Bank Lawyer's Blog

Nationalized Banking's "Vision Problem"

Between them, bank analysts Dick Bove and Christopher Whalen supply more bank buzz-kill than a cohort of meth-fueled Mad Max Waters and Lizzie Bordens Warrens. Quoted in an article posted today on CNBC, Chris and Dick took the news that the biggest banks passed their stress tests and are likely to be permitted by the federal regulators to dividend 100% or more of their earnings to shareholders, and spun it so it sounded like they all just found out (A) they are pregnant and (B) tested positive for the Zika virus.

"These companies have completely lost their way. ... They have no vision, they have no concept of how to grow these businesses," Dick Bove, vice president of equity research at Rafferty Capital Markets, said in an interview. "They have no idea how to use the capital they've been entrusted with."

Lacking ideas about how to grow their institutions organically, banks are boosting their stock prices by simply shoveling cash back to shareholders. However, even with the prospect of that cash coming back, investors remain cool to bank stocks.

[...]

Bove said the banks' leaders are to blame for the weak performance not only in share price but also in overall performance.

"Banks are selling the perfect no-growth strategy — i.e., we have no idea as to how to grow our businesses so we are giving away shareholders money primarily to people who do not want to have anything to do with us," he said in a separate note to clients.

The industry, he added, is piloted by "bank executives [who] may be the most inarticulate group of company leaders in history. ... This industry needs new leaders who can shape the visions and implement the strategies to grow."

Perhaps its time for Millennial bankers to leap out of the dugout, step up to the plate, and strike the bank leader long ball. After all, as we've seen, they've mastered forestry. The Baby Boomers (aka "The Not So Greatest Generation"), has obviously run out of gas and needs to head for the showers. And the Ensure. And the Ben Gay.

Bove moderated his attack, and Whalen also chimed in, by noting that a lack of bold vision in the leadership ranks is a natural consequence of the over regulation that has become the norm in the wake of 2008, and, to me, is exactly the business model that sets the largest banks up for micromanagement by regulators and politicians, a scheme favored by folks like Warren.

As long as banking is treated as a utility — Bove contends the industry has been effectively nationalized — the hopes for organic growth may go unfilled, at least for the largest institutions.

"I think it is very limited. M&A is the only way you can show top-line growth, but the deals aren't obvious," Whalen said. "The curse of regulation is that you can''t innovate. None of these big banks or big financials generally can really be that flexible in how they run their businesses, because they have this top-down template from the regulators. They are forced to run their businesses to suit the regulatory environment."

[...]

"The Street has turned the [stress test] process into a way of justifying greater cash return, and I'm not sure that's appropriate," said Christopher Whalen, head of Whalen Global Advisors. "But this is the house the Fed has built, so they have to live in it."

Nationalization and innovation are characteristics that are usually incompatible.

Even one of Bank Lawyer's Blog's perennial favorites, The Care Bair, jumped on the dogpile in order to let everyone know that she wasn't sucked into a worm hole somewhere between Uranus and Neptune with many of the rest of those former federal bureaucrats who once prospered under The Change We Were Waiting For but then were kicked to the curb with the arrival of the new Tweeter in Chief.

Former FDIC Chair Sheila Bair worries about the Fed's willingness to approve the capital plans. In a post for American Banker, Bair said she "would advise extreme caution for payouts in excess of earnings," reasoning that for some banks the capital returns might not leave enough left over should a crisis hit.

Unfortunately for Sheila, Marty Mosby points out earlier in the piece that the big banks have built up so much capital that even if another Great Recession were to strike (perish the thought!), they'd still remain "well capitalized." Thus, unless the regulators simply lost their minds, that warning of hers sounds as sophisticated as warning your child that if he turns the stove top burner to its highest setting and places his right hand palm-down on it for 10 minutes, he might get a vicious "Owweeee." Then again, Ms. Bair's strong suit when she was the federal watchdog over the financial safety and soundness of the nation's FDIC-insured banking industry was not actual banking industry expertise, it was a hybrid of consumer advocacy, stiff-arming the industrial banking industry, and positioning herself for an exit launch into academia and the world of NGOs. It's always great to see folks as they "evolve" over time.

Regulatory Relief: Don't Hold Your Breath

On a purely partisan vote, the House passed the Financial Choice Act last week and sent it to the Senate, where a number of sources proclaimed that it was DOA. On the other hand, everyone's favorite hectoring harridan, Elizabeth Warren, publicly announced that she and her Democratic cohorts in the Senate would be willing to consider "targeted relief" for community banks, provided that "you are not changing the law," whatever the heck that means. I assume it means that as long as changes to existing law, particularly Franken-Dodd, aren't substantive, Princess Liz and her social justice warriors will pay lip service to some feel-good window dressing legislation that makes it seem that little banks are getting a break, but in a "form-over-substance" context only. As whatever sausage the Senate makes out of the Financial Choice Act becomes a bit more visible, we'll see what takes shape. Breath-holding is not advised.

Our reason for caution as to timing is caused by the fact that Liz is getting her own action figure, which was inspired by Mitch McConnell telling her to STFU when she engaged in some verbal theatrics during Jeff Sessions' confirmation hearings. We assume that playing with her mini-me self will fully occupy Liz's time over the next few months, especially since the doll has "quirky details," a characteristic that would likely fascinate the quirky in all parts of the planet.

The Warren action figure has quirky details, like a "power blazer to topple the patriarchy."

Who can't get behind toppling the patriarchy, especially when the toppling is consummated by the use of a "power blazer"? I need Patty Jenkins, the director of Wonder Woman, to explain to me the mechanics of how toppling-by-blazer actually works (because I assume it's similar to the way the Bracelets of Victory work). However, I'm sure, whatever that process might be, it's as empowering as all get-out. The only guy I can think of who might have a problem with patriarchy-toppling-via-sports-coat is the unreconstructed Scott Brown, Warren's predecessor in the Senate, who Liz scalped and left for dead in a wagon rut five years ago. However, the Machiavellian Warren made sure that Brown will be mingling with Maoris 8,729 air miles from D.C., by doing Brown a solid and helping with his confirmation by the Senate as The Orange Lord's new ambassador to New Zealand. That's what we call a move worthy of Claire Underwood.

Perhaps, once the patriarchy in the Republic is toppled, Warren and her sister Power (Blazer) Rangers will turn their attention to the world's bare-chested Interferer-in-Chief, Russian President Putin. That's one patriarch who could stand the gentle ministrations of a power blazer! In fact, if Warren's running buddy in the House, Maxine Waters, is to believed, the dastardly Putin will simply not stop with his invasion of Korea, so patriarchy-topplers have no more time to waste.

If we can't get meaningful regulatory relief in any reasonably swift time frame, the least these PhD's of the world's foremost clown college can do for us is to continue to keep us entertained.

He's A Lumberjack And He's OK

Although I'm taking a break from banking and legal issues this week, I do want to continue my series of public service announcements designed to educate older generations about their newest challenge in the workplace: Millennials. While previous episodes (such as this one) have concentrated on the challenge posed by young sprouts to old codgers in the white collar world, such as that inhabited by commercial bankers, a recent music video illustrates that when it comes to Millenials, the blue collar workplace is no bed of roses. For your viewing and listening enjoyment, ponder, if you will, startled forest flora and fauna encountering the phenomena of Lumberjack Millennials.

Small Enough To Jail

At a time when many of both the over- and under-educated among the chattering class have repeatedly bemoaned the lack of banks and bankers who have done the "perp walk" as a result of the high crimes and misdemeanors that allegedly caused the 2008 mortgage meltdown, you would think that the case of the only bank that was indicted by federal or state criminal authorities (in this case, by the never-publicity-shy prosecutors in New York county) would have led the glitterati in the entertainment biz to fall all over themselves to document the story of how at least one bad bank got what was coming to it. Instead, when the owners of the indicted bank (a family full of lawyers, according to the preview embedded below) told state prosecutors to take their indictment, fold it five ways, and stick where the moon don't shine, they got an Emmy award-winning, Academy award-nominated documentary film maker to tell their story in a film recently released and appropriately entitled "Abacus: Small Enough to Jail."

Business Insider's Jason Guerrascio reviews the movie by Steve James ("Hoop Dreams," "Life Itself"), which tells the tale of not only " how thin the case against Abacus really was," but how the indictment and persecution of the bank "was a miscarriage of justice." Adding to the irony of the miscarriage, the state decided, of all the financial institutions in New York that sold mortgage loans to Fannie Mae from 2005 to 2010, to go after "a small, family-owned bank tucked inside Chinatown in New York City...a reliable institution for thousands of Chinese immigrants that is run by Thomas Sung, who's considered the George Bailey of Chinatown."

The Sungs (one of whom worked for the New York DA's office at the time of the indictment) fought back, and after five years of what what Guerrascio describes as a "David-versus-Goliath court battle," the charges were dismissed in 2015. Another review (see below) indicates that the battle cost the Sungs $10 million. In this country, battling a criminal indictment never comes cheap.

Guerrascio's review also states that the film reveals, through accounts of the defendants and interviews with members of the DA's office (the film maker was not allowed to film in court), that the DA's case unraveled as the testimony of the prosecution's star witness, the bank's former loan manager (fired after the bank's senior management learned of his activities), showed him "practically admitting how he pulled off his illegal acts behind the backs of everyone at Abacus while on the stand." James claims that he tried to give an account of the prosecutors' case against the bank as clearly as possible, "because my feeling is by really laying out the case against them you also not just hear the case — you see how weak the case against them was."

A more extensive, and nuanced, review, of the movie was written by Variety's chief film critic, Owen Gleiberman, which attempts to throw cold water on the heat one might feel when thinking about the injustice served up by the state criminal authorities. He notes that 19 employees, in addition to the bank itself, were indicted, and that eight pleaded guilty to falsifying bank records, including inflating income and assets of borrowers. Does that sound familiar? However, the fact remains that the government, after five years and millions of dollars, could not present enough evidence against the Sungs to avoid a dismissal of charges, which is a pretty low bar to be unable to hurdle. Moreover, James gave the prosecutors a post-trail opportunity to make their case in the court of public opinion, and they fell flat on their faces.

Cyrus Vance Jr., the New York County District Attorney, sits down for an interview and says nothing of substance, and the whole arena of evidence — what the prosecution thought it had and why — remains frustratingly vague.

Gleiberman then makes an observation that shows a critical lack of understanding of how our system of justice is supposed to work.

Was the Abacus Federal Savings Bank dragged through a legal morass for five years because it was being treated, in effect, as a surrogate for the bigger banks that got bailed out? The movie wants us to raise our fists and shout, "Yes, that’s what happened. And it’s an outrage!" Instead, you may feel like raising your hand and asking "Is that really what happened? If so, it’s an outrage! Now please show us some evidence."

Abacus does not have to be a "surrogate" for unindicted big banks for a viewer to feel outraged at the way the bank and its owners were treated. Whether or not the DA's office had that intent, the bank does not have an obligation to prove its innocence. That's presumed by law. Instead, it's an outrage that the bank was indicted at all, regardless of the existence or nonexistence "scapegoating" motivations, unless the DA's office had evidence in hand, prior to filing the indictment, to prove, beyond a reasonable doubt, that the bank's senior management was guilty of the crimes for which the bank was indicted. As I've asserted many times, criminal prosecutors have enormous power to destroy people's lives. Before they set out to do so, they need to be damned sure they've got the facts on their side. The court ultimately decided that they did not, and, according to James (and the two reviewers quoted in this article), the prosecutors were not able to make their case to the public on camera.

Obviously, the best way to make up your own mind is to actually see the film, which was released a couple of weeks ago. That might be tough to do, since it appears from the film's web site that screenings are limited. Perhaps many of us will have to wait to see if it eventually shows up on cable television, Netflix, or Amazon Prime. James admitted that the subject matter of the film was not be one that seizes the imagination of the average move viewer. To those of us who live in the world the Sungs inhabit, however, it sounds like gripping fare.