Dennie was always upbeat

The funeral for Dennie Emmans is Saturday. We wrote about his passing earlier this week. Here is the obit that appeared in the Minneapolis Star Tribune.

Dennie was a friend and I will miss him. He was the executive director of the Bank Holding Company Association from 1994 through 2010, and I met him at his office in Coon Rapids a number of times, typically visiting over lunch at the Olive Garden Restaurant just across the parking lot. My company produced his association’s newsletter and we would visit about upcoming editions. He also was kind enough to support NorthWestern Financial Review magazine with ads promoting the BHCA Spring and Fall seminars.

Most recently, Dennie was very helpful in the association’s transition to my management, which began Jan. 1 after Dennie retired.

I will always remember Dennie for his upbeat nature. Even after he was diagnosed with cancer some six years ago, he remained upbeat. “How ya doing, Dennie?” and he’d always say “Pretty good,” even though you knew he had just completed a difficult round of chemotherapy.

He was an athlete as a young man. He even played baseball at the professional level, pitching in the Detroit Tigers organization. He eventually went into business, but his athletic frame was never lost on me, particularly on the golf course. He loved golf and played it well, playing all the way through the summer of 2010.

He put on successful, consistent seminars for bankers, bank owners and managers. He put on more than 30 of them as a trade group exec, and I attended most of them. He did a lot of good for the industry, leveraging his experience as a banker for Crosstown State Bank in Ham Lake, Minn., where he worked for 14 years up until 1994.

Reflecting on the death of a friend always reminds me how precious life is. Time is short. You never know when your time is going to be up. So don’t put off the important things. If you have something in life you want to do, or perhaps need to do, do it now.

Economic optimism

Peter Richiutti, the entertaining economics professor from Tulane University, expects higher federal taxes, some cuts to the federal budget, changes in entitlement programs, and high revenue to the U.S. Treasury as a result of a rebounding economy. Richiutti shared his thoughts, laces with comical anecdotes, in a presentation to Iowa bankers at Okoboji earlier this month.

Corporate earnings are at record levels, driving stock indexes to healthy levels. Richiutti commented that stock prices are a leading indicator, giving him confidence that the pace of economic recovery will increase. While some economist note concerns over inflation, Richiutti said the most significant form of inflation is driven by rising wages, but with the current employment situation, wage inflation is not on the horizon. He said inflation simply is not a worry unless the unemployment rate falls below 7 percent, a significant drop from its current rate over 9 percent.

Richiutti also said he is encouraged by the positive yield curve, with 10-year Treasury Bonds paying much more than short-term bonds. An inverted yield curve, with short-term bonds paying more than 10-year bonds, historically has foretold recession, but Richiutti was we have nothing like that in the bond market today. “There will be no double dip,” he declared.

The agricultural economy is very strong now, Richiutti noted. Commodity prices are strong, and he noted the earnings strength of companies which serve the ag sector.

Richiutti expects corporate merger and acquisition activity to increase. He notes many large companies have record amounts of cash on their balance sheets. They are under pressure to deploy that cash, and this forces many of them to look at acquisitions. Current market conditions price many companies at around 13 times earnings, which Richiutti said is historically cheap. The combination of cash-rich companies and underpriced companies is a recipe for increased M&A activity, he said.

Richiutti said we are still early in the recovery; consumer confidence is still low and Richiutti said it will pick up. Over the next several decades, Richiutti said robust export markets will drive a major portion of growth in the U.S. economy.

We will miss you, Dennie

W. Dennie Emmans, a long-time friend of this magazine, passed away this morning at his home in Andover, Minn. He was surrounded by his wife and extended family. Dennie was the Executive Director of the Bank Holding Company Association from 1994 through 2010. Prior to that, he was an executive with Crosstown State Bank of Ham Lake, Minn. Dennie had been fighting cancer since 2005.

Does Dodd-Frank sufficienctly address too-big-to-fail?

Further reflecting on the one-year anniversary of the signing of the Dodd-Frank law, it is necessary to consider whether the law successfully addresses the issue at the heart of the financial crisis: too-big-to-fail.

The economy is based on confidence — confidence that credit will be available, confidence that people will pay their bills, confidence that the law will enforce legal contracts, confidence that the markets will remain open and functioning, etc. The government plays a huge role in preserving or threatening that confidence.

One of the major contributors to the financial crisis of 2008 was the incredible uncertainty caused by erratic government actions. It saved Bear Stearns but let Lehamn Brothers fail. It preserved Fannie Mae and Freddie Mac but it let IndyMac and WAMU fail. It lent capital to banks that needed it — CitiGroup — and banks that didn’t — Wells Fargo. It bailed out AIG, plus a couple of automakers, while thousands of other businesses closed their doors for good in late 2008 and throughout 2009.

Dodd-Frank’s too-big-to-fail provisions are supposed to bring some predictability to the marketplace. It is supposed to take some of the uncertainty away when very large financial companies get into trouble.

Certainly Dodd-Frank moves in the right direction on some key points. For example, it expands the too-big-to-fail framework to firms beyond just banks. It was smart to create a council that will look not only at large banks, but large insurers and other firms that have the potential to disrupt the economy. It is also smart to require these firms to develop plans that will help wind down these companies should they get into financial trouble. And, I think it is smart to leverage the expertise of the FDIC in these situations. No one knows more about resolving failed institutions outside the traditional bankruptcy process  than the FDIC.

However, many questions remain. Which companies specifically will be named systemically important? And what will be the market reaction to companies that end up on that list? Do those firms become de facto too-big-to-fail? And the wind-down plans, deemed living wills by those who follow this stuff closely, how effective will they be? How will they be tested before they are actually needed? And, while the FDIC is experienced, how successful would it be resolving the failure of a trillion dollar entity? This is truly uncharted territory.

And, while the law attempts to institute triggers that initiate the resolution process for very large firms, will they be followed in practice? I remember when FIRREA and FDICIA were passed, and they contained all kinds of steps to be taken in the event of trouble at a financial institution. At the time, these laws were touted as solutions to too-big-to-fail. Well, clearly they came up short. So how will Dodd-Frank pan out? Will it come up short when tested, also?

I the end, I don’t think anyone really knows and we won’t know until we find ourselves in another crisis.

More reaction at anniversary of Dodd-Frank

Today is the one year anniversary of the Dodd-Frank Wall Street Reform Act. I remember the signing ceremony: ICBA participated, ABA chose to stay away. The response by the two major industry trade groups accurately reflected widespread mixed feelings about the new law. Certainly, many of our readers like the new asset-based formula for determining FDIC premiums, but many of our readers dislike the Durbin amendment which caps the fees debit card issuers can charge for transactions.

I am intrigued by this essay from Newt Gingrich, the former Speaker of the House who is now running for president. He believes Dodd-Frank should be repealed, however unlikely that might be.

The one year anniversary of Dodd-Frank marks the official beginning for the new Consumer Financial Protection Bureau. Earlier, President Obama nominated former Ohio Attorney General Richard Cordray to be its director. Here is an essay from the Competitive Enterprise Institute expressing grave concern of the president’s selection.

Whether it’s the CFPB, or interchange rules, or the termination of Reg Q, or the new compensation limitations for mortgage lenders or a myriad of other things, there is a lot to deal with in this new law. The U.S. Senate will take time to review just where things stand one year after they passed this massive legislation with a hearing today that features Ben Bernanke, Barney Frank and others.

Uncertainty remains a year after Dodd-Frank signed

A year ago, the president signed the Dodd-Frank Act, the biggest banking law Congress has ever written. I remember other big laws that passed — FIRREA, FDICIA, the Riegle-Neal Act and the Gramm-Leach-Bliley Act — but Dodd-Frank dwarfs them all in scope and significance. It does a lot of things, but my fear is the main thing it does is lay down another layer of regulation that ultimately may prove too heavy for many banks. Indeed, just about all industry observers are predicting an accelerated pace of industry consolidation in the coming years. Community banking will survive, but it will be an industry with fewer players than today.

As of the first of July, 121 new rules had been proposed under Dodd-Frank, with 38 of those being finalized. That leaves another 215 rules mandated by Dodd-Frank that have yet to be addressed. Keeping up with all this is a huge challenge for any bank and its compliance officer(s).

Almost as important as the new rules are the personalities that will enforce the rules. And there are big changes taking place at many of the bank regulatory agencies. Sheila Bair has concluded her term at the FDIC and Martin Gruenberg has been nomated for the post. He has been FDIC vice chair, so that transition should be a smooth one. The Comptroller of the Currency’s top post has been vacant for some time, and Thomas Curry, who has been a director at the FDIC, has been nominated for that job. The Office of Thrift Supervision is gone, having been merged into the OCC.

Elizabeth Warren, who has attracted so much attention as the point person on the Consumer Financial Protection Bureau, will not be the new agency’s director. President Obama nominated Richard Cordray for that post, and there are indications from the Senate that the confirmation process could drag on for a long time. Today is the first day CFPB can begin its enforcement responsibilities, but until it gets a permanent director, it cannot go after the non-bank shadow players who really need the most attention. The Bureau is technically part of the Federal Reserve, which itself has two vacant Board of Governor’s seats.

As new players assume new roles in the industry regulatory aparatus, agendas will become more clear and bankers will get a better understanding of what their challenges are. Currently, a wave of uncertainty is making it difficult to plan for the long term. Of course, you could have said the same thing a year ago when the debate over the Dodd-Frank Act was in its closing moments. So a year has gone by and I am not sure the industry — or the general public — is any better off.

President to nominate former Ohio AG for CFPB post

News came out this weekend that President Obama will nominate Richard Cordray to be director of the Consumer Financial Protection Bureau. Cordray is a former attorney general for the State of Ohio. He has a reputation for being tough on lenders, particularly mortgage lenders. Here is the story from the Washington Post.

This Thursday marks the official launch date of the Bureau, although Special Assistant to the President Elizabeth Warren has been assembling the Bureau for months. Warren reportedly was interested in the director’s job, but many observers said the Senate was unlikely to confirm her if President Obama nominated her. Reports have it that Cordray’s confirmation process could be contentious as well. As we have written here, there are several Republican Senators who say they will not confirm any director until the President agree to structural changes to the Bureau.

Some organizations rushed to announce support for the Cordray nomination. For example, here is the statement issued by AFL-CIO President Richard Trumka:

The AFL-CIO strongly supports the nomination of Richard Cordray to head the Consumer Financial Protection Bureau.  Mr. Cordray has an outstanding record of protecting the public interest as the Attorney General of Ohio and as director of enforcement for the bureau.  We are nonetheless disappointed that President Obama chose not to appoint Elizabeth Warren, who was opposed by Republicans and the financial interests that ruined our economy in an attempt to keep the Consumer Financial Protection Bureau from getting off the ground.  We express our deepest appreciation to Prof. Warren for her vision and leadership in establishing the bureau.

Working women and men need a fully empowered bureau that can realize the promise of the Dodd-Frank Act.  Without a Director, the CFPB cannot effectively police non-bank financial institutions, including firms such as pay day lenders and mortgage companies that have histories of exploiting working people.  We sincerely hope Republicans will drop their super-partisan efforts to block staffing of the agencies essential to enforcement of Wall Street reform and consumer protection.  We urge the Senate to move quickly to confirm Mr. Cordray.

Pricing for banks relatively soft

One of the break-out sessions at the annual conference of the Iowa Community Bankers in Okoboji yesterday featured Stephen E. Nelson of Hovde Financial, one of the leading firms in the country that buys and sells banks. He spoke about the mergers and acquisitions market for banks. Here were some of his key points:

  • There has been improvement in bank earnings in the last couple of quarters, but it is due almost entirely to a reduction in provisioning.
  • Charge-offs are down, but loan demand is weak and margins are compressing. “The” issue for the foreseeable future is going to be trying to find demand for loans.
  • In terms of overall industry performance, Hovde Financial “expects more of the same for the remainder of 2011 and through 2012.”
  • Bank prices are decining. In the last three years, there has been a 48 percent decline in tangible book value in the price of banks for sale.
  • The average price of a community bank for sale in Iowa is currently about 1.15 percent of tangible book value.

“If you are a good bank that does not need to sell now, why would you?” Nelson asked. “You won’t get much of a price.”