Bank Lawyer's Blog

Where's Snowden When You Really Need Him?

In a performance worthy of Dean Wormer's Double Secret Probation, the US Treasury Department gave a classic runaround to St. Louis Business Journal reporter Greg Edwards when he had the temerity to ask Treasury why it is keeping the names of bidders in its auction sales of "TARP stock" a big fat secret.

Originally the Treasury spokesman, who identified himself as Adam, said he would get the answer from the department’s lawyers. Having received no response by Thursday, we called again. The inquiry was duly noted, I was told.

Today I made another effort, aware of the three-day weekend’s approach. The line rang and rang before I got a voicemail recording that told me public affairs was “not available.” Perhaps the weekend already has begun for taxpayer-funded government workers.

Edwards relates an email from a reader (I assume a banker) who was also being stonewalled.

“I have called and emailed the U.S. Treasury several times to try to find out when certain auctions would occur and who had won auctions I read about after they took place. I have never heard back from anyone.”

As one outraged St. Louis banker reminds us, this is taxpayer money we're talking about.

Yes, well, so it is. As if that ever meant a thing to the people who play with it. File a FOIA request, Greg. Then pull out a pillow, a blanket, and a quart of Ripple, and settle in for a long and peaceful slumber while you wait for denials, the redaction of all critical information, and a Westminster Abbey-sized load of smoke to be blown up your nether regions. After all, this is your federal government at work, and accountability to the taxpayer is definitely NOT its long suit.

TARP Paybacks Continue To Roll In

Although I’ve beaten this drum for the last four years, I’m going to continue to rip flamadiddles on the same theme until my hinged wrists get tired. TARP, when it stuck to its intended purpose (before it became a slush fund to bail out the auto unions), not only saved many deserving community banks, it has ended up making a net profit for the US government. One more example is a recent auction of TARP preferred stock of a "saved" Texas community bank.

The U.S. Treasury said Friday it expects to recoup $19.8 million in proceeds from the public auction of FC Holdings Inc.’s Troubled Asset Relief Program debt.

The Treasury priced 21,042 TARP shares of the Sugar Land-based bank holding company’s TARP at $897 per share, which would ring up at $18.8 million. Another 1,052 TARP shares are expected to be sold for $955 per share, totaling $1 million, according to the Treasury.

FC Holdings, the bank holding company for Sugar Land-based First Community Bank, originally received $21 million in TARP in 2009. The Treasury said it has gotten back about $268 billion from its TARP investment in the U.S. banking industry, which was $245 billion.

Unfortunately, the hard-core critics of TARP will never admit that there might have been some good done for some banks, along with all the evil visited upon pure free market principles. The facts keep rolling in like waves onto the shore, and many refuse to acknowledge the error of their ideological ways. It's tough to prove a negative, namely, the proposition that if TARP had not been created, the economy would have tanked a lot worse than it did in 2008-2009.

It's a question of judgment. On this matter, I choose to trust my own. Of course, I'm leaving AIG out of the calculations. That organization wasn't among the "banks" TARP was originally designed to bail out. Nor, for that matter, was Chrysler.

A Deal Is A Deal

AIG's moment of temporary insanity has passed. It's decided not to join a shareholder lawsuit filed by a company controlled by former AIG CEO Hank Greenberg against the US Government for bailing AIG out in 2008. Actually, Hank's company didn't allege that fact of the bailout was itself wrongful, just that the bailout terms set by the government were wrongful. Everyone understands that when you're going down like a torpedoed garbage scow, you always sue the guys who threw you a life preserver because they didn't reel you in quickly enough and you caught a nasty cold.

AIG's board of directors was apparently worried about reputational risk. Given the bad taste left in the collective mouth of the American public by the Wall Street bailouts, that's probably a justified worry. Politicians of all stripes were publicly uttering variations on the theme of "WTF?" on a daily basis. On the other hand, David Boies (yes, THAT David Boies), the attorney for Greenberg's company (which is the plaintiff in the litigation), thinks that the board's decision was not in the best interests of the shareholders. I assume that's a vague threat of a lawsuit against the directors of AIG. It seems to me that if Greenberg goes that route, he'll first have to win the lawsuit against the government in order to prevail against the directors. I'd think he'd have his hands full on with the suit against the government, without taking on the additional defendants. Then again, I don't swim in that specific shark tank, so I assume my rube-like perceptions and opinions are of little interest to the masters of the universe.

There were some other interesting, and even amusing, observations on AIG's board's decision. The Cato Institute's Mark Calabria astutely observed that big financial institutions rarely sue the federal government "because if they did, the government might not bail them out next time." Rim Shot!

On the other hand, AIG's CEO Robert Benmosche told CNCB that AIG believed that "a deal is a deal." Really, Bob? You danced with the bear and you still said that to a reporter without cracking yourself up? "A deal is a deal" as long as you're not the US government, which believes in honoring its deals unless it's politically expedient to renege on them, in which case it just litigates the resulting lawsuits for a decade or more until the public's interest in the outcome has been long since diverted to one or more other shiny baubles.

I understand the public relations downside as a reason to back off suing the US government. However, the "a deal's a deal" rationale simply doesn't hold water, based upon the nature of the devil with whom the deal was made.

TARP Profits Continue To Grow

Back in February, I noted that TARP had yielded a profit for the US Treasury of $20 billion. Notwithstanding the fact that the program is now down to the "harder-to-exit" smaller banks that might not be as attractive to potential purchasers of the preferred stock that the Treasury still holds, the profit figure is now up to $23 billion. While that's a drop in an ocean of federal debt, it's nothing to sneeze at. What I said earlier, I'll say again:

Opponents of the original TARP will never admit that they might have been wrong about the need for the program to save the economy from ruin. The fact that the Treasury has already made a profit on its original TARP investments ($20 billion so far, according to the linked article) is meaningless to them. I guess they wanted to let the "creative destructive" forces of a "pure market system" work their magic on all of us, and if we ended up standing in bread lines, they'd say that was a hard lesson learned and that we're all the better for it. I don't have the energy to tell them that not only is God dead, but so is Ayn Rand.

Even if the remaining $8 billion is written off (it won't be), the program still ends up in the black. Not bad for a much-maligned "bailout."

Of course, the Treasury may have a problem getting potential investors to pay as much as they might have in future TARP stock auctions now that one bank has stiffed an investor on TARP stock dividends (paid subscription required). The fact that those dividends are noncumulative makes it risky when small banks decide that, while it was their patriotic to pay the US Treasury, it's perfectly fine not to pay investors who bought their TARP stock from the Treasury Department.

"This is a good lesson as to what risks buyers need to be aware of with small banks," said Doug Faucette, a lawyer at Locke Lord. "That's why they call it stock."

I think that's an astute observation. However, I wish that bank the best of luck if it ever finds itself in need of capital from private equity investors in the future. PE hates it when Main Street starts acting just like Wall Street.

Stop Me If You've Heard This One Before

It's not merely the fact that former Wells Fargo CEO Dick Kovacevich complained publicly and loudly in 2008 that Hank Paulsen made him a TARP offer he didn't want but couldn't refuse, it's that, nearly four years later, he..won't...stop...ranting...about...it, that leaves some listeners amazed, others stupified, and still others screaming for someone to stick a knife in their neck in order to end the pain. Moreover, he's gone from "I didn't want it or need it but they threatened me" line to "TARP is likely to cause the end of life on Earth, at least as we know it."

Former Wells Fargo Chairman and CEO Dick Kovacevich says the federal government's bank bailout during the depths of the financial crisis was an "unmitigated disaster" and laid much of the blame for the financial crisis on "ineffective regulators."

"The decision by the U.S. Treasury and the Federal Reserve in October 2008 to make banks take TARP money even if they didn't want it or need it was one of the worst economic decisions in the history of the United States," Kovacevich told about 100 people attending a Stanford Institute for Economic Policy Research event Tuesday evening.

Kovacevich then offered a roster of reasons fueling his criticism of the government's Troubled Asset Relief Program, including "spooking the financial markets," damaging the reputation of financial institutions who did nothing wrong, and institutionalizing the concept that some institutions are too big to fail.

Kovacevich also cites TARP as the genesis of Dodd-Frank, the Ebola and AIDS viruses, as well as the horror now known as "Charlie Sheen."

Dick claims that any pundit who argues that TARP saved the financial system from a China Syndrome-like meltdown is a mere government apologist and spinmeister. In fact, Dick declares that TARP caused the financial meltdown and stock market collapse by stampeding the markets, as if the pre-TARP failure of Lehman Brothers was nothing more than a minor blip on the radar screen. He didn't say this exactly, but I think Dick also suspects that TARP is the reason that supermodel Linda Evangelista has repeatedly spurned his offers of concubinage. As a parting shot, he also blames most of the failed banks on "poor regulation."

This is what we call the "Dick-Cheney-Scattergun-To-The-Face" approach to criticism. If you load up on Double-O buckshot and blast away at close range, you're bound to hit something. If you're really lucky, like the other Dick, you'll bag a lawyer.

Bank Bashing: It's Not All Fun And Games

Long-time bank analyst Richard Bove has some harsh words for The New York Times and the anti-bank critics it's recently quoted. If Mr. Bove pulled any of his punches, it's not obvious to me. Basically, he calls many of the critics either ignoramuses or worse: ideologues. He thinks that the basic premise of these critics is that banks are "public utilities."

They should be price controlled and offer products for lower income households even if this results in losses. Moreover, there is a core belief that banks should not be allowed to make profits.

The obvious problem caused by all this bank bashing for Mr. Bove, an equity research specialist, is that investors are avoiding bank stocks like they carry the Ebola Virus.

[T]here is a definite sense that there is too much risk to get involved in an industry which the government is clearly attempting to nationalize on a de facto basis— i.e., the government is using regulations to control the industry’s activities. In essence, the government wants to run the industry without actually owning it. This is not appealing to investors.

I think he's right. I think he's also right that if the CFPB ("a new tool with which to bash banks") enacts de facto price controls on bank fees through regulation of "unfair" or "abusive" practices, many investors will treat bank stocks as toxic waste.

While I don't necessarily agree with Mr. Bove that all negative news is bad for banks, certainly the unthinking sort of spleen-venting isn't helping the health of banks of any size. Further, while I'm not as alarmed as he is by the "break-up-the-too-big-to-fail" threat, I can't argue with his allegation that many critics of the bank "bailouts" just don't get it.

There is no understanding that if the banks failed then millions of businesses across the country would have had their loans called causing them to fail driving unemployment higher.

No one even thinks about asking the question as to why every country in the world protects its banking system. The answer, of course, is because the banking system holds the key to the health of middle to small business and the people they employ. There is even less understanding that taxpayers made over $150 billion on the investment made in banks by the Treasury.

Just think how much taxpayers would have made if TARP hadn't been used to bail out automobile manufacturers and insurance companies.

There doesn't seem to be much doubt that too much of the "debate" in this country on most issues, including "banks," degenerates into pure polemics, often uttered (screamed, actually) inside of echo chambers, where like-minded true believers reinforce their prepackaged world views. It's as if a quarter of the country watches nothing but MSNBC, another quarter nothing but Fox News, and the other half is too busy hoping that what happens in Vegas, really does stay in Vegas, or whether you should have a medium or large fries with that Whopper, to give a rip.

Treasury Contemplating TARP Closeout Sales?

When word leaked out last week that the US Treasury Department was considering selling the preferred stock it held in over 350 banks as a result of its TARP capital injections, I think the remaining TARP banks had a mixed reaction. On one hand, there's always the advantage of dealing with the devil you know as opposed to the devil you don't. It's theoretically possible that Treasury might sell the whole kit and kaboodle to Gordon Gekko, who might downsize some his acquired banks with extreme prejudice.

On the other hand, there's always the disadvantage of continuing to deal with a federal bureaucracy that is motivated by factors that focus less on the bottom line than on meauring the political wind's speed and direction. Ask a TARP bank that's tried to negotiate a "haircut" on repayment of TARP stock in connection with a merger or acquisition transaction how political considerations (i.e., how Treasury can insulate itself from being criticized during the period starting now and ending with The Rapture) trump common business sense. If you have a savvy private equity investor owning your stock, you might ultimately be screwed, but at least you'll have a chance of understanding why.

Opponents of the original TARP will never admit that they might have been wrong about the need for the program to save the economy from ruin. The fact that the Treasury has already made a profit on its original TARP investments ($20 billion so far, according to the linked article) is meaningless to them. I guess they wanted to let the "creative destructive" forces of a "pure market system" work their magic on all of us, and if we ended in standing in bread lines, they'd say that was a hard lesson learned and that we're all the better for it. I don't have the energy to tell them that not only is God dead, but so is Ayn Rand.

So, if I take pot shots from the peanut gallery at the administrators of TARP, I still think that it was a good idea, albeit one that could have been executed a heck of a lot better than it was.

Kanas & Co Cashing Out?

Two years ago, when BankUnited announced an IPO and private equity haters were screaming "cash out," I said it was too early to tell. When the IPO was later completed and the major private equity players retained an ownership stake, which was worth a heck of a lot of moola, I said that both critics and supporters of private equity had fodder to support their opposing positions. Last week, Kanas and Company announced that they may very well be looking to cash out, so those who hate the fact that private investors make money on failed bank deals can finally legitimately point their fingers at the principals and proclaim "J'accuse!"

The accusers are bent out of shape because the lowest cost bid for BankUnited was one in which private investors, in effect, recapitalized a failed bank (although they legally started a new bank that acquired most of the failed bank's deposits and assets), received a generous loss-sharing arrangement from the FDIC on the failed bank's assets, and, because they were one of the first PE horses out of the gate, negotiated a better deal than did most of those who subsequently tried to run the same race. In fact, it might be said that the negative publicity generated by this deal and a few others (the IndyMac transaction being another) soured the FDIC on private equity deals altogether. As the Wall Street Journal reported yesterday:

The deal was one of the few in which regulators allowed private-equity firms to take control of a failed institution on terms that are now considered to be lucrative. Since the deal took place, regulators have offered less rich terms to private-equity firms that are seeking to buy banks.The buyers paid $945 million for BankUnited. The FDIC gave them $2.2 billion in cash and agreed to reimburse as much as $10.5 billion in future loan losses.

As we've said previously:

Much of the prejudice against private equity appears to be based on the fact that it desires to make money on its investments. Isn't that what investors in any bank seek to do? The critical issue in the BankUnited deal isn't that the private equity investors might make money from an FDIC-assisted transaction, but whether the loss to the FDIC insurance fund will be less with the deal that was done than it would have been without that deal. I'm going to assume that the loss will be less, and therefore, that the FDIC was right to do the deal in the first place.

I still think that's the case. Moreover, the investment preserved jobs and the viability of a resuscitated financial institution that has grown in size and expanded into new markets under the current ownership and management. That sounds like a win-win, except for the fact that the stockholders made money on the deal. As we all know, in the current political climate, "profits" and "banks" are a deadly combination.

Well, we don't need to worry about a repeat of this "travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham." As those of us who represent private investors in the banking business well know, the FDIC will never again make such a "mistake."

The Big Dog Always Gets The Bone

Proving once again that when it comes to the federal government, Too Big To Fail banks get a backrub while Too Small To Save banks get a backside paddling. Yesterday, we discussed how so many of the community banks who received a TARP investment a few years ago are stuck with TARP with no way out. On the other hand, according to TARP's special inspector general, the biggest 17 TARP banks were coddled by Congress and the regulators, including by special interest legislation and relaxed requirements by the banking regulators, and allowed to exit the program before the IG thinks they should.

The quick exit was motivated in part by the executive compensation restrictions that Congress enacted after the banks were already in the TARP, so you can't blame the banks for wanting to back out of a program where Congress changes the rules ex post facto. Also, the Fed and the OCC have pushed back hard against the IG's criticism, claiming that the government wanted the early exit as much as the banks, and that the banks were able to raise Tier 1 capital through private sources more easily with the loosened restrictions. Certainly, none of the banks that exited was unstable without the TARP capital.

Nevertheless, it's galling that special action was taken at the highest levels to accommodate the fat cats, while providing any TARP for the little guys was at first an afterthought, and that now that many of the small banks took that capital, no one in Congress or the federal banking agencies is falling all over themselves to relax any rules (e.g., amortization of CRE losses) to help them exist before the dividend rates rise.

Help: I've Fallen (Into A TARP Pit) And I Can't Get Out!

In a very revealing article in last Thursday's American Banker (paid subscription required), reporter Kevin Whack let's us know that the recently closed Small Business Lending Fund was a bust at helping most banks, and most of all, at helping those small community banks that are still sitting on a pile of TARP to exit that sorry state of affairs.

The SBLF generally offered a cheaper alternative to Tarp, but the banks that were able to take advantage are in the minority.

Out of at least 319 Tarp recipients that applied for SBLF funds, only 137 eventually received the money.

In addition to the banks whose applications were denied, other Tarp banks were discouraged from applying because the SBLF's rules made clear that they would not qualify.

As a result, the prospects for many small banks in Tarp, which already looked bleak when the SBLF began a year ago, seem even darker today.

At least 170 of them have missed two or more of the quarterly dividend payments they owe to the Treasury Department. Such payments are set to jump to 9% from their current rate of 5% in two more years.

Each bank's primary federal banking regulator had to approve them for SBLF capital, and it appears that the regulators were shooting down applicants faster than Dick Cheney can blow a shotgun load of buckshot into a lawyer's face.

Overall, more banks were rejected by the SBLF than were approved, according to Paul Merski, executive vice president and chief economist for the Independent Community Bankers of America. The available data suggests that the same trend holds for Tarp banks.

One commenter to the article alleges that the FDIC ought to be sliced and diced for nixing so many potential recipients of SBLF capital for fear they'd be too aggressive in their lending. I don't know why the FDIC and other federal regulators discouraged so many applicants, but if it was based on fear of "aggressive lending," that would be the kind of dysfunctional analysis would not exactly shock me.

As another commenter complains, "just $1.33 billion of the $30 billion SBLF fund was new money given to banks that will help the economy. Treasury only used 4.3% of the funds they could have used to help create jobs in the economy. Geithner needs to be fired for this." That's a legitimate complaint, but it misses the larger problems that $30 billion is too little, too late, and that without a robust economy creating robust borrowers, banks who received SBLF capital would be doing what banks who are still stuck in TARP are doing with such capital: sitting on it. To echo the old Clinton campaign mantra: "It's the economy, stupid."

Two observers cited toward the end of the article, Christy Romero, the acting inspector general for TARP and Neil Barofsky, the original IG for TARP, make a good point about what the end game might be for many of these small, privately owned banks who can't raise capital from other sources to pay off the TARP preferred stock, and are waiting for the dividend rate to escalate from 5% to 9% in a couple of years.

"I think they really need to be talking to these banks, and talking to the observers that they're sending, and determining how to give these small banks a clear exit path," Romero says.

She also notes that in some instances the Treasury has restructured its Tarp investments, taking a partial loss in order to avoid a total loss.

"So that same kind of consideration needs to go into, 'What's the ultimate strategy to get small banks out of Tarp?' " Romero says.

Barofsky predicts that as the eventual rise in Tarp's dividend rate approaches, the Treasury Department will agree to take partial losses on its investments in small banks as part of sales and merger deals.

"You're going to see mergers, you're going to see acquisitions," he says.

That conforms to our recent experience. In the right case, Treasury is willing to take a haircut, sometimes a substantial haircut, on its TARP investment in connection with an acquisition or recapitalization transaction. Realists understand that 20% of your investment is a lot better return than no return. Don't be surprised to more instances of this type of "exit strategy" being employed as 2013 looms closer and sellers become more "realistic" about what's a "market" price for their stock.