Bank Lawyer's Blog

Power Groping

Although I'm otherwise occupied, several readers have emailed me to urge that I comment on the current ridiculous kerfuffle involving the Celebrity Deathmatch between Mick Mulvaney and Leandra English over who lawfully acts as the "Acting Director" of the CFPB. My bottom line comment is that it's a useless sideshow. Eventually, Trump will appoint a director, and the Democrats don't have enough votes to block his or her confirmation. In the not-too-distant future, the new director will be able to undo any damage Ms. English might do in her brief tenure, should she win her legal battle with Mulvaney.

I do not think that she'll win that battle. I side with the analysis presented by Mayer Brown's Alan Pincus, and backed by the CFPB's own General Counsel, Mary McLeod. On the other side are folks like the noted legal scholar Maxine Waters, former Native American law professor Elizabeth Warren, and Harvard law professor and Barack Obama mentor Laurence Tribe, who once claimed that Neal Gorsuch's seat on the Supreme Court was stolen from Obama (which was educational for those of us who never realized that US presidents "owned" SCOTUS seats). Tribe lashed out at his idiotic opponents with his usual flair in The Washington Post (surprise!). Read the opposing views and decide for yourself which you find more persuasive. By the time you do so, the district court may have ruled and we'll have yet another wrinkle to iron out until the inevitable occurs, and Ms. English flies out the revolving door into the waiting arms of Big Law, Mulvaney goes back to his day job, and a permanent director moves in with, I hope, a flamethrower, a stash of M18 Claymore mines, and a list of names.

If they really wanted to settle this quickly, instead of taking the battle to court, they should have Indian leg-wrestled for the title. I think Leandra could have leg-whipped Mick into a vicious back-roll in less than three seconds flat. Trump could have promoted the living hell out of that match, with the proceeds going to a charity of the winner's choice (less Mulvaney's medical and rehabilitation expenses, of course).

Too many lawyers, not nearly enough time or ammunition.

The King Is Dead! Long Live The King!

Richard Cordray announced that he is resigning as Director of the Consumer Financial Protection Bureau by the end of the month.

""The new Director of the CFPB must be someone with a track record of protecting consumers and holding financial firms responsible when they cheat people," wrote Sen. Elizabeth Warren, D-Mass., on Twitter. "This is no place for another Trump-appointed industry hack."

Actually, it's the prefect place for another Trump-appointed industry hack. My choice: the spousal unit of Treasury Secretary Steven Mnuchin, British actress Louise Linton. Who better to watch out for the little guys and gals than someone so sensitive to the plight of the proles that she and Steverino posed shamlessly grinning while waving sheets of newly minted bills signed by Mnuchin. A woman who recently fought an Instagram snark war with total strangers over her allegedly tasteless flaunting of her husband's wealth on social media is, I assert, the perfect watchdog to ensure that the Adjustment Bureau fulfills its Gaia-given purpose in life: self-immolation.

No matter who the Orange Lord nominates to fill Cordray's size-five Bass Weejuns, Warren, Sherrod, Al ("Grope-Me-Or-Leave-Me") Franken, and the rest of their running dogs will have a chance to bay at the moon and sell popcorn to the nomination hearings. Of course, since the Republicans have a theoretical majority in the Senate (Lindsey Graham, Susan Collins, and John McCain have this nasty habit of thinking for themselves, so you're never completely certain of any outcome), the Dems' opposition will be primarily an exercise in political theater. Still, the 2018 mid-term elections are less than a year away, so keeping the pot boiling within the base is not a totally useless exercise.

Two other things to keep in mind. One, when Sheila Bair was nominated by George W. Bush to head the FDIC, she was described by supporters (including her mentor, Bob Dole) as a conservative Republican. Once in office, she zipped into a phone both and flashed out in her super-heroine costume as "Consumer Queen." Nothing in life is certain except death, taxes, and the fact that Liz Warren is not 1/32 Cherokee. Moreover, "top down" changes at the CFPB will not be any easier than they've been for any other Trump administration agency head. The CFPB, especially, is filled with true believers, likely to resist change in the mission in the thousands of ways that bureaucrats have resisted change throughout history. The saving grace in this situation is that the goal of opponents of the CFPB is to slow it down, and, if possible, either break it down or drive it off a very high precipice. Infighting in the ranks is, therefore, not at all necessarily a bad prospect.

Whatever the future holds, CFPB-haters won't have Recess Richie to kick around anymore. We'll leave that to Ohioans. Instead, we will await the day we can hail the new King or Queen of the CFPB with a hearty "Dilly Dilly."

Leuktemeyer Using The CRA To Roll Back Regulatory Restrictions

According to a recent article from Reuters, if Congressman Blaine Leutkemeyer has his way, the recent use of the Congressional Review Act to overturn the CFPB's arbitration rule will be only the opening salvo in what might be a bombardment of bank regulatory rollbacks.

A top U.S. House of Representatives Republican has written to banking regulators asking them to stop enforcing restrictions on leveraged lending and to review other guidance that he says may no longer be legally enforceable.

The letter, sent on Wednesday by Blaine Luetkemeyer, chairman of the House Financial Services Subcommittee and seen by Reuters, will increase pressure on the watchdogs to rescind rules banks say have stymied billions of dollars of deals.

It could also pave the way for Congress to scrutinize and roll-back other rules banks say have dampened lending, prevented business expansion, and bogged them down in paperwork.

[...]

The letter was sent to the chairs of the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

[...]

The letter follows a determination issued by the Government Accountability Office (GAO) on Oct. 19 that said the guidance issued by the three watchdogs in 2013 restricting leveraged lending legally constituted a rule-making.

The decision could have profound consequences for leveraged buyouts, acquisitions that load the companies being bought with a lot of debt, as well as other rules.

This is because U.S. law requires all rule-makings to be submitted to Congress for review before they are legally binding. Since the leveraged lending guidance was never submitted, Luetkemeyer said they are not yet effective.

Although the FDIC, OCC, and FRB have not yet indicated what their responses might be to Leutkemeyer, I imagine that there have been more than a few "uh-oh" moments in each agency. Much mischief might ensue if, to pick a random example in addition to the leveraged lending guidance, the commercial real estate guidance adopted by the agencies eleven years ago, was revisited and determined to have been, in effect, a regulation that was not appropriately promulgated. Six years ago, the GAO criticized the lack of clarity and consistency in application in such guidance. Perhaps, in the these early stages of what has been promised to be an era of diminishing regulatory burdens, Rep. Leutkemeyer might want to light a CRA cherry bomb and flush it down the CRE concentration guidance regulatory commode and, you know, see what happens. If the misguided missile of CRE concentration guidance, one that blew up more than a few community banks and formed the basis for enforcement actions during the latest banking meltdown, was not appropriately adopted, does that mean that any regulatory actions that were based upon alleged violations of that "statement of policy" are of questionable merit and, therefore, capable of being set aside? It may be moot at this point regarding actions in the past (I have not devoted much thought to the issue because (A) I'm incredibly lazy and (B) more critically, no one is paying me to do so), but, obviously, going forward the CRA may inhibit the ability of regulators to use "guidance" in lieu of formal regulations adopted in accordance with the Administrative Procedures Act, at least to the extent the regulators want to consider deviations from the guidance as the basis for supervisory actions, formal or informal.

There's so much "guidance" out there, much of it not infrequently used as the basis for MRAs and MRIAs in examination reports, that the mind boggles at the prospects of the use of the CRA to stir up a world of hurt for the regulators, if encouraged by pro-bank representatives like Leuktemeyer or worse, bank lawyers.

Perish the thought!

No Relief, No Peace!

In a recent article at BankDirector.com, John Maxfield gives us insight as to what private equity investors are looking for and why commercial banks are not on the list.

One of those private equity funds is run by former Bank of America Chairman and CEO Hugh McColl, who observes that banking does not meet the fund's return-on-equity (ROE) requirements of an 18 percent to 25 percent annual return. In addition, banking doesn't have the growth that private equity investors favor. Other experts echo McColl's opinion.

"One of the major themes we’ve seen over the past decade in the banking space is a shift from growth to value investors," says Frederick Cannon, director of research at Keefe, Bruyette & Woods. McColl agrees: "I ran a growth company. An explosive growth company. It’s hard to see that happening now."

What's the primary cause of the comparatively low returns for most banks? The answer will not surprise community bankers>

There are many explanations for this shift, but it springs fundamentally from the stricter regulatory environment brought on by the Dodd-Frank Act of 2010. Under the new rules, known as Basel III, banks must hold more capital relative to their assets than they did before the crisis, which reduces leverage and thereby profitability. Banks also face higher compliance costs in the post-crisis world, thanks to the litany of new rules passed in Dodd-Frank’s wake. And low interest rates, as well as regulations such as the Durbin Amendment, which limits how much retailers can be charged for debit card processing, are a drag on revenue.

As a result, the typical bank on the KBW Regional Banking Index earned a 15 percent return on equity in the years before the crisis. But this has since plateaued at less than 9 percent.

"From the beginning of the crisis until just recently, returns in the industry have been below the cost of capital, with a number of large banks trading below book value," says John Allison, who served from 1989 until 2008 as CEO of BB&T Corp., a now $221 billion bank based in Winston-Salem, North Carolina. "An industry can’t be healthy over the long term if they’re earning less than their cost of capital. It has happened in the past in certain industries, and when it does something dramatic happens to those industries."

While Maxfield notes that a similar period of risk-aversion and lower returns followed the collapse of many banks during the Great Depression, the problem with the post Dodd-Frank era is that even banks that weren't crippled by the Great Recession of 2008 because they didn't take unreasonable risks in the lead-up to that collapse, are nevertheless being burdened by a restrictive regulatory regime implemented by regulations and regulators who are determined to fight the last war in perpetuity.

Charles Calomiris, the Henry Kaufman professor of financial institutions at the Columbia Business School, takes this argument even further. "We’re really living in a kind of Kafkaesque world now in terms of the way regulation is done in the banking system," says Calomiris, who co-authored a seminal book ("Fragile by Design") on the evolution of financial regulation in the United States. "And it’s not just the regulations. It’s also the new mode of approach by regulators, especially toward financial institutions."

Calomiris points to how regulations passed since the crisis impede growth in the industry and, together with low interest rates, have all but halted the filing of new bank charters, both of which would logically hasten the exit of rational growth investors.

As to de novos, a topic we've focused upon for years, hedge fund manager Tom Brown doesn't see any sense in thinking that the trickle of them will turn into a steady stream any time soon.

"Investors can’t earn an adequate rate of return on the capital that they’d be required to put into a de novo bank," Tom Brown, founder and CEO of Second Curve Capital, a New York-based hedge fund that invests in banks, said in an interview... "I think anybody who applies should be denied just on the basis of poor judgment."

I don't think that I'd go that far, but I understand his point.

While much of the article focuses on regulatory burdens facing medium-sized and large banks, McColl's observation that "you have a large number of small banks that have no place to go because there aren’t any buyers, no real buyers. And that’s where I think the industry is at today," will ring true to many community bankers. Potential buyers like McColl are staying away, and the crushing burden of regulations is a primary reason.

McColl and others also contend that the problems of the banking industry are deterring the "best and the brightest" among the millennials from seeking careers in the banking industry. While cynics might call that a mixed blessing, over the long haul, that is not a good trend for banks. Those of around in the early 1980s recall similar problems when the masters of the universe all seemed to want to pull a Gordon Gecko and make their billions on Wall Street instead of in the more pastoral environs of commercial banking. Some cowboys rode savings and loans into the ditch in spectacular fashion, but commercial banking has seldom been as glamorous, or as potentially financially rewarding for most of its minions as has Wall Street. The flip side of that trend was the fact that banks were spared legions of fresh faces adorned with flashy bow-ties and suspenders adorned with Koala Bears, as well as slicked-back hairdos with enough oil to fuel a Formula I race car.

The article ends with cautious optimism.

"I’m relatively optimistic about the industry given what’s been going on recently," says [former BB&T CEO John] Allison. "I think we will get some regulatory relief. I think interest rates might return closer to normal levels. But it’s going to take a while for the industry to get back to exciting growth, radical improvement in products and technology. And it’s going to be difficult to achieve that until we get true action by Congress to undo Dodd-Frank. You can’t just get better regulators, you actually need to undo some of the structure, which is hard to do in this type of political environment."

I agree that it's going to take a while. However, the timer can't start until we get some regulatory relief, and while the bank regulators can provide some of it, for major relief, Congress needs to act. Jeb Hensarling's Financial CHOICE Act, which would provide major relief, passed the house but has been stuck in the Senate for months while Crapo and Brown negotiate behind the scenes. It's past time they got off the dime and got something done.

Perhaps if community bankers adopt the slogan "No relief, no peace!" and form tag teams to stand outside the Senate chamber screaming it 24/7, that might help. Thus far, with some exceptions (the use of the CRA to overturn the CFPB's arbitration rule, for example), substantive "regulatory relief" has been mostly all hate and no cattle.