Bank Lawyer's Blog

Paying For The Great Wall: Let The Banks Do It

Customarily, you'd have to work harder than El Chapo's Narc-Anon sponsor to find common ground between me and the Golfer-in-Chief on any issue, but leave it to The Candidate with the Cockatoo Do to move that Sisyphean boulder up the slope and on to level ground. For all of you who've been wondering like me (and most other Americans, as well as many Mexicans) how The Orange Man plans to get Mexico to pay for The Great Wall along the Rio, he's made it clear: American financial institutions will carry his heavy water.

Under the proposal detailed on Trump’s campaign website, the Republican would rely on a section of the Patriot Act to effectively force banks and money transfer companies to determine whether a person trying to send money abroad is a legal resident of the U.S.

That section of the law was written to crack down on terrorist financing and requires banks and other financial institutions to verify the identities of people opening accounts and doing business with them.

Trump has vowed on his first day in office, he would expand that requirement to include wire transfers and require that no foreign person living in the U.S. can send money outside the country without first proving their legal status.

The businessman predicts that Mexico will agree to pay for a border wall within a matter of days to keep money flowing over the border. 

The Trump campaign has also floated increasing visa fees, cancelling visas, and establishing trade tariffs against Mexico as ways to pay for a border wall, but cutting off remittances is the centerpiece of his plan. 

Usually, the words "centerpiece" and "Trump" are used to refer to the living blonde-furred creature he wears on his cranium, the one that sometimes rears back on its hind legs and bays at the moon, Megan Kelly, or any other thing or person who displeases the the former lead singer for Devo. In this case, it refers to banks and other financial institutions, as well as other money transmitters like Western Union, doing what all federal government agencies otherwise responsible for keeping the word "legal" in "legal immigration" have failed to do since the 1930s: ferret out who's here legally and who is here on the down-low.

Naturally, banks are doing back-flips in anticipation of the expense and liability of that job, not to mention the back-breaking prospect of adding a ton or two to the already crushing compliance burden it will entail.

But banks and other financial companies say they do not want to get involved on the front lines in a contentious immigration battle, arguing there are questions about how effectively such a policy could be implemented.

“It should not be for the banking system to be the police or the immigration task force,” said one banking lobbyist. “I don’t think it should be left to banks to report that someone has come in to remit money to whatever country, and it may or may not be legal. That’s not our role.”

[...]

Banks contend that they do not have a method of establishing the legal status of a person in the U.S. A person can open an account or send money abroad simply by showing an Individual Taxpayer Identification Number, which is given out by the government to people lacking a Social Security number, including people who are in the U.S. illegally.

The banking lobbyist said Trump’s proposal is not yet being taken seriously by the industry because it is still several steps away from even beginning to look like a reality.

I assume that same lobbyist a year ago scoffed at the notion that a bloviating clown prince like The Donald could ever beat a well-funded, well-connected, "heavyweight" like The Jebster for the Republican Party's presidential nomination. Underestimating this carnival barker is a common blind spot this election season. He's like a nightmare from which you can't wake up no matter how loudly you scream. Let's take him seriously, no matter how many knots that ties in your nether regions, and make sure that he understands that any banker, even those who live in Colorado and consume mass quantities of EdiPure Raspberry Jellies, who was thinking of holding their nose and voting for him are going to vote for the Wicked Witch of the Chappaqua, or otherwise "Go Green," "Libertarian," or even "Liberace," unless he drops this harebrained scheme to build The Great wall on the backs of America's banks. In fact, bankers could get some assistance in making this point from their MSB brethren, as The Change We Were Waiting For recently noted.

“The notion that we are going to track every Western Union bit of money that is being sent to Mexico, good luck with that,” Obama told reporters. 

I amaze myself when I say this, but "Right On, Mr. President."

As the linked article points out, there are so many ways to circumvent the money transmission barrier that Trump proposes that banks, despite the money and labor it would cost them, would be about as effective in stopping money flowing from Mexican illegal immigrants in the U.S back home to Mexico as the US Border Patrol is at keeping out undocumented immigrants in the first place. In other words, it wouldn't work.

Not that reality ever stopped a megalomaniac.

Drilling Down On De Novos

After reading one of my recent posts on the headwinds faced by those who are thinking of starting a new (de novo) bank, David Rice, the Senior Editor of the Federal Reserve Bank of Richmond's Econ Focus, kindly sent me links to a couple of recent articles from that publication that address the same issue. The first is "Who Wants to Start a Bank?," by Tim Sablik. Sablik explores the possible reasons for the dearth of de novos since 2008. Many of those reasons have been discussed here, but the article is an excellent compilation of the potential reasons and research (especially Federal Reserve Bank research) on the issues. Although I'd recommend that any interested reader review the actual article, here's a bullet point list of the reasons cited by Sablik:

• Regulatory burden on banks of all sizes that has grown like marigolds since Franken-Dodd was hatched by Barney, Chris, and Those Who Only Lizzie Loves.
• FDIC roadblocks to the formation of de novos during the period following the Great Recession's onset in 2008 until very recently (more on that in a future post).
• Low interest rates since 2008, and the resulting narrow interest rate spread, which makes it tough to make a buck in the banking business, especially when you're the new kid on the block.
• Competition form nonbanks.

Although regulatory burden is often given top billing by the biased, it's only part of the story. As the research cited by Sablik demonstrates, and as is the case with most things in life, problems are often more complex than those who like their story lines simple might like to acknowledge, including those who blog. Whatever the various causes, the article ends on a chipper note via Chip Mahan, who has started two de novos, the last one in 2007, when he had to have a face-to-face meeting with Shiela Bair, then FDIC Chairman, to sell her on why his proposed bank should receive insurance of its deposit accounts from the FDIC. Although Mahan does not disclose it in the article, our investigative reporters have informed us that he attended the meeting with The Care Bair armed with five cloves of garlic, a portable flame thrower, a mirror, and a Vampira® model hammer-and-stake combo he picked up at Walmart (gratis, given Walmart's love affair with Bair).

Mahan thinks the future is bright for new banks — if they're willing to adapt to changing consumer demands. "You've got to be focused on technology and deliver products and services with a beautiful user experience," he says. "Because at the end of the day, who wakes up and thinks about their bank?"

At the end of the day, I don't wake up. That's usually what I do at the beginning of the day. On the other hand, when I do wake up, I wake up thinking about my bank. Maybe that's because they pay me obscene amounts of moola to do so. May be it's because I've always been what my elderly neighbor, Mrs. Scooter, characterized as "such an odd boy." Maybe its because I confuse "my bank" with "Tyra Banks." Maybe it's all of the above.

At any rate, whatever Mahan's smoking, I want a toke, because the second article by Mr. Sablik to which Mr. Price linked discusses the practical challenges of steering your new bank barque through the storm-tossed shoals off the FDIC's shoreline. Among the eye-popping (to the uninitiated) obstacles are the length of time (6 months to a year) and cost ($1 million is not an outrageous estimate), as well as the necessity to prove to people who don't currently, and likely never have, run banks that the community in which you'll locate the bank is not already adequately served by the banks operating in the community, and the fact that you'll have to raise and keep in place enough capital to fund a year's worth of cross-border smuggling activities for the Sinaloa Cartel ($15 million to $30 million). I recall when $2 million might allow you to blow and go with a de novo, but then, that was when folks thought bell bottom pants, Nehru jackets, and Madras shirts were cool.

This article ends with a less rosy view of de novo prospects from Fred Green, CEO of the South Carolina Bankers Association.

It can be challenging to recruit executives and directors for a new bank. "Historically," Green says, "a lot of folks aspired to be on a bank board and be part of a founding group. Serving on a bank board was an honor." Today, the hurdles to starting a new bank seem higher and the rewards less enticing. From 2006 to 2010, the average return on assets for community banks less than five years old was negative, according to a 2012 FDIC report. Older and larger banks managed to earn positive returns on average during that period, though they too suffered a hit.

"It’s harder to find people that would have the energy and desire to be involved in a startup today," says Green.

Following November's election results, you might have a better chance of finding them in Belize than in the U.S., because whichever of the two front runners for the Oval Office wins, the dearth of de novos will not be the only cause of community bankers seeking a warmer clime, especially one where English is the first language, taxes are extremely low, Cuban cigars are duty-free, and you're upwind from air currents that might carry nuclear fallout from D.C.

Rent Seeking "Reform"

In an opinion piece in the Wall Street Journal, Holman W. Jenkins, Jr. responds to a New York Times editorial that claimed that President Obama has been frustrated throughout his two terms by the "political dysfunction" caused by a recalcitrant Republican-led Congress. In his response, Jenkins touches upon a subject near and dear to community bankers and, not coincidentally, to the author of this rag sheet.

If Mr. Obama was “deeply frustrated,” the reason was the American people’s lack of support for his agenda. And what the Times calls his regulatory strategy would better be described as unbridled rent seeking.

That’s the term economists use for exercising government power to create private gains for political purposes. Consider:

Mr. Obama’s bank policy dramatically consolidated the banking industry, which the government routinely sues for billions of dollars, with the proceeds partly distributed to Democratic activist groups.

His consumer-finance agency manufactured fake evidence of racism against wholesale auto lenders in order to facilitate a billion-dollar shakedown.

His airline policy, urged by labor unions, led to a major-carrier oligopoly, with rising fares and profits.

His FDA is seeking to extinguish small e-cigarette makers for the benefit of Big Tobacco and Big Pharma (whose smoking-cessation franchise is threatened by cheap and relatively safe electronic cigarettes).

His National Labor Relations Board, by undermining the power of independent franchisees, is working to cartelize the fast-food industry for the benefit of organized labor.

We could go on. Mr. Obama’s own Council of Economic Advisers complains about the increasing cartelization of the U.S. economy—as if this were not a natural output of regulation. In a much-noted Harvard Business Review piece this spring, James Bessen, an economist, lawyer and software entrepreneur, cites increased “political rent seeking” to explain the puzzle of rising corporate profits in the absence of job creation and economic growth.

The truth is, government playing neutral arbiter over the private economy doesn’t produce rents. A stable and predictable regulatory system produces only mingy or non-existent rents.

Jenkins' allegation that "rent seeking" regulatory "reform" that has resulted in thousands of pages of new regulations that burden banks big and small, as well as pushing the envelope on "disparate impact" and other theories designed to squeeze blood and money out of banks through regulatory enforcement actions, is leading to the "caterlization" of the U.S. economy in general and the U.S. banking system in particular, strikes a chord in many ears It's not the only reason for the consolidation of the banking business, but it's one of them, and a not insignificant one.

As to the ideologues who deny any regulatory burden exists, or if does exist, isn't having a negative effect on community banks (based, I assume, upon Vladimr Lenin's assertion that "A lie told often enough becomes the truth"), the House Financial Services Committee recently published a raft of contrary opinions from the folks on the firing line. Read 'em and weep.

As to where the community banking business, and the country in general, are headed, I have to agree with the conclusion of the CEO of a Mid-Western community bank, communicated to me in an email this weekend: "This doesn't end well."

No, it doesn't. Unless, of course, you're a rent seeker.

Conflating A Little With A Lot

A friend of mine, a business consultant and "recovering lawyer," once told me that there wasn't a damned thing you could tell lawyers, because they thought they knew it all. This helps explain why his sojourn into the world of business consulting for law firms was so short. Another reason might have been what a boss of his once told him: "You not only don't suffer fools gladly, you don't suffer them AT ALL."

Being of the same temperament, I "feel his pain."

In an article in the March-April 1996 issue of the Harvard Business Review, entitled "Making the Most of the Best," Dartmouth's Tuck School of Business professors James Brian Quinn, Philip Anderson and Sidney Finklestein, expressed similar views, albeit with less exasperation. Of course, they didn't have to live with lawyers 24/7/365, either.

Because professionals have specialized knowledge and have been trained as an elite, they often tend to regard their judgment in other realms as sacrosanct as well. Professionals generally hesitate to subordinate themselves to others or to support organizational goals not completely congruous with their special viewpoint. That is why most professional firms operate as partnerships and not as hierarchies, and why it is difficult for them to adopt a uniform strategy.

The good professors were talking about doctors, accountants, investment bankers, management consultants and similar professionals, not merely lawyers. They all risk suffering from the twin dysfunctional traits of arrogance and hubris, the deadly combination embodied in its Platonic ideal form by THE GREATEST PRESIDENTIAL CANDIDATE EVER (aka "The Orange Man").

"I know a lot about a little, therefore, I know a lot about everything."

Or, as my friend less generously puts it: "Mix equal parts of arrogance and ignorance and you've got yourself a law firm."

Of course, you could have said the same for an accounting firm, a medical practice, or a business consulting firm. Nevertheless, singling out and picking on lawyers is simply more fun, isn't it?

Yeah, I thought you'd say that.

And while we're on the topic of a human being that wears a live animal for a hairpiece, let's not forget that if He-Who-Knows-More-Than-His-Generals is elevated to Bloviator-in-Chief in a few months, a side benefit for bankers might be that one of the biggest "Native American" burrs under the saddle of the banking biz might finally be forced out of public life and back on to the reservation. At least, that's the hope of Homer Simpson.

Everybody Gets A Trophy

A few years ago, I featured the face-palming antics of Gen Y job candidates, including those interviewing for jobs with commercial banks. At the time, I asked "How much worse could Gen Y be?" Apparently, much worse. In fact, when it comes to generational cluelessness, Gen Y's joystick is frozen in the forward position and the plane is augering into the frozen tundra at 32 feet-per-second squared.

Just before turning out the office lights and grabbing a (first) Shiner Bock this past Friday evening, I received an email from a client who's a senior level bank executive for a large bank in Texas. Attached to her email was a link to what is obviously intended to be a comedy "training video" that ostensibly seeks to educate Boomer and Gen X employers on the right ways and wrong ways of dealing with the future of the American workforce. My correspondent assured me that, while the laughs are real, she has personally experienced two interactions with a member of The Not-So-Greatest Generation that were almost identical to scenes enacted in the video.

I share it with other bankers (and credit union officers) who might find it both humorous and sadly realistic.

Here's hoping we can stave off crippling the economy and allowing China to take over. At least, until I pop the final aneurysm and finally see the light at the end of the tunnel. Après moi le déluge.

The CFPB's Worst Nightmare: The US Constitution

A couple of months ago, we discussed the possibility that a case involving the CFPB and PHH Mortgage might go against the CFPB, including a potential finding that the CFPB's very existence (as created by the Franken-Dodd Monster) is unconstitutional. The prior blog post linked to a Forbes article by former White House official Susan Dudley in which Ms. Dudley listed the various arguments on which a finding of unconstitutionality could be based.

Long-time bank lawyer (and current Dorsey & Whitney partner) Joe Lynyak gave his analysis of the same topic in an article in the Westlaw Journal's "Bank and Lender Liability" entitled "The Constitutionality of the CFPB —An Exegesis." That's an imposing title, but at only four pages, it's worth a read, especially if, like this blogger, you've been wishing upon a star that the CFPB might, at best, take a long walk off a short pier, or, at worst, get its extremely large, flapping wings clipped.

Joe lists a number of the same arguments against the CFPB that Ms. Dudley also discussed, including:

• All authority is vested in a single director with extraordinarily broad power, no oversight by a board or commission, and tenure that can be shortened only by removal by the president "for cause."
• Unique existence as a bureau" within the Federal Reserve, an independent entity whose budget (and, therefore, the CFPB's budget, which the Federal Reserve is mandated to fund) is immune from Congressional oversight or control or, for that matter, any oversight or control by the FRB.
• "Broad administrative authority to examine and supervise a wide range of consumer financial firms, with administrative hearing authority to enforce orders requiring corrective measures. Favorable hearing determinations by an administrative judge can be summarily reversed by the director."
• The ability of the bureau to exercise such broad enforcement authority over any "unfair, deceptive, or abusive act or practice," which "need not be illegal; instead, it may be merely unfair in the view of the bureau."
• The ability of the CFPB ignore the due process rights of people and entities subject to its jurisdiction by regulating via enforcement orders — a practice that in many cases obviates the responsibility to extend the protections afforded by the Administrative Procedure Act (the In every instance
  governmental agency power has remained subject to acceptable levels of oversight by the three branches of the federal government —at least until now. APA affords the opportunity for public comments and dialogue prior to the exercise of an
  agency rulemaking)."
• The CFPB's"position that statutes of limitation do not apply to its enforcement activities, with the result being that targeted institutions have been sanctioned for conduct occurring well beyond the five-year federal agency statute of limitations governing agency enforcement actions that seek monetary penalties."

As to the PHH case, Joe does what many weak-kneed commentators often fail to do: he offers an actual opinion.

As to whether the CFPB’s current structure can withstand a constitutional challenge¸ it is suggested that the correct answer to that question is no. Although the necessities of a federal agency’s administrative mission concededly require flexibility, in the CFPB’s case the outer parameters of permissible agency boundaries have been far exceeded.

A review of the somewhat patchwork set of judicial decisions addressing this issue indicates that courts balance several factors against an infringement on the president’s right to dismiss agency officials without cause.

[...]

In light of the clear efforts of consumer proponents of the CFPB to statutorily insulate the bureau from any meaningful oversight, it is very probable that the CFPB will be found to be unconstitutionally structured.

After dropping that "hot sports opinion" on his audience, he then offers some insight into what festivities might ensue as supporters and opponents of The Adjustment Bureau attempt to either resurrect it or to decapitate it, drive a stake through its heart, and set the remains on fire.

Importantly, should the CFPB’s structure be struck down, the bureau’s prior actions and interpretative pronouncements (now spanning more than five years in length) arguably will become void. Also (and absent judicial mischief that might create a solution to the absence of a reasonable degree of executive oversight), any corrective measures to remedy a constitutional infirmity relating to the CFPB must be considered and adopted by Congress.

Finally, if the CFPB is found to be operating on a constitutionally infirm basis, legislative efforts to defend the bureau will encounter an interesting role reversal.

In the past few years, critics of the CFPB have attempted to amend the bureau’s statutory structure. These attempts have been soundly defeated by supporters who have effectively filibustered any such efforts. (The most frequent attempts for statutory changes have involved proposing a commission form of agency governance, as well as imposing congressional oversight through the budget process.)

Even though it might be relatively simple to minimally modify the CFPB’s structure in order to pass constitutional muster, opponents of the bureau could filibuster any attempt to cure the statutory difficulties without obtaining the concessions demanded by critics. Although this result seems highly likely if the CFPB is found to be unconstitutional, the belief that the bureau has brought about a paradigm shift in consumer protection may prevent consumer advocates from both anticipating this result and compromising sooner rather than later.

I'd pay for tickets and movie theater popcorn prices just to see all that unfold.

On Independence Day, it's pleasant to contemplate the possible demise of a tyrannical overlord, especially one whose minions clothe themselves in the mantle of "doing god's work," the US Constitution be damned.

B of A Questions New Lawyer Salary Increases

Last week, we made an obscure reference to the fact that some of the nation's largest law firms have opted to raise the starting base salaries of their new associates from $160,000 per year to $180,000 per year. While many law school graduates come roaring out of the chute with a Mt. Everest of debt and an ant-hill's worth of job prospects (the result of what has been, for a number of years, a law school shell game), the nation's largest law firms still fight over the top students from the elite law schools, and for those lucky few, the pickings are rich and the competition is fierce. Apparently, the brain trusts that maneuver our private practice Titanics between the icebergs of fatal hubris and a wised-up corporate clientele decided that the time had come to butter their babies' biscuits with more moolah. Like lemmings, where a few go, the rest will surely follow.

Who would have thought that the initial push-back from clients would have come from a sector of the economy not known for being the first to any "space" but the feeding trough: big banks?

Bank of America Corp.’s top lawyer recently sent an email to a group of law firms calling the increases in associate lawyer pay unjustified, making it clear the bank wouldn’t help firms absorb the cost.

“While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions,” David Leitch, Bank of America’s global general counsel, wrote in the email, reviewed by The Wall Street Journal.

A Bank of America spokesman declined to comment.

The linked article from The Wall Street Journal discussed other aspects of standard big law firm business practices that have annoyed clients. Among those is training inexperienced lawyers on the client's tab by billing them at rates that give clients sticker shock.

The chief litigation officer for a Fortune 100 company said $180,000 for a first-year isn’t justified, pointing by way of comparison to a lawyer in the company’s litigation department with 20 years of experience who doesn’t make that much money. “Why would we ever think a first-year associate is worth that?” the lawyer said, adding that they recently denied a firm’s request to charge $400 an hour for a first-year.

In the normal course of a lawyer's career, she or he should become much more efficient as she or he becomes more experienced. In addition to paying an hourly rate that seems excessive, the clients may also pay for more hours that it will take the "newbie" to complete the task. Apparently, the "chief litigation officer" who was cited thinks that it's the law firm's job to bear the cost of training the new lawyers until such time as their experience level permits them to deliver "value" for the buck(s) charged. If the firm wants to pay a new lawyer 15 grand a month, that's its business. If the firm expects to pass that cost along to the client, it appears that Bank of America and other large purchasers of Big Law legal services are saying "fuggedaboutit.!"

The article also discusses ways in which big banks and other businesses have been working in recent years to staunch the bleeding of outside legal costs. This discussion might be of interest to community and regional banks, as well. In addition to trimming the number of firms used, the clients have explored alternatives to traditional hourly billing.

Historically, law firms charged their clients in only one way: by the hour. While many in-house lawyers grumbled about the arrangements, saying they encouraged inefficiency and led to eye-popping bills, they mostly paid them.

But within the last decade or so, companies have pushed back. They now routinely demand “flat-fee” arrangements for a single piece of work, like a lawsuit or a transaction. And many have stopped paying for photocopies and legal research, items that were once rubber-stamped.

In-house lawyers have also ramped-up their resistance to paying for the most junior lawyers, often saying they won’t pay for first- and second-year lawyers even if they are staffed on assignments. Such lawyers, the thinking goes, are too often billed out at hundreds an hour to perform relatively menial tasks, like reviewing documents.

As another large corporate general counsel puts it, what ultimately matters is the "value" delivered by the lawyer to the client. Is the result and/or the advice worth what the client pays for it? Regardless of a lawyer's hourly rate or law firm compensation, when the client gets the monthly bill, does he or she think they have been "well served" by that lawyer? Obviously, that's a business judgment call; however, if the sentiments expressed in the linked article are any indication, many business clients are going to be appraising the "value" of inexperienced, but highly paid, lawyers with a critical eye, especially regarding first year lawyers who may be billing at an hourly rate commensurate with that of a lawyer in a smaller firm with, literally, decades more experience in the subject matter.

Countrywide: Closed For Good

Maybe it's the fact that in another six months or so, the regime change here in the Land of the Free will lead many of the the current crop of enforcers in D.C. out the revolving door and into the loving arms of Big Law, where those wet behind the ears begin the learning curve with 15 grand a month of pocket money. Maybe it's the fact that they knew all along that they were pushing the envelope and, when called on it, they simply shrugged, smiled, and said "Ya' got me!" Whatever the reason, the U.S. Justice Department appears to be throwing in the towel several years earlier than my initial expectation, as a result of the US Second Court of Appeals decision that squashed the Justice Department's fraud claims against Bank of America that arose out of the former Countrywide Mortgage's so-called "Hustle" subprime loan program.

According to The Wall Street Journal, this week, the Justice Department sent letters to various former officers of Countrywide, including the infamous Angelo Mozilo (aka "The Tan Man"), that told them that Justice would do some justice by not filing any civil law suits against them.

Government lawyers sent letters within the past week to Mr. Mozilo and other Countrywide executives advising that the investigations against them were closed, and thanking them for their cooperation, these people said.

“We are pleased to see this investigation concluded without any further claim against Mr. Mozilo,” said his lawyer David Siegel.

I'll bet they are pleased. Mr. Siegel was sufficiently courteous to refrain from thanking the Justice Department back for providing years of legal work for defense counsel that has now resulted in the close of the investigation without criminal charges or civil lawsuits being pursued. For litigation attorneys, this is called "stroking the long ball." And, as ESPN's Sport Center loved to tell us, "Chicks dig the long ball."

To the "Occupy [Insert Venue Here]" crowd, this latest outrage will be further proof that the system is rigged in favor of fat cats and the bureaucrats who stroke them. On the other hand, those of us with actual experience in this area saw this coming years ago. From a September 22, 2009 blog post that discussed the outlook for folks like Angelo ever doing the perp walk:

Unlike the last round, when the savings and loan industry went into a tailspin, proving that CEOs and other senior executives knew about and encouraged, much less actively participated in, the fraud is tougher to prove in connection with the subprime mortgage mess. I recall a number of instances involving failed Texas thrifts in the late 1980s where there was ample evidence that thrift owners and senior executives were swapping dead horses for dead cows, making stock loans to an owner of another thrift to purchase 100% of the stock in his own S&L in return for the borrower causing his S&L to purchase a bunch of participation interests in the lender's portfolio of exquisitely ripe carcasses known as acquisition and development loans (in which the lender funded 100% of the acquisition and developments costs AND all of the interest reserve, leaving the borrower with as much equity in the collateral as a US congressperson's integrity). This time around, the CEO's and Chairman's muddy paw prints aren't stamped all over the lender's records.

"The problem is finding the executives' fingerprints on the consumer files," said Peter Henning, a law professor at Wayne State University. "Angelo Mozilo may have set the tone at Countrywide, but there is no way you're going to find his fingerprints on any of those mortgages."

Even Marg Helgenberger of CSI couldn't find enough CEO DNA in these files to make a case. I'd like to watch her try, though.

If you want to become completely bent out of shape about the relative lack of suffering inflicted on Wall Street and its cronies over their role in the meltdown, consider the fact that no one in Congress has had their wrists slapped, either. Barney Frank and Friend-of-Angelo Chris Dodd even managed to get their names emblazoned on a piece of "financial reform" legislation for all eternity, masking for future generations (who seem to have short memories in any event) the major roles those two actors played in the drama. When it comes to skating, it seems to me that most of the culprits had their blades finely honed.

Let's hope that the late British physician, Havelock Ellis, was wrong when he said “Every society has the criminals that it deserves.”

The Blame Game Is Still Being Played

In the spring of 2008, months before Lehman Brothers became the largest bankruptcy in US history and the world as we knew it went to hell in a hand basket, I wrote a post about a Wall Street Journal editorial by the former CEO of Nomura Capital, Ethan Penner, in which he decried the bailout culture and the lack of personal responsibility it both reflected and fostered in America.

And so we have the insidious modern trend to shirk responsibility and blame others for our missteps. This trend, this "victim mentality," is a path toward personal disaster.

Perhaps if the Fed had raised short-term rates more aggressively, the excesses of the bubble could have been avoided. Maybe regulators could have noticed that the criteria for achieving an AAA rating had weakened markedly and inserted themselves early on. Yes, we can hope that the government takes the appropriate steps to ensure that the regulatory system improves as a result of this crisis. However, we citizens also need to accept our share of the responsibility.

Homeowners must learn that there are risks to using a home as an ATM. Investors who borrowed to flip condos must learn the downside of such risk. Individuals who steered money from insured bank deposits into uninsured money market accounts to pick up 1% more yield – like the institutional investors who purchased complex securities with little due diligence – need to know that in an efficient market, extra yield means extra risk. Those who played the derivatives market, focusing more on computer-driven pricing models and less on managing counterparty risk, must pay for that oversight. And, much as it is impolitic to say, people who took money from lenders and signed without considering how they'd repay those loans must also be held accountable.

In one of this year's primary debates, Ron Paul said it is not the president's job to run the economy. I'd add that it is not the government's job either. It is each and every citizen's job to manage our own affairs, make our own decisions, bear the fruits or painful consequences and learn our lessons.

The free market is the essence of our society's strength and is rooted in the Lincolnian precepts of accountability and responsibility. When decisions are made and actions taken (or not taken), there are consequences. These consequences are models for us to learn from and serve to stimulate social growth and advancement.

Less than six months later, the collapse occurred, the big bailouts ensued, and as we all know, the lessons taught by the adverse consequences of poor decision making were not learned. At least the world economy didn't tip over into total depression, but eight years later, we still haven't fully recovered from the meltdown.

Last December, Michael Burry, a main character in the book and movie, "The Big Short," gave an interview to Jessica Pressler which was published in New York Magazine, in which he, too, bemoned the unlearned lessons of the events leading up to that collapse. When asked if the crash resulted in any "positive changes," he responded negatively.

Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

[...]

The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. This crisis was such a bona fide 100-year flood that the entire world is still trying to dig out of the mud seven years later. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it’s the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.

Burry's another smart guy who condemns the consequences of a culture in which "personal responsibility" is a foreign concept. If the vitriol of this election season has emphasized anything to me, it's certain that most of us are no closer to looking in a mirror when it comes to assigning blame for the bad things that happen to us today than we were in late 2008. In fact, after eight years of non-governance, with Nanny State organs like the CFPB "all fired up and ready to go" with the task of finding others to blame for every single instance of inequality of condition, and with an apparent choice between (as Peggy Noonan put it) a criminal and a crazy man for the title of "Leader of the Free World," we appear to be farther down the road to perdition than we were in 2008, and with a heavy jackboot pressing the accelerator pedal all the way to the floor.

Not that I expect anyone to really give a rat's tukus about the foregoing, this being an election year in which every person seems to be polarized by the zeigeist. However, maybe we ought to be concerned by the prospect of "deja vu all over again." Ben Lane at Housing Wire pointed out this past week that during the first quarter of this year, Mr. Burry's hedge fund liquidated its portfolio of a number of big bank stocks. Lane states that "[t]ime will tell if Burry’s bet is proven right again." Although that's true, based on his track record, this should not allow anyone to sleep well at night. Unless, of course, you, too, are "going short."

[Edited to clean up typos and the brutal overuse of the verb "decry."]

De Novos: A Recipe For Success or Heartburn?

Long time community bank attorney (and former FDIC Regional Counsel) Jeff Gerrish created his recipe for cooking up a new bank charter.

The number one ingredient is cash, and plenty of it. Because FDIC policy is that de novos need meet an 8% leverage ratio by the end of the third year, "if your new bank is going to be $250 million in total assets at the end of its third year, you will need to raise about $20 million in order to obtain the charter. And that is the minimum. If FDIC determines there is some unique risk in your proposed charter, then the requirement could be higher."

My somewhat jaundiced take is that the FDIC will frequently find additional risk, so for planning purposes, count on 10%.

Jeff's second main ingredient is seasoned senior management and an impressive board of directors.

[Y]ou need to find a seasoned CEO of an existing community bank or previously healthy community bank that sold. You also need to find a couple of other seasoned senior officers, as well as a board of directors that, while not maintaining quite as much “seasoning,” still has some folks on it who have possibly been directors of community banks previously, or know something about the industry. The era of establishing a board of directors of a new bank, anywhere from 8 to 15 people typically, made up of individuals who are simply pillars of the community with no banking experience is over.

Jeff also observes that getting FDIC, as well as other regulatory, approvals is "daunting and time-consuming" (He thinks 12 to 18 months from the first meeting of the organizing group to discuss the concept among the members is "good; I'd call it "optimistic."). I think that he and I would agree that in addition to raising money for capital contributions, the organizers need to raise a decent chunk of cash to fund organization expenses, including expertise needed to prepare and shepherd the necessary applications through the FDIC and the state or federal chartering authority. Depending upon how the organizers intend to raise capital, additional expertise will be needed (and expense incurred) in those efforts.

I would throw a couple of additional ingredients into Jeff's recipe. One is a convincing argument that there is a need for a new bank in the community that it is intended to serve. The few de novo applications that have survived the "gauntlet" in the past half-dozen years have been intended to create a bank in a well-defined and targeted community that the organizers have argued convincingly is not being served by existing financial institutions. I'm not saying that that everyone has to have a "bird in hand" like serving the Amish community, but the applicants ought to have at least two-in-the-bush that can serve the same purpose. Unless you can show a need other than you'd just like to be in the community banking biz, I don't think that the regulators will see much upside in granting you a new charter.

A related ingredient is a combination of a well-thought-out and well-prepared business plan that is as close to conventional as it can be, and a feasibility study that demonstrates that, "By Gum, we can make money running this thing!" In other words, assume that you're a guard taking the rock to the iron for a thunder-dunk and the FDIC is Hakeem Olajuwon towering in the post screaming "Don't be bringing that internet-only, CRE-centric, lowering-our-payday-lending-conglomerate's-cost-of-funding-through-the-use-of-insured deposits garbage into my house!" right before he pile-drives you into the floor with a flagrant 2 foul. Moreover, spend some time and money securing help from folks who have actually carried water to the bench in this arena, so you have at least a fighting chance of surviving the initial hurdle in any such endeavor: the laugh test.

I remain skeptical about a "thaw" in this freeze. Others are more buoyant. I think a threshold question you have to ask yourself is how early in the "thaw" do you want to put out into open water. Is it better to let others blaze the trail and learn from their success (and/or failure), or is time "a wastin"? If you think you've got the necessary ingredients, including plenty of cash, patience, and persistence, then maybe the time is finally right to cast off. I would recommend that you initially paddle slowly and carefully, though.