Monthly Archives: October 2009

Inside look at closing of Jennings State Bank

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If you want to know what it is like for regulators to close your bank, be sure to read the first person account of the closing of Jennings State Bank of Spring Grove and Stillwater, Minn. The state Commerce Department closed the bank on Oct. 2. Paul Jennings, who ran the bank with his brothers, Steven and David, writes about the experience for an essay that appears in the November 1 edition of NorthWestern Financial Review. Here is an excerpt:

A week before they closed us down, FDIC started asking about our fidelity bonds and our insurance policies, which they said the acquiring bank was asking for.  It seemed strange that any buyer would be interested in those policies but we provided what was requested.  Then the night we were closed the resolution team “interviewed” (interrogated) bank employees with special attention to the management team. They informed us it was “standard practice” for the FDIC to make a claim against the failed bank’s policies if they could find any way at all to allege a basis. They said if we had a problem with that to talk to the on-site ombudsman. This person was apparently put there as window dressing because the first question we asked her she refused to answer.

 

We felt we had done the right things during two years under C&D. We said, “This is our government and they are asking us to do these things. Can we do them? Yes.” We could have walked away at any time. It was hard hanging in there and keeping things together as long as we did. Toward the end we thought, at least we will be able to walk out with our reputations intact.

 

Now it appears we may need to gear up to defend ourselves against a purely frivolous claim by our government aimed at exacting money from our insurance carriers. Not only is this abusive, but it is a terrible way for our federal government to be conducting itself against its own citizens. Bankers need to start speaking out publicly about these types of unjust abuses or they will certainly continue unchecked. They probably also need to make a much less naïve assessment than we did of how much it is actually in their own best interest to cooperate with any agency of the U.S. government.

NorthWestern Financial Review will continue to follow the Jennings’ story as it unfolds.

The state of card security

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Security is only as strong as its weakest link, so it was jarring to hear Robert Siciliano’s anecdotes during an event hosted last week by United Banker’s Bank.  Seems there are some pretty weak links.

Siciliano is an identity-theft expert who describes himself as obsessive on the topic. He writes UBB’s Identity Theft e-newsletter.

What’s interesting about Siciliano is, he doesn’t just speculate on where the weak points may be in the system; he stress-tests the system himself. A few weeks ago he responded to an ad on Craig’s List. A bar owner was closing his business, selling the beer signs and pool cues, the bar stools and the ATM. Siciliano plunked down $750, loaded the ATM into his truck and took it home to his garage. After reading the ATM manual he was able to print out three months’-worth of credit and debit card logs.

Siciliano also discussed a point-of-sale scam that broke in Australia. Criminals posing as card-scanner repairmen walked into fast food restaurants, picked up perfectly good machines, ostensibly for repair, and replaced them with readers that skimmed card information.

“Nobody had any clue, and they didn’t realize it until $4 million in fraud occurred and 3,500 people reported it,” Siciliano said.

Siciliano also played a voice mail recording from “Vera,” a woman who thought she had called her credit card company but accidentally called Siciliano instead. Vera recited her card number, her PIN (plus a backup or alternate PIN) and other personally identifying information. Imagine what could have happened if the person picking up that message were someone other than Robert Siciliano.

New ABA Chairman emphasizes unity among diversity

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Art Johnson is CEO of United Bank of Michigan, Grand Rapids. Following are key excerpts from his first speech as ABA chairman, delivered yesterday in Chicago:

We know now, more than ever, that we have to be political risk managers because we are in a political environment where we cannot afford to be on the sidelines. We have to be engaged.

 

The unity of purpose, a unity of message — one that is focused, credible and fact-based. ABA’s positions are developed from our diverse views and perspectives. And it is that diversity that makes us stronger. Whether your institution is big or small, rural or urban, mutual or stock, public or private, your voice is heard.

 

Like many of you, I take a long view of my bank. I’m a second generation banker and both of my children are the third generation of bankers in my family. And I want to keep the door to new opportunities wide open for all the succeeding generation of bankers today and tomorrow. We want options. And we don’t want onerous new barriers as some in Washington would like to erect. 

 

As financial services restructuring legislation and other critical issues work their way through Congress, we will make tough policy decisions. Ideal solutions may not be practical, and practical solutions may not always have great political appeal, but by ensuring that policymakers understand the impact of their decisions on traditional banks, we can produce results.

 

We have carefully staked out our positions, knowing that as Ed Yingling says, we only have so many rounds of ammunition to use in this intense public policy debate over bankings’ future. We have to pick our battles. We have to focus our passion and commitment on our priorities. We have to be firm, focused and engaged.

 

Those who disagree with our positions will look for and exploit our weaknesses. They will seek to divide and distract, and we cannot allow that to happen. Our unity is critical.

 

Ed Yingling and Diane Casey Landry have been out front and up front in communicating on our industry’s behalf during this critical time. They are forthright and credible. They provide voices of reason in an often noisy, confused and highly emotional environment. As good as they are — and they are very good — they can’t do it alone. We all need to be leaders and spokesmen for our banks, for our industry, for our community, and for our nation during this time of economic crisis…

 

There is no question that this is a challenging environment for all of us, yet I am optimistic for several reasons. I am optimistic because traditional banking is back again. Our core business, taking in deposits and making loans, is looking good once again. I am optimistic because our customers and our communities need us. Our industry did not create the economic problems and upheaval we have experienced. But we are a big part of the solution. And I am optimistic because I am from Michigan, and I have had plenty of experience with economic downturns and recovery.

 

This is a time when standing together as an industry and telling our story advances our cause more than trying to draw distinctions that divide us. In fact, it is this very diversity of our members that gives ABA the strongest, most compelling voice for banks in Washington. And we are using that voice to shape the policy discussion that will define our industry’s future. We can lead. We will lead. Together.

ABA tightens security in response to protests

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The American Bankers Association has implemented several security measures at its convention taking place today and tomorrow at the Sheraton Hotel in downtown Chicago. Reporters were asked to leave their drivers licences in exchange for press credentials, and everyone had their badge checked at nearly every doorway.

During the opening general session this morning, the ABA’s Bob Schmermund told the audience that protestors had demonstrated in the lobby of the hotel yesterday and had to be removed by police. And, he said; “It could happen again. In fact, it could happen in this room.” We were told that if protesters appeared, we should remain calm and that “we will restore order.”

More than 100 protesters demonstrated outside the front of the hotel during the lunch hour today. They stayed behind a barricade that had been set up, waving signs that featured words such as “greed” and “money.”

The protesters apparently are union members, community activists and others who are participating in an event they have dubbed “Showdown in Chicago.” You can read about them here. A story in the American Banker noted that Michael Moore is part of the group. Here’s how the local newspaper is covering the protests.

There is a lot of press here. I remember years when I was nearly the only reporter to come to this convention. But this year is different. There were at least five television cameras in press row earlier today when FDIC Chairman Sheila Bair and Comptroller John Dugan delivered their comments. Watch for analysis of their comments in NorthWestern Financial Review magazine.

Stories from the front lines

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Jim MacPhee, chairman-elect of the Independent Community Bankers of America, shared a couple of interesting stories in Lincoln, Neb., on Friday, where he was attending the annual meeting of the Nebraska Independent Community Bankers. MacPhee is the chief executive officer of the $78 million Kalamazoo County State Bank in Schoolcraft, Mich.

He explained that last October, he and other ICBA leaders (including Cindy Blankenship of Bank of the West, Irving, Texas, and Mike Menzies, Easton Bank & Trust Company of Easton, Md.) met for 30 minutes with then-Secretary of the U.S. Treasury, Henry Paulson. The Troubled Asset Relief Program had just been announced. MacPhee described the following exchange.

Secretary Paulson looked at me and said, “Jim, are you going to take some of this TARP money so we can get business moving again in this country?”

“No sir,” I said. “My bank has 14.1 percent Tier 1 capital and 20 percent liquidity. I really don’t need any of the TARP money.”

Then he looked over at Cindy and Mike and said “What about you two, are you going to take TARP money?”

Mike said, “Well sir, we’re both sub S.”

He looked at them and nodded. One of his aids said, “Sir, a sub S doesn’t issue stock.”

Point is, Treasury really didn’t understand our model. They don’t understand how we function under sub S or as a highly capitalized bank.

In contrast, MacPhee told this story about a regulator who seems to understand the community bank model.

Last March at the ICBA convention, we had breakfast with Chairman of the FDIC, Sheila Bair, and Chairman of the Fed, Ben Bernanke. It was about a 45 minute breakfast. We could ask them anything we wanted. They were very candid with their answers.

 

That was the time that the 20-basis-point special assessment had been proposed. At the time, my bank is being examined. I asked Sheila Bair this question.

 

“The ‘E’ in CAMELS stands for earnings,” I said. “That E could be taken down fairly substantially, based on this special assessment. Is there any opportunity for you to consider not further reducing our CAMELS rating based solely on the special assessment? Examine my bank on its merit; you give me a 3 on earnings, I accept that. But if I had a 2 in earnings, don’t take it down to 3 just because of the special assessment.”

 

She said, “Jim, I see your point.”

 

She turned to her aid and said “I want a memo to go out on that. Tell our field supervisors not to lower the CAMELS rating based on the special assessment.” 

 

Look for coverage of the NICB convention in the November 15 edition of NorthWestern Financial Review magazine.

Replacing managers would have been better than cutting pay

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The U.S. Government should not be involved in decisions to determine compensation for executives at companies in the private sector. Compensation is a can of worms, and only those closest to the situation should be involved in determining the appropriate levels.

Ken Feinberg, the so-called “pay czar” in the Treasury Department, reportedly is requiring that compensation be reduce by 50 percent for the top 25 executives at seven companies that got government bailout money. Seems to me the real winner in these cases will be the guy currently receiving the 26th-highest pay in the company. Keep in mind that none of the “czars” that are populating the Obama Administration were elected, nor even confirmed by the senate.

Reducing executive compensation is purely a populist move designed to win political points for those who were elected; it will do nothing to improve the performance of these companies, nor reduce the risk they take. If anything, these restrictions will weaken the companies as they find themselves unable to compete with companies that can pay their execs whatever they deem appropriate.

Pay levels should be up to the companies, their boards of directors, and their shareholders. If those folks fail to do their job and their companies falter, then they should be allowed to falter. In most cases, shareholders respond and the market reacts. It’s actually a pretty good system.

If the market doesn’t work, and the government feels these companies are so important to the economy that they have to step in and keep them going, then at that point they should fire the executive team, perhaps some board members, and allow the remaining company leaders (possibly in consultation with government officials) to name a new executive team. This is a much better way to maintain order in the economy; restricting compensation does nothing to improve the outlook for the company. By the way, this is essentially what happens in small banks all the time. A small bank gets in trouble, and regulators often demand that new managers be brought in.

Politically, it might be easier to win recognition for capping pay, but forcing management change would be a better route. Our government is a republic, not a pure democracy, precisely to protect againt emotional, populist whims. The country will not survive if 51 percent of the population can vote to punish the other 49 percent. My point is, even though most people are outraged by the level of executive compensation, that doesn’t give them the right to cut their pay. In a republic, we elect officials to exercise judgment based on careful research and thorough reasoning. I am not seeing that in this latest effort to cap executive pay.

CFPA passes out of committee

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The House Financial Services Committee voted today to create the Consumer Financial Protection Agency. On a 39 to 29 vote the committee passed a CFPA that was altered considerably during the bill’s markup period.

As CNN Money notes:

“The biggest change was to allow 98% of the banking industry — some 8,000 community banks and credit unions — to keep their current regulators when it comes to enforcing new consumer rules.”

ABA said it still has “major concerns with some principal areas, including restrictions on preemption standards for national banks…and the very broad, ill-defined authority” granted to the CFPA.

ICBA said it still has “several serious concerns” but allows that the bill is better than it was when it was introduced.

Would CFPA be any better than the FBI?

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Community banks are definitely gaining clout. You can read in this earlier post about the carve-out the House Financial Institutions Committee is giving community banks on the consumer financial protection agency. Now, this. It seems the president is going to propose opening up TARP so that community banks have easier access to those funds. This is something community bankers have been asking for, and apparently the Administration was listening.

While I am heartened to read that U.S. Rep Keith Ellison (D-Minn.) acknowledges the difference between the nation’s largest banks and its community banks, I don’t buy into his argument that we need a CFPA, and I really don’t buy into the argument that such an agency would be a benefit to community bankers.

Here is an excerpt from Ellison’s essay:

One cause (there were many) was the failure of our system of consumer financial protection. No one was there to review transactions or protect consumers. The proposed Consumer Financial Protection Agency provides the lifeline that consumers need.

The most abusive and predatory lenders were not federally regulated. More than 50 percent of the subprime mortgage loans made in 2005 and 2006 were originated by lenders not subject to federal supervision. Mortgage brokers, finance companies and payday lenders made toxic home and consumer loans with few limits — loans with little or no documentation — commonly known as “liar loans.”

Ellison is wrong. It is illegal to lie on a loan document. It’s called loan fraud, and the FBI has jurisdiction. One of the real scandals of the financial system collapse during the last 18 months revolves around the question of why charges were not brought against mortgage lenders who encouraged borrowers to lie on mortgage applications. If I were in congress, I would not be advocating for the creation of a new federal agency, I would be calling for an investigation into the FBI to find out why it has not prosecuted more loan fraud cases and other financial crimes in connection with the mortgage crisis. Why hasn’t the FBI gone after those borrowers, those lenders, and — perhaps most importantly — the executives who encouraged their lenders to stoop to illegal practices to make predatory loans?

So Ellison and other lawmakers are wrong to say that no federal agencies had any ability to do anything that might have prevented the massive abuses that took place in the mortgage market. The FBI is a well-funded federal agency; if they fell asleep on the job, why should we have confidence that a new agency would do any better? We don’t need new tools to fix the potential for abuse in the financial services industry; we need to use the ones we have.