Category Archives: Treasury Department

Using SBLF to exit TARP; cookie anyone?

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The Special Inspector General for the U.S. Treasury’s Troubled Asset Relief Program has reported that 137 banks out of the 332 banks participating in the Treasury’s Small Business Lending Fund used more than half of the funds disbursed by the program to exit from TARP.

This announcement will surprise you as much as the discovery that your child has eaten the cookies you set out on the counter to cool.

Launched in September 2010, SBLF was created by Congress for a specific purpose: to boost small-business lending. But Congress left the goods out on the counter, it allowed banks in TARP to access SBLF and it made no law prohibiting the use of the funds to repay TARP. It had communicated its intent for SBLF, without making a law.

In fact, Congress created an incentive for TARP banks to use SBLF in this fashion. “Several members of Congress voiced concerns that the program could serve as a vehicle for TARP recipients to refinance into SBLF under more favorable terms… TARP banks paying a dividend rate of 5 percent that transferred into the SBLF program had the potential to lower their dividend rate to 1 percent if they increased lending,” the Inspector General reported. “In addition, the SBLF dividend is non-cumulative, meaning that participants have no obligation to make quarterly payments as scheduled or catch up on missed payments, compared to TARP dividends, which generally are cumulative.”

In the middle of last year, the U.S. Treasury also notified small banks that it would begin to auctioning pools of stock from banks participating in TARP in the fall. The 200 banks that received the notice made up $2 billion of the Treasury’s then $11 billion TARP investment. Treasury cannot require banks to repurchase their own investments but Treasury can sell its TARP stock without the bank’s consent. And, if the bank didn’t have the capital to buy its securities back, its stock would be sold to the highest bidder. Is it any wonder the banks used SBLF to exit TARP? I had access to the cookies and I didn’t like the idea of others eating them, so I took one.

More than a majority of TARP community banks (320 out of 552) applied for SBLF funds. Banks selected for SBLF were required by Treasury to repay TARP in full, and Treasury allowed banks use SBLF funds to do so.

There is no doubt that the banks which used SBLF to exit TARP did not use the program in a way consistent with its purpose. Out the 137 former TARP banks in SBLF, over 96 percent did not significantly increase small business lending. They used $2.1 billion of the $2.7 billion they received to repay TARP.

There also was a significant difference in lending depending on whether the bank received only enough SBLF funds to repay TARP or received additional funds. TARP banks that received only enough funds to repay TARP have lent out significantly less than they received in SBLF funds – increasing lending by only 25 cents for each $1 in SBLF funds. TARP banks that received additional SBLF money beyond the outstanding TARP balance have increased lending by $1.67 for every $1 in SBLF funds. Non-TARP banks increased lending by more than three times that amount – $3.45 for each $1 in SBLF funds.

Even with such loose restrictions on the use of SBLF funds, Treasury only managed to invest $4 billion of the $30 billion available. And of that $4 billion, about 66 percent went to banks exiting TARP. Congress and President Obama successfully created a program which, in the majority of cases, only proved useful for those banks which had already been bailed out.

Perhaps now Congress will learn that in the arena of government handouts and chocolate chip cookies, creating something with the right intentions does not guarantee the intended result. I’m not getting my hopes up.

 

Wall Street-Washington D.C. axis is troublesome

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The relationship between Washington, D.C. and Wall Street has made me uncomfortable for a long time. Too many of the big time Washington players are former employees of Goldman Sachs (Hank Paulson), Citibank (Robert Rubin), et al. One of the underlying problems during the financial crisis was the government’s inability to smoothly handle the failure of a large Wall Street firm, be that investment bank, commercial bank or other kind of financial institution. In other words, the economy was done in by the too-big-to-fail problem, which was masterfully articulated in Andrew Ross Sorkin’s book by that title.

The Dodd-Frank Act implemented procedures for handling the failure of a large financial institution but I don’t know that anyone really believes they will work. When the next crisis comes, let’s see if the safeguards put in place do the trick. Will Washington muster the political will to act? I hope so, but I think the chances of success diminish considerably if the government official who has to pull the trigger is a former employee of the financial firm in question.

The Senate Finance Committee this morning approved the nomination of Jack Lew to U.S. Secretary of the Treasury. Lew is a former Citibank employee. That just makes me uncomfortable; Citibank is certainly a plausible candidate to be the first to test Dodd-Frank’s provisions for unwinding a big troubled institution. I am not saying, or even suggesting, that Citibank is poised to fail but as the recipient of three government bailouts already it is not impossible to imagine the bank coming under pressure in the future. If it does, is a former employee the right guy to make a decision about its future?

Why couldn’t the president have nominated someone from the Midwest or the Mountain states to be the next Treasury Secretary? Believe it or not, there are qualified candidates for the Treasury Secretary position who have never worked for a Wall Street financial institution.

The Wall Street Journal’s lead editorials last Friday and yesterday both raised questions about the Lew nomination. The Feb. 22 editorial describes a deal worked out between New York University and Citibank during Lew’s tenure as an NYU executive vice president where the school received a kickback for every student loan run through Citi from an NYU student. Lew left NYU to go to work for Citi, and then the New York attorney general charged the university with a conflict of interest in the arrangement with Citi. NYU settled without admitting guilt but it did adopt a new code of conduct.

Also strange is a payment Lew received from NYU upon his departure. Lew called it a severance payment, but of course severance usually goes to those who are fired or let go involuntarily.

Stranger still was Lew’s separation from Citibank to join the Obama Administration. The WSJ reports Feb. 25 that Lew’s employment contract included a provision that guaranteed him a bonus should he leave Citi to take a “high level position with the United States government or regulatory body.” The WSJ notes that usually employment contracts include provisions to get high level executives to stay, not to leave. The whole thing just smells bad.

The sad thing is that the confirmation hearings didn’t get to the bottom of these issues. In the end, Lew is being confirmed with lots of unanswered questions.

Granted, we can never know everything about candidates nominated for cabinet positions in the government. But in the case of Treasury Secretary, it would be nice if the candidate was not a former employee of one of an institutions that may very well test the new too-big-to-fail rules.

Thomas Curry to be nominated Comptroller

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Thomas J. Curry will be nominated Comptroller of the Currency by President Obama, the White House announced today. The New York Times runs this article on it.

Former Comptroller of the Currency Eugene Ludwig had the following comment about the news:

“Thomas Curry is an able and dedicated public servant who has served the FDIC board well during a period as trying as any in its history, and I commend the President for nominating him as Comptroller of the Currency. The OCC has an ample agenda, and I am pleased that it will have Tom’s leadership in implementing it.”

Ludwig is founder and CEO of Promontory Financial Group. He was Comptroller of the Currency from 1993 to 1998.

 

Does Treasury really understand small business?

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I have often felt that policy-makers inside the beltway just don’t understand small business. Even though they know that most of the job growth in this country comes from small businesses, they really don’t get how any operation with fewer than, say, 100 employees, can do anything worthwhile.

The Small Business Loan Fund is an eminent example. I wrote before that many of the banks that could really use money from the fund can’t apply for it. I was referring to banks with poor CAMELS ratings, but a reader pointed out to me that sub S banks can’t apply for the money either. Today’s American Banker newspaper carries an informative article on this topic.

Can you believe that Treasury comes up with a program designed to promote small business lending, and it doesn’t bother to include subchapter S or mutual banks? This is evidence to me that the folks at Treasury just don’t get small businesses. Sub S banks and small business lending go together like peanut butter and jelly. About a third of the nation’s banks have sub S status. How do you come up with a program and exclude the very portion of the industry that could benefit from the program the most?

The industry has been all over this. Here is a letter the ABA sent to Treasury last month. ICBA sent this letter earlier this week. It should not be difficult for Treasury to include sub S banks. All they have to do is follow the template the developed for TARP, another program that initially ignored sub S banks.

People wonder why bankers are skeptical of regulators and policy-makers. It’s because while they say they appreciate the role of community bankers and Main Street businesses, policy-makers and regulators often take actions which exclude, ignore or even deter them.

Lending fund draws tepid interest

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The U.S. Treasury extended the deadline for banks to apply for the Small Business Loan Fund to May 16. The original deadline to apply for funds was yesterday.

The Wall Street Journal reported yesterday that only 526 community banks have applied for a combined total of $7.6 billion of the $30 billion that is being made available. While the lending fund attracted some fanfare when it was created last fall, there are some facts which make the fund lackluster.

The fund is supposed to increase small business lending, but the problem in the small business lending arena is not a lack of funds to lend, it is simply a lack of demand on the part of small business owners and managers. Lending is not slow because banks don’t have the money to lend; it is slow because few bankable borrowers are seeking additional credit.

The other important fact is that banks that are on the FDIC’s problem bank list, or have recently been on it, are ineligible to participate. That’s a problem. There are 860 banks on that list right now, out of about 7,700 banks, or about 11 percent. Those are the banks that could really use the money and they don’t have access to it. There are plenty of CAMELS 4 banks on that list that will work through their problems, that will survive this crisis. They could really use the boost that access to this fund would provide. Most of the banks that do have access to the fund simply don’t need the money.

It will be interesting to see how many more community banks sign up for the program between now and May 16.

The politics of deposit insurance

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One of the good things to come out of the Dodd-Frank Act was the permanent increase in deposit insurance protection to $250,000 per account. Typically, Congress increases coverage when the national median household income reaches a level equal to about half of the deposit insurance cap. The current median household income for the nation is about $50,000, which was half the old coverage cap of $100,000 — time to raise the cap.

In 1980, when the cap was raised to $100,000 from $40,000, the median household income across the country was about $17,700. In 1973, when the cap was raised to $40,000 from $20,000, the median household income was about $10,500. In 1968, when the cap was raised to $20,000 from $15,000, the median household income was about $7,700.

Whether it makes sense to tie deposit insurance to median household income is a debatable point. Whatever the cap is, I like to see it tied to real economic data; I really don’t like to see the FDIC and the Deposit Insurance Fund manipulated for political purposes.

The increase to $250,000 may certainly have been the result of political horsetrading. In “On the Brink,” former Secretary of the Treasury Henry Paulson writes about a Sept. 30, 2008 meeting with top Treasury officials. He writes:

“We had a meeting Tuesday morning and then a conference call to discuss raising the FDIC cap on insured deposits from $100,000 to $250,000 per account as part of the TARP sweeteners.”

So the increase in coverage had nothing to do with the economy and appropriate levels of deposit insurance. It was all about getting enough support to pass TARP.

The $250,000 cap is a good thing, even if I don’t really like the way it was achieved.

Community banks and the OCC

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For as long as I have been covering this industry, bankers have told me that the OCC is really not interested in small banks. “They are focused on the big banks,” I have been told many times. OCC leadership obviously has heard this message and they clearly don’t like it. Many speeches delivered by the Comptroller begin with some clarification about all the community banks under OCC supervision.

“Despite my best efforts, I sometimes still confront the stereotype that the OCC is only concerned about big banks. Let me say again, emphatically, that that’s just not true,” Comptroller John Dugan told community bankers in a speech delivered March 19 in Orlando. He goes on to explain that two-thirds of OCC examiners are focused on community banks. He also noted that the agency reaches out to listen to community bankers through a variety of industry events and meetings. “My over-riding point here is that we at the OCC consider community bank supervision as core to our mission.”

Yet, I wonder whether Mr. Dugan really understands community banking. In the remainder of his speech, he talks about bank failures, emphasizing the disproportionate representation of community banks. “195 banks, nearly all of them community banks, have failed since the start of the crisis in 2008,” he says. Furthermore, he notes an “estimated cost to the deposit insurance fund exceeding $58 billion.”

Any community banker would find that observation a bit galling. Citi and BofA both failed on the OCC’s watch, but Treasury stepped in to prop them up so they were never closed. Had they failed, they would have wiped out the FDIC fund completely. I think it is pretty insensitive to talk to community bankers about the problems in community banking without acknowledging the far more severe problems in a sector of the industry where the OCC has much greater responsibility.

In the speech, Dugan noted four things that he believes regulators need in order to be effective: balanced judgment, to provide appropriate guidance, consistency and forthright engagement with bankers. The irony of his third item — consistency — is inescapable. There is nothing more inconsistent in bank regulation than regulators picking winners and losers. Too-big-to-fail pretty much tells community bankers they are a bunch of losers. Dugan is right to say that one of the most important things regulators can do is be consistent; to me, that means ending too big to fail. Not until this policy is ended will it make any sense to compare community banks with the rest of the industry.

Robust lending versus safety and soundness

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Politicians and pundits criticize bankers for making too few loans, for tightening credit too much. At the same time, most examiners are urging caution on lending. Few examiners are telling bankers to go out and make more loans. Most bankers say that when the examiners come into the bank, they are quick to criticize, even the loans that seem very sound.

The leaders of the regulatory agencies are aware of this dichotomy. FDIC Chair Sheila Bair and Comptroller John Dugan talked about this in Orlando last week. Bair referred to this join statement issued by the regulatory agencies and the Conference of State Bank Supervisors, which encourages banks to make loans to credit-worthy small business borrowers.

“The statement recognizes the importance of small businesses and the fact that some are experiencing difficulty in getting credit,” Bair said. “It clearly states that financial institutions that extend credit using prudent lending standards will not be subject to supervisory criticism. I know that there are concerns about examiners being overzealous in adversely classifying loans and applying capital requirements … What I want you to understand is that we hear your concerns. We are trying very hard to achieve a balanced approach to supervision during these challenging times.”

Dugan also acknowledged tension between advocates of increased lending and those focused on safety and soundness. “These hard times have produced a very difficult regulatory climate, for both community banks and their supervisors,” Dugan said. “A number of bankers and their trade associations … have complained that regulatory measures have been too stringent … At the same time, others have criticized regulators for being too lenient with troubled banks …”

Dugan said he has given his examiners a four-part message for dealing with this dilemma:

First, it is critical that examiners strive continually for professional judgment that is balanced.

Second, as significant issues arise, we can and should do more over time to provide appropriate guidance.

Third, in the expectations we communicate to banks and the actions we take, we need to be consistent.

Fourth, our examiners and their supervisors need to engage bankers forthrightly and address the specific concerns that [bankers] raise. Read the entire speech here.

It is difficult to argue with these four points, although the third point is a little hard to swallow. Certainly as long as too-big-to-fail is the official policy of the Treasury Department, action by regulators will not be consistent across the industry. Bair in her speech made a big deal out of the too-big-to-fail problem. Although Dugan mentioned too-big-to-fail in his speech, he did not go into depth about it.