Bank Lawyer's Blog

Winners and Losers

2009-07-15T21:35:00-05:00

It matters little who's in power in D.C. You can rest assured that whoever is at the helm of the federal government's ship of fools, the big will be bailed out and the little will be allowed to sink unmourned. The latest example is this afternoon's announcement by CIT that the feds have told it to take a hike. No more bailout bucks for one of the nation's largest lenders to small businesses.

I understand that the FDIC was particularly reluctant to extend a helping hand. That's understandable in light of the new primary mission of that agency under the Care Bair to make sure that delinquent homeowners are bailed out first, and damn the consequences to FDIC-insured banks. What's good for the consumer is good for banking, according to Chair Bair, and there's no such thing as a bad subprime borrower. Small businessmen and women, on the other hand, can pound sand and man their own lifeboats. There's no free lunch for those pogues. They made their own beds, etc., etc.

The government's picking interesting winners and losers, isn't it? For example, Goldman Sachs.

While it turned up its nose at CIT, the FDIC bent over backwards to make sure that a bank started by Democratic Sen. Inouye of Hawaii got a helping hand of government TARP capital, after one of the Senator's aides called the FDIC "to check on the status" of the bank's TARP application. Even a left-wing rag like the WAPO couldn't let that one pass unnoticed, even managing to grind out an editorial condemning the apparent conflict. Sen. Inouye's lame response to a fawning Honolulu TV outlet was not convincing ("I didn't do it, an aide did it." "I don't sit on the Banking Committee, therefore how could I have any influence?"). Nevertheless, this little incident has blown by most of the in-the-tank MSM, so don't expect it to go anywhere. Furthermore, compared to Maxine Waters and Barney Frank, Daniel Inouye's a rank amateur when it comes to this stuff, and those two squirrels are still going strong, so Inouye will almost certainly skate away from any consequences other than a reporter's annoying question or two.

Although The Wall Street Journal panned any move to bail out CIT, it's editorial staff had the honesty to point out the injustice of who's been picked to survive and who's been left to die.

Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman [Sachs], which apparently needs no help printing money anyway.

Some day, there will be payback. When and how may not appear to be clear at the moment, but having been through these cycles before, I am convinced that "a day will come."

Baltimore Lives To Fight Its Oppressors Another Day

2009-07-14T21:21:00-05:00

It's easy to sit there and say you'd like to have more money. And I guess that's what I like about it. It's easy. Just sitting there, rocking back and forth, wanting that money.
---Deep Thoughts, by Jack Handey

Cleveland may have taken it on the chin when it tried to blame its decrepit state of existence on bankers and other lenders, but Baltimore is hanging in there.

A federal judge on Thursday denied Wells Fargo's motion to dismiss a lawsuit filed by Baltimore over what city officials said were racially discriminatory lending practices that led to a wave of foreclosures that cost the city millions.

The courtroom victory means the city, whose lawsuit is being closely watched by other municipalities, could gain access to the inner workings of one of the largest mortgage providers in the region.

U.S. District Judge Benson E. Legg wrote in a memo Thursday that the city had produced enough evidence to continue its claim and is entitled to discovery.

Surviving a motion to dismiss is a long way from proving your claims at trial by a preponderance of the evidence. On the other hand, it's better than a kick to the nether regions.

Wells Fargo isn't backing down (not that it has much choice given the seriousness of the allegations and the potential financial disaster that would follow should the city's Hail Mary legal pass actually be caught in the end zone).

"We continue to believe that this lawsuit lacks merit," said Cara Heiden, co-president of Wells Fargo Home Mortgage. "We welcome the opportunity to set the record straight and demonstrate the many controls we have in place to ensure fair, responsible and nondiscriminatory lending for all our customers."

[...]

n an all-day "test run" of the case Monday, lawyers for Wells Fargo argued that it will be impossible for the city to assess damages specific to vacant houses that once were purchased with Wells Fargo loans. They said a fraction of 1 percent of the city's 33,000 foreclosures in recent years involved Wells Fargo, and that the city itself is responsible for 9,000 vacancies.

Wells Fargo's case hasn't been helped by two former employees who have given affidavits and, we assume, are prepared to testify, that Wells Fargo consciously "steered" minority applicants into high-cost, subprime mortgage loans, even those applicants who qualified for prime mortgage loans. Then again, it's one thing to prove a violation of fair housing laws. It's another thing to prove that such violations have wrecked your city, as Baltimore claims. As in every other case of this sort, proving causation for the damages that are claimed is a rocky shoal on which many a ship of state (or of municipality) has foundered and, in my view, will continue to founder.

For a "fair and balanced" take on this latest development we (shockingly) did not turn to Fox News, but to another unbiased news source, The Party for Socialism and Liberation, which put the kind of spin on Judge Legg's decision that only those who believe in the resurrection of Lenin, not Jesus, could conjure.

Banks under capitalism are all too eager to victimize the most exploited and vulnerable segments of society in pursuit of profit. By preying on the dreams of oppressed people, Wells Fargo and other lenders unabashedly ruined lives to inflate their bottom line.

Even the crisis caused by the overproduction of housing and the resulting explosion of sub-prime foreclosures has been used by big banks to further their aims for ultimate profits: After taking billions of taxpayer dollars from the government, the largest U.S. banks consumed their weaker competitors, speculated on volatile international markets and pocketed billions more in outright profit, all while working people continue to bear the brunt of the worst economic crisis since the Great Depression.

Freakin' Banks! Borrowers of the World Unite! You have nothing to lose but your homes (and your credit cards, SUVs, ATVs, boats, and all the other "stuff" that makes living a middle class existence in this capitalist cesspool a living hell-on-earth)! How can anyone sleep at night knowing that banks (as well as other capitalist warmongers and their running dog lackeys, bank lawyers) are working 24/7/365 "to further their aims for ultimate profits"?

By the way, are "ultimate profits" akin to "Ultimate Cage Fighting"? If so, we want tickets to the front row, center stage.

After giving this entire mess the deep thought it deserves, Bank Lawyer's Blog has decided that the only solution to capitalism's problems are to bring in the ultimate capitalist, Warren Buffett, to serve as The God Emperor, and to "regulate" the entire economy. Here, for your viewing and listening enjoyment, is the latest rap video by Warren B, Graham & Dodd, shot by MBA graduate students at Columbia University for their latest Follies, in which Warren and his wing-men tell us how it ought to be. Who knew Buffett was still so spry?

Advance Fee Scams: To File Or Not To File

2009-07-13T21:29:00-05:00

We've long been fond of "419" e-mails, named after the section of Nigerian law that prohibits them. Most or perhaps all of you reading this blog have received an e-mail similar to the following real-life example, posted on the 419-busting site "419 Eater":

************************************************

From: Martins Jide
Date: Thursday, September 23, 2004 11:02 AM
Subject: URGENT REPLY

It is obvious that this proposal will come to you as a
suprise. This is because we have not met before but I am inspired to
sending you this email by the huge fund transfer opportunity that
will be of mutual benefit to the two of us.

However, I am Barrister Martins jide,the personal
attorney to the late Engr. Suk Hun Wufei flody, a Citizen of
Japan, who used to work with Nigerian National
Petrolum Co-operatrion (NNPC).

On the 26th of August 2003, my client,his wife and
their three were involved in a fatal house explossion at
Nigerian National Petrolum Co-operatrion (NNPC)
quaters Lagos.

Unfortunately they all lost their lives including
other people in the premises.Since then I have made
several enquiries to several Embassies to locate any
of my clients extended relatives, this has also proved successful.
After these several unsuccessful attempts, I decided
to trace his relatives over the Internet to locate any
member of his family but of no avail, hence I
contacted you.

I contacted you to assist in repartrating the money
and property left behind by my client since I have no
place to locate any of his relatives. I can easily
convince the bank with my legal practice that you are
the only surviving relation of my client.Otherwise the Estate he
left behind will be confiscated or declared unserviceable by the
bank where this huge deposits were lodged.

Particularly, My late client had an account with one
of the banks in Republic of Ghana valued at about
US$9.3Million (Nine Million Three Hundred Thousand
United States Dollars) which I witness the
documentations and the documents are with me.

Conseqently,The bank issued me a notice to provide the
next of kin to my client since I have been unsuccesfull in
locating the relatives.

I seek your consent to present you as the next of kin of the deceased
so that the proceeds of this account valued at US$9.3Million (Nine Million
Three Hundred Thousand United States Dollars) will be paid into
your account and then you and I can share the money. 55% to me and 40%
to you,while 5% should be for expenses,tax as your government may require.

I have all necessary legal documents that can be used
to back up any claim we may make. All I require is
your honest cooperation to enable us see this deal
through. I guarantee that this will be executed under
a legitimate arrangement that will protect you from
any breach of the law.

Please get in touch with me by return email .

Yours Faithfully,

Barrister Martins jide

N.B. Please indicate your telephone and fax numbers
for easy communication in this mutual transaction.

***********************************************

It's hard to believe that any person, no matter how simple, falls for one of these schemes. Yet, a recent conversation with a bank officer indicates that suckers are being born not every minute, but every nanosecond, and some of them are bank customers. Recently, a good customer of a community bank, a successful business person, arrived at the bank and asked the wire transfer department to wire tens of thousands of dollars to a foreign bank account as a "good faith deposit" to "cover expenses" involved in this sort of "advance fee" get-rich-quick scam. Luckily, the talkative customer showed the e-mail to the bank personnel. A bank officer was able to explain to the customer the risks involved and to dissuade him or her from being bilked. The bank officer who related this story to me assured me that this was not the only example she had seen of customers either falling for these schemes or asking bank personnel whether the offer was legitimate.

A bank confronted with a customer who is about to be suckered into parting with funds, but who is stopped prior to doing so, might wonder whether a suspicious activity report (SAR) should be filed. Inasmuch as 419 scam e-mails are as common on the internet as bird droppings are on any major highway, banks might fear that filing 419-related SARs in circumstances where no money was lost might become a full-time job for some unlucky employee. Luckily, FinCen has provided some guidance.

In The SAR Activity Review Issue 7, FinCen sets forth the reporting guidelines for these schemes. Basically, FinCen doesn't want to be buried under an avalanche of SARs, either.

If a monetary loss has not been incurred from an advance fee fraud scheme and
there are no other indicators of illegal activity warranting the filing of a Suspicious
Activity Report, a financial institution should not file a Suspicious Activity Report
and no further action is necessary.
If a monetary loss has been incurred from an advance fee scheme or the scheme
involves other indicators of illegal activity, such as investment fraud, counterfeiting,
forgery, or the misuse of an official United States Government seal, a financial
institution should consider filing a Suspicious Activity Report based on the
requirements of 31 C.F.R. Part 103 and the Suspicious Activity Report filing
instructions. In addition, the financial institution should contact the local United
States Secret Service field office, local police department, or other appropriate law
enforcement agency.

In other words, when it comes to 419s, "no harm, no foul." I know some banks who seem to be enamored of a theory of SARs filings that goes "when in doubt, file," and to a certain degree I can't blame them. When it comes to these types of scams, however, FinCen wants banks to restrain themselves.

Foreclosure Moratoriums A Bust

2009-07-12T21:12:00-05:00

Paul Jackson, editor-in-chief of HousingWire Magazine and Housingwire.com, is not shocked by the results of report releases recently by Clayton Holdings, Inc.

Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers — and may even have made things worse, for everyone involved.

[...]

According to Clayton’s data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm’s analysts estimated would have otherwise had foreclosure sales completed during the “freeze” period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.

It's not only that foreclosure moratoriums are not helping borrowers to avoid losing their homes,it's that more loans that were subject to a moratorium-caused delay eventually proceeded to complete foreclosure than loans that were not subject to such a moratorium.

The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were “helped,” either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze — a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.

According to HW's sources, the basic problem is that so many borrowers have "negative equity," with respect to their homes and with respect to their overall net worth, that no "moratorium" will miraculously make them suddenly solvent. According to one servicer, all the moratoriums have done is to dig a deeper grave for many consumers "in the form of further arrearages and potential fees that get added to the mountain of debt that already must be repaid to bring a loan current." Another servicer pointed out another obvious problem: many borrowers have lost their jobs or otherwise had their incomes severely reduced. "Even if we forgive some of the debt, we can’t solve long-term for a lack of income."

Other servicers claim that a number of borrowers seem to believe that they are entitled to much larger payment reductions under the Obama administration's guidelines than those guidelines actually provide. I suppose that if a person wasn't savvy enough to originally appreciate the risks of the loan he or she had agreed to repay, he or she isn't going to suddenly become well-informed about their modification options. Plus, folks like Sheila Bair are constantly on the boob-tube pushing the "necessity" of "affordable" loan modifications, so I imagine many delinquent borrowers believe that the government has mandated that private lenders give them whatever loan modification they want. After all, we do live in a nation whose inhabitants believe that they're entitled to have the government make their lives as pain-free as possible, regardless of the ill-advised decisions they make.

In the end, of course, it's the lenders who ultimately take the loss caused by the delays. As Paul puts it, it's the lenders, servicers, and investors who "bear the cost of carrying a bad loan to some sort of finish line." All the moratoriums have accomplished is to increase those carrying costs and the ultimate loss.

Criminalizing Corporate Governance

2009-07-09T21:36:00-05:00

Emily Flitter at BankThink concisely summarizes a recent useless contretemps among conservative and liberal bloggers and newspaper columnists over a proposal by leftard Paul Collier of Pravda The Guardian to make bad business decisions by bank managers that lead to the failure of a bank a criminal offense ("bankslaughter"). Collier's idea was promoted by the often-but-apparently-not-always-sensible Felix Salmon, who stoked the ire of Clusterstock's John Carney, who, in turn, drove first-year Yale law student James Kwak to lecture all of us, based upon his vast reservoir of knowledge about the US legal system. Links to all the bloviators are contained in Emily's post.

It makes for "interesting reading," but it's a non-issue. Anyone who knows anything about the current state of the law and regulation that governs the US commercial banking system knows that the banking regulators have all the firepower they need to punish reckless bank management and directors until they cry like little girls, including stripping them naked, tying them to an anthill, cutting off their eyelids, and pouring honey on their private parts. Then, they can get really nasty.

Regulators can issue cease and desist orders, impose civil money penalties of up to $27,500 per day, institute removal and prohibition proceedings against "institution affiliated parties" (including officers and directors), sue directors and officers personally for "gross negligence," and seize assets in prejudgment seizure actions. If an institution fails because of the type of "reckless" conduct that so irks the proponents of criminal penalties, you can bet your bottom dollar that the FDIC and the US Justice Department will be all over the management and directors with as many civil and criminal sanctions as they can concoct. Ask Don Dixon and Woody Lemons.

Any bank officer, director, or professional who survived the last banking crisis knows full well that the government has all the arrows in its enforcement quiver that it needs to theoretically deter and punish every "reckless" officer and director it can lay its hands upon. Adding additional criminal penaltiies at this point makes as much sense as all the current discussions about reducing the US and Russian nuclear weapons stockpiles. What's the difference in deterrence incentive between being able to blow up the world 10 times over versus 15 times over?

Ms. Flitter closes in on the most important aspect of the discussion, however, when she wonders whether additional criminal penalties would actually deter anyone when current penalties do not. The obvious answer is "No." The kind of people who take reckless, bank-destroying risks in one of the most heavily-regulated businesses in the world aren't the type of people who worry about the downside. Again, if you'd actually had experience in this business, and had encountered people like this previously, you'd understand all of this. If you're devoid of such actual experience, however, you can always blog or write a newspaper column about the subject, and readers who are equally ignorant might find your opinions useful.

Killing The PE Golden Goose?

2009-07-08T21:19:00-05:00

Those who can, do, those who can't teach; and those who can do neither, administer.
---Calvin Calverley

Last week's release by the FDIC of a proposed policy statement on the acquisition of assets and deposits of failed banks and thrifts by private equity investors set off a mini-explosion of negative reaction from private investors and pundits. After a reportedly "marathon" session between private investors and FDIC Chairman Sheila Bair this week, some sources were gloomy about the proposal and other sources were hopeful. On the gloomy side was The New York Post which, in its typically understated fashion, ran a headline that screamed: "SO JUST GRIN & BAIR IT; FDIC Chief Unmoved."

A meeting called by Federal Deposit Insurance Corp. chief Sheila Bair this week with several banking and private-equity bigwigs suggests the regulator has made her mind up when it comes to PE firms buying banks: Thanks, but no thanks.

That was the conclusion of one participant in Monday's meeting, who described the sit-down with top-tier financial players as a way for Bair to learn about how to help bank executives step up and buy fallen banks.

While the source described the meeting as friendly, this person noted that several of the people in the five-hour meeting at the FDIC's Washington office were banking executives, including JPMorgan Chase's retail banking boss Charlie Scharf.

Meanwhile, just three of the meeting's participants were from the private-equity world -- Wilbur Ross, Kohlberg Kravis Roberts' Deryck Maughan and Warburg Pincus' Michael Martin -- even though PE firms have been the most active buyers of banks that have gone into receivership.

According to sources who talked to The Post, the FDIC has an unannounced agenda to dramatically reduce the number of insured institutions, inasmuch as Ms. Bair has determined, in her infinite wisdom, that the current number of FDIC-insured institutions is too large to support the grazing needs of the entire herd. Therefore, it would be better if banks bought failed banks' deposits and assets, thereby reducing the total number of banks, rather than have private equity investors charter new banks to buy those assets and liabilities. I, too, have heard that view from my sources, and believe that this is, in fact, the FDIC's position. They'll never "fess up," of course.

If that's the case, then it makes sense for the FDIC to discourage private equity investors from bidding for failed banks and thrifts, except in cases where the FDIC thinks that the private investors are the only game in town, as was likely the case like for IndyMac and may well have been the case with BankUnited.

Wilbur Ross, who is involved in the BankUnited deal and has repeated and publicly indicated an interest in playing a large role in bringing private equity to the failed bank banquet, wasn't exactly turning cartwheels over the proposed policy, nor were other private equity investors.

"It may be well intentioned, but I think it could guarantee that there will be no more private equity coming into banks," Ross said in reaction to the guidelines this past weekend.
And Ross is not the only one who feels this way. "We believe that the FDIC's proposed guidance would deter future private investments in banks that need fresh capital," Douglas Lowenstein, president of the Private Equity Council, said in a statement last week.

Seeking Alpha's Matt Stichnoth was driven to a fit of exasperation.

If Sheila Bair doesn’t want any more private equity money in the banking, she should just come out and say so. . . .

Fat chance! She might then be criticized by some influential politicos for driving away private investment that could save the FDIC some serious bucks. On the other hand, if she encourages private investment and the investors make their hoped-for return, lame brains like Barney Frank, Maxine Waters, or Chris Dodd might eventually erupt in a fury of vindictiveness over the fact that private investors made money in return for putting their capital at risk (which is perversely becoming un-American in the current political climate). No, better to obfuscate and set the hurdles too high to leap, rather than come right out and be publicly honest about it. If a private deal is never made, you can never be criticized for being too hot or too cold. You never actually said "no" and you never actually said "yes." Inertia often passes for action in a bureaucratic dimension.

Perhaps the FDIC was putting an onerous set of conditions forward first in order to demonstrate to potential critics that it tried to take a hard line but that private capital wouldn't bite. If it then backs off and actually makes the deal points attractive, it can deflect some of the criticism coming from its hind quarters that it could have driven a harder deal. Some observers opined today that they think the FDIC may be "listening to reason."

“I definitely felt that the FDIC was listening in a constructive mode,” said Patricia McCoy, who teaches banking and securities regulation at the University of Connecticut Law School in Hartford, and who attended the meeting in Washington. “The private-equity representatives spoke with a heavy hand, saying that without some compromise they would walk away.”

The simple truth is that as it stands, the proposal is a dog that won't hunt, although I'm confident that it can roll over and play dead. We'll see in the next thirty days whether or not the FDIC is serious about giving the proposal legs or if this is just another exercise in futility.

Overheating The Brakes On Preemption

2009-07-07T21:19:00-05:00

The harsh winds of speculation blew across the blogosphere this week about the dire possibilities unleashed by the decision last week of Nino and The Leftists to throw down some spike strips in the path of the OCC's speeding muscle car known as "national bank federal preemption." Yesterday's FinCri Advisor featured a jeremiad in which some experts warned that the Cuomo v. Clearing House Association decision "opened up the back door" to state attorneys general enforcing "safety and soundness" violations against national banks. I found that assertion to be untenable.

The ability now of states to prosecute national banks for consumer compliance violations means they also can go after issues of safety and soundness, says former OCC Chief Counsel Brian Smith, now a partner with Latham & Watkins in Washington, D.C.
"I don't see how one enforces a state law without implicating the actions of an institution, which is the reason for a bank examination. A bank examiner goes in, sees what a bank is doing and determines if it is safe and sound and complies with the law. Now the states can look at a practice and say, ‘That doesn't look legal. Here's a subpoena. Send us all your records.' Then the results of their enforcement actions are likely to have a material effect on the business practices of he bank, which ultimately is the safety and soundness of the bank itself."

First, the states cannot merely say "here's a subpoena." I made that clear a few days ago. The law enforcement officials will have to convince a judge that there exists probable cause that a violation of law has occurred in order to obtain a judicial subpoena. Administrative subpoenas are still not allowed. "Fishing expeditions" are specifically not intended to be permitted by any members of the SCOTUS, and the majority and dissenting opinions were clear on that point. Second, while it's true that a pattern of state law violations could very well constitute an "unsafe and unsound practice," that determination will be made, and enforced, against national banks strictly by the OCC (or its successor), not by a state attorney general or state court. Thus, much ado about about not much, at least at this point, in my opinion.

It made an attention-grabbing headline, though, didn't it?

The "back story" on all of this hoopla is that if you take attorneys general such "Spitz" Spitzer and "Deputy Sheriff" Barney Fife Andy Cuomo at face value and accept that there was a pattern or practice by some national banks of violating state fair lending laws, and that the OCC failed to do its duty to pursue examinations into such violations and to take enforcement action by reason of the same, then giving the state attorneys general the right to go after the banks directly through state judicial enforcement actions might conceivably result in eventually proving violations of the law and, as a result, forcing the OCC to act on the grounds that the banks were engaged in unsafe and unsound banking practices. However, if the OCC had been doing its job in the first place, then the banks will be subjected to no more liability than they should have been subjected to had the OCC vigorously enforced not only state law, but safety and soundness standards.

On the other hand, if, as many cynics have suggested, allegations of fair lending law violations were initially raised by Eliot Mess, and pursued by The Deputy, primarily to create a public relations event to further the political careers of the attorneys general involved, with no real hope of actually obtaining an eventual favorable judgment in court, but, at most, extracting a consent decree (in which the banks wouldn't admit wrongdoing) when the banks finally decided that they'd rather settle the bogus enforcement action than pay each of their defense counsels enough for a new mink stole for the wife and a Jaguar X-KE for each of the kids, then I don't see the SCOTUS ruling presenting undue "safety and soundness violation" risks to national banks. Either the banks broke the law or they didn't. Settling without an admission of liability (as many state actions are) does not necessarily mean that the OCC will determine that laws were broken or, even if they were, that the practice constituted a violation of safety and soundness standards. Again, it's the OCC, not the state, which decides "safety and soundness" violations by national banks.

Frankly, being pursued by a state attorney general who's being supervised by an independent judge and, perhaps, by a jury, in a court of law, with the rules of evidence applicable, and with the bank being presumed by law not to have violated the law, rather than having a federal bank regulator, with many fewer practical restraints on its power, with the deference traditionally shown by the courts to regulatory determinations of what's "unsafe and unsound" (other than in cases where "Nino Knows Best"), and with the ability to kill you softly over many months and years with a thousands cuts, having the ability to determine if you violated the law and, if so, what sanctions will be imposed, might work out better for the banks over the long haul. Even, and perhaps, especially, if they actually violated the law. OJ wouldn't have been acquitted if he was a national bank and the jury had been composed of OCC supervisory officials, regardless of the fact that "the glove didn't fit." Take my word for it.

There's no question that national banks are not in as good a position as they would be had Souter decided to just mess with everyone's head on his way out the door and vote with Thomas, or had Nino taken his Metamucil the night before oral arguments. Nevertheless, while hyperventilating about all the dire consequences that may flow from the decision might make great reading, it's grossly premature and, I suspect, grossly overblown at this point.

Straight Talk

2009-07-06T21:12:00-05:00

Former OCC attorney John Podvin, currently lodged in the Dallas office of Texas-based law firm Haynes & Boone, was interviewed last week by Metropolitan Corporate Counsel magazine. He had some “hot” opinions about the expected course of federal bank regulation, and since this blog favors “hot” over “lukewarm,” we thought that some of John’s points were worth repeating, especially since we happen to agree with him (a testament to his brilliance, obviously).

His first observation that continued deterioration of commercial real estate is a “red sky in the morning” harbinger of potential storms for commercial banks may not be controversial, but is worth emphasizing. Bank examiners have been focusing so heavily on community banks' CRE portfolios recently that in a number of cases, increased write-downs, loss reserves, and capital requirements by examiners have pushed some banks to “offload” their most attractive, stable, and best-earning CRE loans, not their worst dogs. After all, if you have to downsize quickly, you need to sell the assets that are most easily moveable, and those are the good loans, not the bad ones. In addition, while you ought to be able to sell the good stuff at a premium, the bad stuff is most assuredly going to fetch such a low price (if you can even find a buyer) that your capital will be further impaired.

John makes another excellent point that programs other than TARP and P-PIP (which have absorbed most of the mainstream press ink) have been home runs in terms of inducing stability and avoiding runs on banks. The increased deposit insurance limit (which is going to be hard not to extend) and the Temporary Liquidity Guarantee Program have worked well.Proper kudos to the government for those. And you thought all we did was blast bureaucrats here.

His comment that the legacy loan portion P-PIP has not been a hit because of the unwillingness of most banks to take the capital hit necessary to sell assets to “market” buyers is based upon reality, which is always the best place to stand when making an observation. Congress should try it sometime, just to change things up a little. That's one dog that not only won't hunt, but that at the sound of gunfire, runs and hides.

I share John’s concern that in its clanging shut of the barn door after the horses are long gone, Congress and the federal banking regulators may not only stuff the goose that lays the golden eggs (our commercial banking system), but outright wring its neck.

One of my fears is that the regulatory pendulum may swing too far, producing excessive regulation. We must be mindful of this as a country in our public policy decisions going forward.

While I repeat that there is no how-to book and everyone is trying to do the best he or she can, in my opinion government has gone too far in some cases. The Congressional reaction to the AIG bonuses with the proposed 90 percent tax on their proceeds, Senator Kerry's response to the bank sponsorship of sporting events and the accompanying publicity have set us back in my opinion. It is the fear of the unknown concerning what Congress will do next that is the potential stumbling block. Having some public policy discussion to encourage capital investment as opposed to frightening it away would be a good step forward. I also believe that the talk of nationalizing banks, or frankly any industry for that matter, is going the wrong direction. We want to be the land of the free and the home of the brave - we don't want companies to be owned by the state and run by the bureaucrats. I think we need to think long and hard before we go in that direction.

Do I hear an “Amen,” brothers and sisters?

A Chink In The Armor Of Federal Preemption

2009-07-04T21:25:00-05:00

After getting a chance to actually read the majority and dissenting opinions in Cumo v. Clearing House Association, rather than merely press reports of the same, I find the opinions themselves only mildly surprising, for reasons that don't have to do with the reasoning employed by Scalia and Thomas in their opposing opinions, but because Thomas confounded his condescending left-leaning critics by refusing to fulfill his assigned role as Nino's "sock puppet." Who knew he had a mind of his own?

To the pinheads who post here, it appears simply that Scalia and the majority refused to accord Chevron deference to the OCC's interpretation of the admitedly ambiguous term "visitorial powers" as including enforcement of state laws against national banks because (1) "Nino Knows Best" what's a reasonable interpretation of "vistorial powers" and (2) extending that definition to enforcement actions is not reasonable. To the contrary, The Sock Puppet thought that inclusion of enforcement actions within the scope of "vistorial powers" was a reasonable interpretation of that ambiguous term in the National Bank Act and that the Court should have deferred to the OCC's interpretation. It was a close call, reasonable (and unreasonable) people can disagree, and among this august body five thought one way and four the other. Game over, unless you "say you want a revolution, well you know, we all want to change the world." National banks will just have to learn to live with it. Until the composition of the Court changes or Nino gets hit by a bus.

The trade press and popular press were full of dire predictions, such as that by Cheyenne Hopkins in the American Banker, warning that the decision "could open the floodgates for lawsuits from state attorneys general..."

"Most attorney generals were waiting until this case was decided," said Arthur Wilmarth, a professor at George Washington Law School. "Given the amount of private litigation we've seen, it certainly wouldn't surprise me to see some state enforcement actions."

Yes, that may be correct. There may be an increased number of enforcement actions by state attorneys general against national banks. However, the rub is that both the majority and dissenters agreed that Eliot Spitzer, Cumo's predecessor who commenced the tussle by issuing correspondence to national banks in lieu of administrative supoenas, had no power to compel national banks to deliver documents or to allow inspection of their records pursuant to anything other than a judicial subpoena, issued by a judge and based upon a finding that there is probable cause to believe that state laws (that have not otherwise been preempted by federal law) have been violated by the national bank. As Scalia put it in the majority opinion:

If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant. An attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive. Judges are trusted to prevent “fishing expeditions” or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing. In New York, civil discovery is far more limited than the full range of “visitorial powers” that may be exercised by a sovereign. Courts may enter protective orders to prevent “unreasonable annoyance, expense, embarrassment, disadvantage, or other prejudice,” N. Y. Civ. Prac. Law Ann. §3103(a) (West 2005), and may supervise discovery sua sponte, §3104(a).

An attorney for a state regulatory agency (not in Texas) who prefers anonymity professed a glass-half-empty view of Cuomo's "victory" in an e-mail to me last week.

In a fine example of Scalia's sick, twisted sense of humor, he tells the states you can bring lawsuits against national banks to enforce your nonpre-empted consumer protection laws, but you can't issue subpoenas to get the information you need to file those lawsuits. (Oh, and Rule 11 sanctions apply to state attorneys so don't try filing that lawsuit and getting the information supporting the lawsuit thru discovery. No sovereign immunity from Rule 11.) I can just hear Scalia saying nanner nanner. This case does nothing for the states as far as I can see. I seriously think he must have meant this decision as a joke directed at all of the states' attorneys sitting down with their cup of joe in the morning to read a new SCOTUS case that is supposedly good for states. And the punchline is the last paragraph.

Actually, I think the last two paragraphs of Scalia's opinion are a telling "punchline." From those paragraphs:

Here the threatened action was not the bringing of a civil suit, or the obtaining of a judicial search warrant based on probable cause, but rather the Attorney General’s issuance of subpoena on his own authority under New York Executive Law, which permits such subpoenas in connection with his investigation of “repeated fraudulent or illegal acts . . . in the carrying on, conducting or §63(12) (West 2002). That is not the exercise of the power of law enforcement “vested in the courts of justice” which12 U. S. C. §484(a) exempts from the ban on exercise of supervisory power.
Accordingly, the injunction below is affirmed as applied to the threatened issuance of executive subpoenas by the Attorney General for the State of New York, but vacated insofar as it prohibits the Attorney General from bringing judicial enforcement actions.

In a long discussion with a reporter from the National Law Journal prior to oral argument in this case, I told her that Spitzer's letter clearly sought to exercise a visitorial power. Unfortunately for the State of New York, without the exercise of such powers, the states will be hamstrung in determining whether or not violations of state laws of the kind in question in this case (fair lending laws) have occurred. That's why, although it's reasonable to assume that some states will be more active in this area, I'm as skeptical as my state regulator correspondent at this juncture that this will "open the floodgates" of litigation. If it does, expect the push-back by targeted banks to be furious, including nasty battles to impose sanctions on state attorneys general who do attempt to "game" the system in order to go fishing.

This issue will be affected by the proposed federal consumer protection agency, if that monster is ever created by Congress. Bank trade associations appear to be on their heels at this point in opposing it, but if the proposal gains traction (which appears likely), bankers and their lobbyists will wage a long, protracted battle to make the federal agency the exclusive agency over such matters, and to gut the present proposal to make the federal standard a "floor" and to allow the states to impose and enforce higher consumer protection standards. No matter how wounded the banking business appears to be politically at the moment, I don't see it rolling over. Instead, I expect blood on the floor and mounds of cash burned before the commercial banking business lets that type of system come to pass. Expect the banks to be supported by their primary regulators (other than Sheila Bair, of course). Neither the OCC nor the Fed has any interest in losing turf to a new "consumer products" regulator. Neither does the OTS, although they don't, at this point, appear to be a long-term player.

Of course, all of this is premature gas-baggery. If any of the pundits who've been blabbing about the future could actually predict the future, they'd be taxing the limits of their livers' ability to process Mai-Tai's on the verandas of their multi-million dollar homes on Hapuna Beach on the Big Island of Hawaii, instead of billing by the hour or the piece, being quoted in newspapers, or writing blogs. The only thing that can be predicted with certainty is that this will be a most interesting federal legislative session for those of us nerds who follow this stuff.

It Takes A Village...Of Idiots

2009-07-02T21:44:00-05:00

Most bankers and bank regulators appear to be on hiatus until next week. The double whammy of Friday "flex day" and the day before a Saturday holiday has apparently driven the "bank biz" to seek a pool, an umbrella, and a cool beverage. Come to think of it, that sounds like a great idea.

Instead of a "serious" (always a relative term on this blog) post, I'll leave you with some recent snark from a "Snark Meister," Libertarian, co-host of ABC television magazine program 20/20, and blogger John Stossel. He quotes Alan Abelson who, in turn, paraphrases the late Texas writer and liberal pundit Molly Ivins: “ …She could always tell when the Texas legislature was in session because every village in the state reported its idiot missing.”

Damn, you have to love a woman like that, no matter what your political bent.

Stossel claims that legislatures exist primarily to steal the public's money to fund liberal projects. Sorry, John, but they exist to steal the public's money to fund any project that will keep them in power, and often to fund their own lifestyle and the lifestyles of their family members. While it's true as a general statement that liberals favor big government and conservatives small government, members of both parties appear to be equally adept at pilfering from the public's pocket. If there's one thing I've seen in the decades I've been voting, it's that nobody I've voted for has actually managed, over any length of time, to spend less of the public's money that his or her predecessor.

Whether Republicans or Democrats, they're all village iditots, and we're even bigger village idiots for letting them continue to get away with it by playing us off against one another. So it has been, so it will always be.

That said, I'd rather live with the village idiots we've got here than, say, those idiots running Iran, North Korea, or...shudder...France.

Have a Happy 4th.