including certain waivers of the C&D's terms, but chose not to do so for reasons that may not be expressly revealed by the administrative record.
Even if the above assumptions and outright speculations might be correct, the problem for the plaintiff is that, ultimately, all the OTS has to show in order to prevail is that there was a rational basis for the Acting Director's determination that one of the following three grounds existed for the appointment of a receiver: (1) the bank was in an unsafe and unsound condition to transact business; (2) the bank was likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business; or (3) the bank was undercapitalized and failed to submit a capital restoration plan that was acceptable to the OTS. The court must defer to the opinion of the Acting Director of the OTS on these matters unless the court determines, based solely on the administrative record, that the decisions of the Acting Director were arbitrary or capricious or lacked any rational basis. The plaintiff must overcome the presumption that the decisions of the director were not arbitrary or capricious by a preponderance of the evidence, again as reflected solely in the administrative record. As I've observed previously, this a high hurdle for a plaintiff to jump and is one important reason that few such lawsuits are brought.
All three grounds for the appointment of the FDIC as receiver seem to hinge on the rejection by the OTS of the bank's capital restoration plan, the undercapitalized status of the bank (albeit at a 5% core capital level), and the perceived "instability" of the commitments of the remaining institutional depositors not to withdraw their funds. The OTS articulated seven grounds for the rejection of the capital plan, all of which the plaintiff alleges are without a rational basis. The OCC, on the other hand, articulates in its motion several reasons to support its decision to reject the capital plan (including, for example, disapproval of the acquisition by the bank of a securities clearing business, "excessive" planned growth of the bank, and requirements by investors that certain requirements of the Cease and Desist Order be waived by the OTS). The alleged instability of the institutional depositors is also an issue where the OCC appears to have demonstrated a rational nexus between the facts as shown in the administrative record and the Acting Director's determination that a potential "liquidity crisis" could occur in the near future due to the OTS' rejection of the capital plan. While the plaintiff argues that there was no evidence that the remaining institutional depositors were likely to withdraw their deposits in the near term, the OCC alleges that the administrative record shows that the largest depositor had given the bank until February 15, 2011 to recapitalize, following which date, if recapitalization did not occur, the depositor would withdraw its funds (in an amount which exceeded the entire liquidity of the bank, according to the OCC).
My concern for the plaintiff's case is that while knowledgeable bankers can conclude that if the OTS was interested in working with the bank's management to reach an accommodation with outside investors that would have addressed their concerns and permitted the bank to be recapitalized and to survive, it could have done so, the OTS can articulate reasons for its decisions not to do so that are based solely on the administrative record to prevent the plaintiff from meeting its burden. This case appears to be a prime example of why it's so tough to overturn a receivership decision. You can think that the OTS made a series of bad judgments, but it's difficult to prove that those judgments were made without a rational basis.
The case is not over. Each side gets another shot at replies. Moreover, I'm not being paid to parse the nuances, so the views expressed in this post are not finely honed. However, at this point, no matter what my heart tells me, my head tells me not to bet against the OCC.
