Bank Lawyer's Blog

Stupefyingly Stupid

New Mexico bank consultant Joe Badal has always had a way with words, and his hot opinions have been blog-worthy in the past. He gave an interview to an Albuquerque reporter a few months ago that many community bankers throughout the country would appreciate.

Community banks in the U.S. will be merging at a frantic pace in the coming years because they can’t afford to keep up with a growing list of federal banking regulations, New Mexico banking consultant and author Joe Badal said Wednesday.

“The big are getting bigger and the small are going away,” Badal said, blasting “stupefyingly stupid” federal regulations at the Economic Forum of Albuquerque breakfast at Hotel Albuquerque in Old Town.

A banker for more than 30 years, Badal noted that a federal appellate court ruled recently that regulators can arbitrarily set capital levels for banks. In other words, they can tell one bank it must have a certain capital level and set a different level for a different bank of the same size.

“What recourse do regulators have against arbitrary and capricious decision by regulators? None. They have no recourse,” said Badal, owner of the Joseph Badal & Associates consulting firm. “Regulators can descend on a bank like storm troopers.”

Yes, they can. And they've got their own Death Star: the FDIC. With no Darth Vaders of their own to throw into the fight, however, many community banks must resort to The Chewbacca Defense.

Badal really gets riled about a failed New Mexico thrift whose fate we chronicled in these pages previously.

The bank was profitable and most of its loans were current, Badal said, but regulators treated it like banks in California, Arizona and Nevada where enormous housing bubbles had burst.

Those regulators assumed what had happened in those three states was going to happen in New Mexico and failed to understand that New Mexico doesn’t have large booms and busts, Badal said. As a result, regulators forced Charter to write down loans they thought would go bad, he said. That forced Charter to increase its loan-loss reserves, which came straight out of its capital reserves, leaving Charter undercapitalized and unable to raise fresh capital, he added.

“They arbitrarily wiped out Charter’s capitalization,” Badal said.

"Arbitrarily" is a loaded term. By insulting the late OTS and, if only by inference, the regulatory shark that swallowed it, Joe might be encouraging cockroach trolls out of their dark corners and into bright daylight long enough to send him hateful "anonymous" email before they scurry back to regions where the Sun don't shine. If that doesn't do it, his novel might.

Badal, who also writes mystery novels, said he wrote his latest book, “Shell Game,” after being outraged by the January 2010 seizure by federal regulators of Charter Bank in Albuquerque.

[...]

“Shell Game” is about a family-owned business that suddenly can’t get credit because federal banking regulators have clamped down on its bank.

While I've got a copy of "Shell Game," I have not had a chance to read it. Once I do, I'll review it. It's the least I can do to bring Joe out of his shell and get him to tell us what he really thinks.

No Dice For United Western

A reader sent me a copy of yesterday's decision of Federal District Court Judge Amy Berman Jackson in the United Western Bank lawsuit against the OCC that sought to set aside the January 2011 decision of the OTS to appoint the FDIC as receiver for the bank. To make a long story short, Judge Jackson ruled in favor of the OCC and refused to overturn the decision of the OTS (now defunct and subsumed by the OCC). I haven't had an opportunity to read the opinion or carefully consider it, and will not have an opportunity to do so until this weekend.

My initial reaction is that this is no surprise. From a couple of telephone calls I received today from other banking law attorneys who've been following the case, it appears to be no surprise to most banking attorneys. As I said when I first wrote about this case two years ago, the legal deck was stacked against the plaintiff from the start. As I also noted the following year, "no matter what my heart tells me, my head tells me not to bet against the OCC."

It may be disappointing to many that David failed to slay Goliath, but given the high legal bar to jump over, you'd need the helping hand of God to clear it, and, in this case, divine intervention was not forthcoming.

Updating

While it's been a hectic week, I wanted to resume blogging long enough to update a couple of recent posts with comments made by readers via email. The first concerned last week's post on Liz Warren's rabid rapid ascent into the stratosphere of the Senate. I closed that post by expressing the hope that Barney Frank's push to fill John Carey's vacant Senate seat would be successful so that, albeit for a short time, we could have both Lizzie Borden Warren and Barney ("Thufferin Thuccotash") Frank going hog wild in tandem on pro-consumer, BIG GOVERNMENT EXPANSION proposals that would have absolutely no chance of surviving a Senate filibuster, much less making it through a Republican-dominated House, but would contain as much moon battery and tom foolery as any blogger might wish for in his or her fondest blog-fodder dreams. Not being glued to Bay State political nuances, I had failed to notice that Massachusetts Governor Deval Patrick had spurned Barney's advances and instead chosen Patrick's very own former chief of staff to fill the interim Senate seat. Out of power, out of mind. I guess we'll have to make do with playing Wack-a-Wack-Job with Liz for the foreseeable future.

As a consolation prize, Barney gets to say "I'm not a real Senator, but I play one on stage."

Another reader, an experienced bank lawyer who has taken on the OTS and OCC from time-to-time, gave me a couple of intriguing comments about my most recent post, which discussed the FDIC's lawsuit against former officers and directors of the failed Charter Bank of New Mexico. I wondered why, after all the writedowns of CRE loans by the OTS and all of the resultant losses tied to those loans that could have been alleged by the FDIC, the FDIC focused instead on a smaller amount of losses caused by a subprime mortgage lending unit.

In the wake of the NLRB holding, and the simple fact that the OTS was running without a properly appointed director for several years, from March 2009 until the 2011 handover and in violation of the Vacancies Reform Act, wouldn’t you limit your case to the non-OTS determined issues too?

The Appointment of the Receiver in January 2010 was, perhaps, an illegal act in itself.

Fun food for thought.

Fun food for thought, indeed, although I haven't had the time--and no one is paying me--to think about it. Perhaps legal counsel for the former officers and directors of Charter Bank will have both the time and the financial incentive.

More Mailbagging

A few recent emails are worth a comment (or three).

1.    A credit union trade official wrote to comment on my recent spate of blog posts regarding news reports about the brutally different results for robbers who pick on credit unions versus robbers who pick on banks. The latter are apt to be apprehended with their persons intact, while the former are apt to meet their maker, then meet his evil twin "Skippy" (aka "The Dark Price"). My correspondent intimated that I might be leaning toward the bankers on this matter, due to some sort of suppressed pacifist tendency that, if not nipped in the bud, might flower into a marijuana brownie-munching, Birkenstock-wearing meltdown. He thought I might soon be shouting "When guns are outlawed, only credit unions will have guns!"

Rest assured: I will never wear Birkenstocks.

2.    Last night's ramble regarding IndyMac officers who did not "beat the rap" prompted one financial institution attorney to wonder when the defendants would demand indemnification from New York Senator Charles "Chuckles" Schumer, and then answer his own question with "Oh wait, I forgot he doesn't have to answer for his actions . . ." A man after my own heart.

Long-time readers may recall my many potshots at that cretin esteemed member of the US Senate when his election year electioneering precipitated the run on IndyMac that forced the OTS to close it. Not that the OTS would not have had to close the steaming heap of goat custards that comprised IndyMac eventually, but that agency and the FDIC might have made a more orderly transition to oblivion than the lines-around-the-block debacle that Schumer's "leakage" precipitated. I reminded my correspondent that my original lambasting of Chuckie Cheese earned me a-whole-lotta-hate from leftards and moonbats, including one prominent, New Yawk City-based, bank-hating blogger who just about had to invent an entirely new language in order to articulate epithets vile enough to accurately describe my bovine nature. Man, that was a sweet memory!

3.    Finally, to the reporter who wrote to complain that she "didn't like me" because, in an off-the-cuff comment in a throwaway line in a blog post of over six months ago that was read by maybe three people (two of whom are related to me), I "twisted her words": please accept my most Grand Canyon-esque yawn of abject inertia. I deny that I twisted anything, least of all your words, but now that I know that I bug you without consciously attempting to do so, I'll be sure to not only twist your words, but your tail, whenever the opportunity presents itself. This is what happens to "one" when "one" takes "oneself" seriously, quite often by referring to "oneself" in the third person.

Keep those cards and letters coming kids. I don't have time to respond to them all, but I enjoy even the barking mad ones.

From The Mailbag: Gripes About The OCC

An interested reader emailed me and offered a couple of thoughts about the United Western Bank/OCC litigation that was the subject of last night's post. First, he focused on the fact that the OCC's "statement of facts" (which the plaintiff has moved to strike) makes much of the fact that the bank "voluntarily" stipulated to the entry of a Cease and Desist Order against the bank, and that the stipulation contains "findings of fact" that concluded that the bank engaged in unsafe and unsound practices and violations of law. My correspondent found that disingenuous, inasmuch as the third recital to the stipulation provides that the bank does not admit or deny any statements or conclusions in the C&D other than two that relate to jurisdiction. This is typical of many consent orders entered into with the federal banking agencies. The bank does not agree that the stipulations of fact or the conclusions drafted by the OCC are correct. My correspondent thinks that the OCC is attempting to construe such "voluntary consent" into a consent that conditions exist that justify the appointment of a receiver. If so, that will have a negative impact on the willingness of banks to sign such agreements in the future.

I agree that there apears to be an attempt to use the bank's consent to the entry of the C&D as an argument that the facts and conclusions contained in the order, such as that the bank is in an unsafe and unsound condition, are somehow "true" and incontestable. I doubt whether that suggestion will have an impact on the judge. As to the willingness of banks to sign such stipulations in the future, it's too early to tell. However, a few more banks in the future might be inclined to fight a C&D rather than stipulate. As my correspondent also wryly observes, if Maxine Waters has her way, the era of consent orders may be coming to an end in any event. If that's the case, the administrative law judges are going to be awfully busy.

My correspondent also opined that the OCC's motion displays a clear bias against private equity investors. Although he didn't clarify the specific provisions of the motion that supported this contention, I assume they were the provisions that discussed the OCC's rejection of the conditions precedent imposed by the potential investors, including the waiver of certain restrictions of the C&D and other "unacceptable supervisory concessions." To me, this bias has been obvious in not only the OCC, but in the FDIC and the FRB, for the last several years. We've discussed this issue previously. The requests for supervisory concessions were normal (and sane) protections that any knowledgeable private equity group would impose before they infused hundreds of millions of dollars into a bank that had "issues."

PE legend Wilbur Ross told the American Banker last week (paid subscription required) that he's had it with the "Big Three." He's now focused on investing in European banks. From my discussions with private equity investors recently, others are following his lead overseas, even to Eastern Europe. It's a heck of a state of affairs when the Ukraine looks rosier than Utah, but there you have it.

United Western: The OCC Responds

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.

There Is No Due Process?

Last night's post on United Western Bank generated a lot of traffic. Apparently, people are attracted by a David-versus-Goliath scenario. However, there's more to it than that.

In response to an earlier post on the attempt to give bankers a right to an "effective" appeal of examination decisions, one of the principal owners of a financial institution that failed during this latest crisis sent me an email that seems appropriate to post at this time. Obviously, this is only this individual's point of view, and the other "players" in the drama would likely disagree. However, his viewpoint is so well expressed, that I've decided to present it. I've changed some information to protect this individual from identification and retaliation (not that a federal regulatory agency would even THINK of EVER doing such a thing, of course). Other community bank owners, directors, and senior officers can share his pain.

It is my understanding that the processes you describe as set out in the Financial Institutions Examination Fairness & Reform Act have been  available to banks (at least [Bank Regulator] banks) for some time.  However, the ombudsman was more like a retired diplomat (for Monaco not Russia), rather than an informed, empowered decision maker.   And the administrative law judge is difficult to access (& triggers a severe adversarial breach in the relationship with the regulator), & the point at which it can be considered is too late in the process.

All of this discussion about oversight & review of due process presumes that the regulators basically know what they are doing, & exercise their regulatory authority in an appropriate manner.  The Office of Inspector General’s material loss review of the [Bank Regulator]’s handling of [The Bank] looked at the process the regulators went through & reviewed their narratives & calculations, but they never evaluated the validity of their loan evaluations nor whether the assumptions underpinning the subsequent reserve calculations could be substantiated.

So what recourse is there in the event the regulators don’t know what they are doing, or that they exercise malfeasance in their examination process?  At [The Bank] we had a complicated operation with large mortgage banking cash flow swings, complex servicing valuation issues, & large commercial real estate credits.  The field regulators were much more accustomed & qualified to review simple consumer credits.   Perhaps there were people up the chain of command at [The Bank Regulator] that could have weighed in in a more informed way, but they were embroiled in a political life & death struggle for their own survival & couldn’t be bothered to waste their time overseeing the destruction of a community bank.

[The Bank] was well capitalized [(Actual Precentage Omitted)] prior to the [Bank Regultor's] final examination in [Date Omitted].  They forced us to make a massive unsubstantiated addition to the bank’s loan loss reserve that immediately put us into a severely undercapitalized position.  And as you know we were extinguished within [A Short Period Of Time].  Now [A Number Of] years later we can look back & start to assess whether we, or the [Bank Regulator], was “right” in calculating the appropriate reserves.  If the books could ever be opened up & revealed in the bright light of day, the world would see that the [Bank Regulator]’s calculations were in fact totally wrong.  [The Bank]’s original reserve calculations very closely mirrored how the bank’s loans have actually performed (or not performed & subsequently liquidated).  Certainly, in these unprecedented market conditions, we didn’t dispute the need for added capital.  The question is, was it best for the FDIC, the depositors & the bank’s customers for the bank to be shuttered, or for it to work through its problems.  An informed & empowered ombudsman might have looked at the bank’s overall loan quality (delinquency rates: commercial RE0; consumer loans < 1%, etc.); profitability of the bank (earnings before reserves were about $[Substantial Dollar Amount] in [The Year Before The Bank Failed]; & history of operating in our market niche ([Many, Many] years), & decide that there should be an impartial, 3^rd party validation of the field examiner’s loan loss calculations before they pronounce the death sentence.

Instead, the government stole our life’s work, & destroyed an important community bank for the state [Where The Bank Was Located].  [The Acquirer From The FDIC] was able to swoop in & flip the bank in a [Relatively Short Peroid Of] time & walk away with a gain in excess of $[A Boatload].  This outcome is market validation of the error the regulators made.

But there is no due process, & this case will never see the light of day.  However, I don’t think this circumstance is unique to [The Bank].  If you look at the profile of the banks that have been put into receivership by the regulators in this cycle there appears, to me, to be a clear bias against private, closely held community banks.  Do the regulatory bureaucrats, with their mid-tier government pay scales secretly begrudge the entrepreneurs that run many community banks?  It bears closer examination, because the results of their bias will clandestinely define the future of the financial services industry & how communities & consumers are served.

As I said, that's one person's point of view. Each reader can decide for himself or herself where they stand on the primary causes of the community bank failures that have occurred thus far in the current cycle. Nevertheless, the foregoing illustrates why so many community bankers are following the United Western Bank litigation with much more than tepid interest.

The Unpopularity of Sunlight Among Vampires

I took some heat--some of it good natured and some of it not--from those corners of the universe where criticism of bureaucratic failings is accorded the same respect as Torquemada accorded the average heretic, about my recent expressions of amusement regarding the fears of federal bank regulators that their deliberations regarding the take down of United Western Bank in Denver might see the light of day. My critics were fond of pointing to the admonitions of federal appellate courts that such deliberations need secrecy because otherwise bureaucrats wouldn't speak to one another. And that result would be a problem?

As someone who spends his professional life conducting privileged conversations, I understand that a certain amount of back-and-forth between regulators ought to be accorded confidentiality. I especially understand that need when the subject is sports or sex. However, when the content of the conversations is the very basis of a decision to close down a bank, wipe out the owners (and likely many unsecured creditors other than insured depositors), and, in most cases, throw a number of people out of work, I think the need for secrecy is outweighed by the rights of those legitimately challenging the regulator's decision. To continue to fight tooth-and-nail to prevent release of such deliberations smacks of the well-founded nervousness of someone with something to hide.

On a broader plain, I think secrecy within bureaucracies is dangerous. In his short work "All Things Considered," that brilliant apostle of common sense, G.K. Chesterton, put the case much better than I could ever hope to.

Society is becoming a secret society. The modern tyrant is evil because of his elusiveness. He is more nameless than his slave. He is not more of a bully than the tyrants of the past; but he is more of a coward...The elaborate machinery which was once used to make men responsible is now used solely in order to shift the responsibility. People talk about the pride of tyrants; but we in this age are not suffering from the pride of tyrants. We are suffering from the shyness of tyrants; from the shrinking modesty of tyrants. Therefore we must not encourage leader-writers to be shy; we must not inflame their already exaggerated modesty. Rather we must attempt to lure them to be vain and ostentatious; so that through ostentation they may at last find their way to honesty.

Chesterton published that book in 1908. He'd expressed the hope that the dangers he discussed would be fleeting ones, and that "if all goes well this book will be unintelligible gibberish" to future generations. I don't things have gone that well because his observations seem more intelligible and applicable today than they might have been over a century ago.

My default position is that transparency trumps secrecy, especially where we're talking about a challenge to governmental action that has serious consequences and for which the legal remedies available to the "injured" are limited. Apparently, that position makes me an unpopular person in some quarters. I can live with that.

Hanging On Every (Concealed) Word

Yesterday's post on United Western Bank's litigation against the OCC/OTS/FDIC trifecta generated a lot of email. One pointed me to Robert Barba's article in the American Banker (paid subscription required). Barba discusses the case's "plot twists."

In June, the judge granted the FDIC's request to be removed as a defendant. In July, the Office of the Comptroller of the Currency replaced the OTS after those agencies merged. The OCC, FDIC, United Western executive team and its lawyers declined to comment for this story.

The tension between the parties intensified in the fall, as the executives sought from regulators as highly detailed an account of the administrative record as possible and accused the OCC of withholding information. The regulator spent months arguing that correspondence between the OTS and the FDIC involving their deliberative processes were privileged and cannot be made public.

February has been a particularly active month in the court fight.

On Feb. 9, Judge Amy Berman Jackson ordered the OCC to provide the executives with the FDIC correspondence. The FDIC then intervened in the case to protect the documents that the agency deems to be privileged. On Feb. 15, Jackson ordered the FDIC to either let the OCC release the documents or provide them to her in private. The FDIC is now proposing to release the documents to the executives, but under a protective order that would keep them from being made public, according to court filings.

He also discusses the regulators' contention that public disclosure of their discussions could have a "chilling effect" on the willingness of regulators to be open with one another in the future. Many of my correspondents think that would be an excellent turn of events. "Chilling" is what some of them want to see, along the lines of what happened to the French army in its retreat from Moscow in the winter of 1812.

Another correspondent has been plowing through the publicly available documentation, including copies of correspondence, and is convinced that "the government is hiding something." There's no question about that, but whether it's because there's a smoking gun under the covers or just a whole bushel of ineptitude, we'll have to wait to see. This correspondent states that the facts read like a novel.

Another correspondent agrees with that assessment: "Bleak House, the Banking Edition," she proposed. Or something like that.

Bank litigation: who knew it could be so gripping?

Bank Western: Still Standing

It's been six months since Western United Bank defeated a motion of the OTS (now OCC) to dismiss the bank's lawsuit against the regulator for placing the bank into an FDIC receivership last year. Since then, the bank has been attempting (vainly, but gamely) to get the OCC to cough up a complete administrative record of the deliberations that were undertaken by the regulators in making their decision to put the bank out of business in the midst of what the bank contends was likely to be a successful capital raising effort that would have permitted to the bank to remain open.

As is totally unsurprising to those of us who've spent our careers on the other side of no man's land from federal bank regulatory agencies, the OCC has been stonewalling. The OCC has claimed, on behalf of itself and the FDIC, that the documents sought by the plaintiff are privileged and should not be produced. The federal district judge handling the case has been tearing down that wall, brick by brick. On February 9, 2012, the court ordered the OCC to spew forth the requested record, so the court (and the rest of us, we hope) can see whether or not the OTS had legitimate grounds to close down the bank and appoint the FDIC as receiver. In the latest twist, the FDIC itself has intervened in an attempt to keep certain documents that might aid the claims of the plaintiff from seeing the light of day.

You get a pretty good idea of what's been happening from a filing last week made by the plaintiff's attorneys in response to the FDIC's attempt to intervene in the case in order to prevent the court from pulling up the window shade and letting in some light. You can read all fourteen pages, as I did. For those who don't geek out on this stuff, here are some highlights:

The court ordered the OCC to produce documents by March 7, 2012, ruling that either they weren't privileged or, if they were, the privilege was overridden in this case. After that ruling, the FDIC intervened, asking the court to over rule itself. Plaintiff's counsel alleges that the FDIC "still seeks to withhold several pieces of relevant information from the Bank, including a critical memorandum on the Bank, agendas, an email, and certain portions of Office of Thrift Supervision ('OTS') Regulatory Profiles." The bank wants all of the documentation produced so that the court has a complete administrative record when it holds against the OTS/OCC/FDIC decides whether or not to overturn the seizure of the bank.

There exist some technical legal arguments that are interesting to bank lawyers but might cause the eyes of laypeople to glaze over, including whether or not the documents sought are relevant, whether or not they are privileged, the extent of that (qualified) privilege, whether the documents are "factual" or "deliberative," and "yada, yada, yada." The bottom line for the plaintiffs is that the judge has already ruled on all essential points, so what we have here is not a failure to communicate, but a failure to comply. Although the plaintiff's counsel doesn't explicitly mention it, the next stop on that train's run is the city of "Sanctions." Judges don't like it when they issue an order and a party says, "I'm not through arguing with you yet, your holiness."

One of my favorite arguments that has been made by the agencies in this case is the "chilling effect" it would have on regulators if their deliberations are open to the light of day. I understand that concern. P.J. O'Rourke put the problem well in regard to the revelations of investigative journalists:

I am a journalist and, under the modern journalist's code of Olympian objectivity (and total purity of motive), I am absolved of responsibility. We journalists don't have to step on roaches. All we have to do is turn on the kitchen light and watch the critters scurry.

I'd tell the regulators to just buy industrial strength sunglasses and SPF 50 sunscreen and welcome to the world inhabited by those of us who have actual accountability for our decision-making. Sometimes hindsight's the bear that you eat, and sometimes it's the bear that eats you.

Another point that brought a raised eyebrow (I can still raise the one not frozen by Botox) was that the FDIC had apparently redacted factual information from some of the documents it did produce. If a fact's a fact, you can't redact. I think Johnnie Cochran said that.

There are a number of other issues that might pique the interest of some readers. To me, the mere fact that a year following the seizure, and six months after the judge told the regulators to produce a complete administrative record, the regulators are still playing "Hide The Salami" with the plaintiff and the court, gives the non-litigator class a flavor of what it's like to engage in a lawsuit with a party that, basically, is not accountable. Who's picking up the tab of the OCC and the FDIC as they stiff-arm their way through hectares of scorched earth? Why, that would be the very institutions they regulate, through their assessments. I suppose Congress could pass a law that clipped a few tail feathers, but that's as likely as Newt Gingrich referring to himself in the first, rather than the third, person.

The best chance the plaintiff's have--that any person really has who doesn't have unbelievably substantial political stroke--is the federal district court judge hearing this lawsuit. At some point, she can impose some pain for not producing what she's ordered be produced. Even that pain, however, will be subject to being appealed, again and again, on every issue that creative minds can concoct, up and down the appellate court ladder, for years and years, until, finally, everyone but the plaintiff will have forgotten what all the sturm und drang was about in the first place.

Nevertheless, I don't get the feeling this plaintiff is going anywhere soon, and we'll be waiting for the next shoe to drop.