Regulators – Our nation’s ball-less wonders!

January 28th, 2009

Our regulators were armed with the laws to prevent this financial crisis.  They simply refused to act.    If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.Anonymous Banker weighs in on banks violation of law:  Regulation H

 

Recently there has been a lot of talk about the belief that there hasn’t been enough regulation to keep the banks in line.  I, personally, have been blaming Congress for not having enacted laws that would arm the banking regulators with the means to control and monitor the activities of the nation’s banks and the power to impose penalties or take punitive measures when the banks stray from their legally defined mission.  I assumed that the problems that led to our current economic crisis arose from issues that were not addressed – or inadequately addressed – in our laws and regulations.  

 

Bank regulators are our first line of defense:  Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing  and adopting regulations.  Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner.  In order to accomplish this, they send out  teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations.  This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and –  on a national scale, our country’s economic safety and soundness.  This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.       

 

Well, today I read Federal Reserve Regulation H —   Subpart E entitled “Real Estate Lending and Appraisal”, a regulation born from the Federal Deposit Insurance Corporation Improvement Act of 1991.  My eyes were opened!!!  My premise, that Congress failed to pass laws to protect us, was completely wrong!  This regulation, which has been in place for over ten years – sets forth all the appropriate guidelines and limitations that should have held the banks in check.

 

 

 

Now this question begs to be asked:  Who is making sure that our banks are complying with the regulations that already exist?  And when they are not in compliance, what actions are taken against them to bring them into line?

 

What I believe after reading this is that NO ONE is watching as the banks run amok in their quest for profits.  Really…. no one.  Did the controlling authorities  perhaps forget that this regulation existed since they authored it over ten years ago?   Or did they foolishly believe that the greedy bankers would, of their own accord,  grow a conscience and behave in a responsible manner? 

 

Federal Reserve Regulation H is a “uniform” regulation.  This means that each of the other three agencies also adopted an identical regulation at the same time.    They are found in 12 CFR 208.51;  12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101.   Links to each of these are provided at the end of this article.  This is some of the content of Reg H and it is directed at all banks.

 

The Real Estate Lending Standards section requires banks to  “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

It instructs banks to  monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.

 

And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”

 

The Interagency Guidelines, which are part and parcel of the regulation,  are extensive and I’ve provided links below to the full text document.   But the following quotes will make my point.

 

“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”

 

“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”

 

“Prudently underwritten real estate loans should reflect all relevant credit factors, including—

  • the capacity of the borrower, or income from the underlying property, to adequately service the debt;
  • the value of the mortgaged property;
  • the overall creditworthiness of the borrower;
  • the level of equity invested in the property;
  • any secondary sources of repayment;
  • any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”

 

Our regulators were armed with this law and these guidelines.  And yet, when they examined the banks and discovered that they were not applying a credit review process that was  consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards  to an abrupt end.   They had to have known that the  banks  were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market  and subsequently repurchasing them to hold in their capital accounts.

 

Instead of taking decisive action,  they  merely issued another interagency comment to the banks (see links below for full text), urging them to cease and desist in their unrelenting participation in the subprime lending market. 

 

What should our regulators have done and what did they have the power to do?  Our regulators could have called for the firing of CEO’s of the banks and replaced the Board of Directors.  They also have the power to ban executives that are found to have violated banking regulations from ever working in the banking industry again.  Our regulators could have refused to continue their FDIC insurance for failure to comply.  They can also limit dividends paid to shareholders. If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.

 

It is interesting that one of the strongest banks in the nation, JP Morgan Chase,  states quite clearly in their 2007 Annual Report exactly how pervasive the problems were.  And we know already that the other banks behaved equally irresponsibly and equally in violation of the law and Reg H.  Some of these banks no longer exist and others will soon disappear.  After reading the following comments, can one imagine that the regulators were unaware of the banks’ violations these many past years?  Or do you have to conclude, as I have, that it was our regulators, and not Congress, that failed completely in safeguarding our county?  The law was there.  The regulators simply did not exercise their powers to enforce them.

 

JP Morgan Chase 2007 Annual Report  (released approximately one year ago)

… increasingly poor underwriting standards (e.g., loan-to-value ratios up to 100%, lax verification of income and inflated appraisals) added fuel to the speculation and froth in the markets. Many of these poor mortgage products were also repackaged and dispersed widely through various securities, thus distributing the problems more broadly.

 

…we still believe that subprime mortgages are a good product. We will continue to find a prudent way to be in this business. 

 

We should have acted sooner and more substantially to reduce the LTV rates at which we lent, given the increased risk of falling prices in a market of highly inflated housing values.  We also should have tightened all other standards (e.g., income verification) in response to growing speculation in the market and the increasing propensity of people to respond to aggressive lending standards by buying houses they could barely afford.

 

In the face of these comments and the banking industries apparent violation of Reg H, instead of being penalized,  banks were rewarded through the TARP program.   Our regulators  have done nothing to ensure that the banks meet their fundamental obligation to lend money.  They have merely asked them to do so.  And finally, our regulators are still not forcing the banks to apply income verification processes to all forms of credit including auto loans and credit cards. 

 

Somehow I don’t think the punishment has fit the crime.    And now that I have the understanding I so desperately sought, I really wish I didn’t look so hard.  I find myself even more saddened to know that while  our country  had the structure and laws in place to prevent this economic collapse, the regulators failed to protect us and the guilty continue to be rewarded for bringing this country to its knees.

 

Sources:   12 CFR 34.62         12 CFR 208.51      12 CFR 365  

Interagency Guidance on non-traditional mortgages

Interagency Guidace on Nontraditional Mortgage Product Risks

    
	     

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Anonymous Banker: Consumers – It’s Time to Go Shopping

December 21st, 2009

If we are looking to see any meaningful improvement in overall employment in 2010,  we’ll need to boost our spending during this holiday season. 

Consider this:  Following the dismal sales results of the Christmas 2008 shopping season,  2.1 million people lost their jobs in the first quarter of 2009.   

While it’s true that unemployment dropped from 10.2% in October to 10% in November, these results are skewed.  First, there has been an increase in the number of people that are perceived as having “left the job force”, those that haven’t looked for work for the last four weeks.  Second, there was a rise in the number of folks that secured “temporary” employment, which typically always goes up during the Chrismas season.  

Wall Street will put their usual positive spin on increased sales that will be realized by some companies.  But it’s not hard for a Best Buy to pick up market share in the wake of Circuit City closing its doors.  So one won’t always be able to gauge the movement towards economic recovery by individual store results.   

And as we hear announcements comparing this season’s cumulative totals to last years, remember, it won’t be hard to show positive results over December 2008 numbers.   

Consumer confidence is at an all time low.  Yet consumer spending drives 70% of our economy.  Those still employed are worried about losing their jobs.  Many are worried about losing their homes.  Folks are dealing with increase in heating, water and electric costs, while gas prices continue to sneak up.  They’ve been battered by the banking industry’s unrelenting rise in their credit card rates and the slashing of their credit lines.  None of these things will encourage Christmas spending this season.

Still, in this season of giving, please remember that our holiday spending has the power to jump-start 2010.   We need to send a signal to business owners and managers that we are confident that better times are upon us and that we are confident in our nation’s ability to recover.  Consumer spending is the best way to send that message.  And it’s the only thing that will encourage the creation of new jobs early-on in 2010.

To those that are still feeling blessed in these challenging times, embrace the spirit of Christmas.  Buy a toy for the child of a neighbor that is unemployed.  Put together a basket of food and leave it at their doorstep.  For those of us that are less fortunate, donate some time to a local soup kitchen serving others.  If ever there was a time to do this, the time is now.

My heartfelt wishes to you all for a very Merry Christmas and blessings for the New Year.

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Anonymous Banker : Bank of America and Chase commit to increase lending to Small Business through unsafe and unsound, deceptive and unfair credit card practices

December 16th, 2009

As you all know, I’ve been an ongoing supporter of the need for banks to step up to the plate and lend to Small Business.   Credit availability to the small business sector is a necessary component to our nation’s economic recovery. 

The History of the Small Business Credit Line

But I am also a banker, and as such, recognize the need for safety and soundness in lending.  I blasted the industry over the last decade when they foolishly disregarded prudent lending practices, leaving the door open for  business “liar loans”.  During that time, a business owner could obtain a small business revolving credit line for up to $100,000 by completing a one page application.  They didn’t have to provide any verification of personal income or business revenue.  They didn’t have to substantiate a profit or the ability to repay the debt.  The loan commitment was based almost entirely on the credit score of the individual owner/guarantor.  In that era, if you had a pulse and a credit score of 700, you could go into any big bank and get a loan for up to $100,000.   Well, okay, there was  one other criteria:  the loan amount was typically limited to 25% of the businesses STATED revenue.  Everyone knew that if you STATED that you had $400,000 in business revenue, you could qualify for a $100,000 business credit line.

Additionally, the banking industry abandoned all forms of public filings on these credit applications.  What does that mean?  Well, first, because the loan was “to the business entity”, the line of credit did not appear on the individual owner/guarantor’s  personal credit report.  The bank also didn’t file a UCC filing on the business assets – the cheapest and easiest way to let other lenders know that one bank already has a loan out to a potential  business borrower.  So the line of credit became invisible to other potential lenders.

The result of these imprudent lending practices was that the business owner could go from bank to bank and accumulate credit lines.  Banks had no way of knowing if that Small Business was applying for their first line of credit or their third, fourth or fifth  line of credit.

These Small Business loans were rarely, if ever,  sold through the securitization process.  That meant that the entire credit risk was held on the books of the bank.  When the economy began to crash and burn, so did the “liar loan” portfolios.  Inside the industry, bankers scrambled   to understand exactly how much exposure they had in this market. 

Throwing the baby out with the bathwater:  Banks withdraw from the Small Business Lending Market

In response to the economic crisis, the very first thing banks did was limit business revolving credit lines to Small Businesses to 15% of gross revenue.  And thankfully, banks finally began to apply some level of credit underwriting to loan requests up to $100,000, requiring borrowers to submit tax returns to support the information they provided on the application. 

At the same time, banks assumed that every loan they had on their books was a “liar loan”.  So they systematically cancelled these credit lines to small businesses across our nation,  stripping the businesses of working capital for salaries, inventory, rent and receivables.  These businesses received no prior notice.  The banks simply froze the credit line and sent the customer a letter, after the fact.  

The banks did make one small concession to their small business borrower.  They allowed them to apply to have their lines reinstated.   These requests for reinstatement were subject to the “new” credit criteria.  So in a year of often declining revenues, the banks applied their new guideline, limiting the borrowing to 15% of gross revenue.  Many viable businesses no longer qualified under the stricter criteria and still found themselves without a line of credit. 

At present, viable businesses have lost their access to working capital and  banks simply don’t want to grant business working capital lines and retain the risk.

Did bankers learn their lesson?  I think not!

You’d  think that the banks would have learned a lesson on the importance of income verification from this.  Unfortunately, they have not.  The banks are promising a new round of lending to Small Business, and they will meet this obligation through  Small Business Credit Cards. 

Want a credit card with a line up to $50,000?   Check out Bank of America or Chase Bank.  Here’s how their process works:

  1. You will be asked to STATE your  “household income”.  Tell them whatever you want.  They won’t even ask for a tax return.
  2. Business Revenue:  Banks don’t ask and they don’t care.  If they do ask, they won’t verify it.  So feel free to lie.
  3. Credit reporting?  Sure, the bank will pull your credit report to get your credit score.  But then, just like the old days, the line will disappear from the radar screen.  At Chase Bank, it appears that management encourages their business bankers to sell their Small Business Credit cards by advising the business owner of the benefits afforded to them when their new credit card is  NOT  reported on their personal credit report.  The invisible business loan all over again. Shame on them!
  4. If you have a good credit score and a personal card from Bank of America, give them a call.  Perhaps they will offer you the same deal they offered me. When I called customer service,  The BofA representative offered to convert my personal credit card to a business credit card because I was such a valued customer!  When I assured her that I didn’t own a business, she insisted that I didn’t need one to get a business credit card.  Perhaps our regulators would like to monitor the prevalence of this practice throughout the industry and prohibit the banks from circumventing the spirit and intent of the Credit Card Act.

The Question is….  WHY are banks doing this?   Greed!  (Of course)

Why would banks continue to lend without regard to any of the time-honored traditions of safety and soundness.  First, unlike  Revolving Small Business Credit lines,  banks DO sell-off  credit card exposure through securitization.   The bankers, together with Wall Street, devised a way to reap the profits  while, at the same time, absolving themselves of any losses.  Securitization rules, in their current form, empower and even encourage banks to violate all prudent lending practices.

Despite warnings released in the OCC’s Survey of Credit Underwriting Practices 2009, stating:

A key lesson learned from the financial market disruption is the need for bankers to apply sound, consistent underwriting standards regardless of whether a loan is originated with the intent to hold or sell. The OCC reminds bankers that underwriting standards should not be compromised by competitive pressures or the assumption that the loan will be sold to third parties.

banks continue to apply lower credit standards to forms of credit they will sell off in the market than they do to credit they will retain on their books.  Just compare the banks requirements for a $50,000 Business Credit Card to a $50,000 small business revolving line of credit.  The first fails to verify ANY financial information and is sold.  The second verifies financial information and the risk is held by the bank. 

Business Credit Cards are a profitable and huge market for big-banks.  Here are a few statistics from Creditcard.com:

  • In 2008, JPMorgan Chase was the largest issuer of small business credit cards with $34.5 billion in total card volume. Bank of America is second with $26.31 billion and Capital One is third with $20.7 billion. (Source: Nilson Report)
  • Credit cards are now the most common source of financing for America’s small-business owners. (Source: National Small Business Association survey, 2008)
  • 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008)

Congress Empowers Bankers to be greedy and deceptive to Small Business

Our Congressional leaders failed to include Small Business Credit Cards in the new protective laws provided under the Credit Card Act of 2009.   Do our government leaders actually believe that it is okay for banks to practice deceptive and unfair lending against Small Businesses, but not consumers? 

Many of the provisions of this Act do not go into effect until 2010 (giving the banks plenty of time to jack up everyone’s credit card rates to almost 30%).   Buyer Beware!  Small Business owners need to know that Small Business Credit cards are not protected from deceptive and unfair credit card banking practices, such as:

  • Interest Rate Hikes – any time for any reason
  • Universal Default
  • How banks apply your payments - Lowest Interest Balances Paid First
  • Limits on over-limit fees

I suspect, that absent a change in regulation, the following disclosure from Chase Bank’s new INK  Small Business Credit Card will remain the same long after the provisions of the Credit Card Act go into effect. Perhaps the disclosure should be called “Chase Bank’s transparent disclosure of deceptive and unfair credit card practices, rather than:

Pricing and Terms –Rate, Fee and other Cost Information

  1. You authorize us to allocate your payments and credits in a way that is most favorable to or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs (such as promotional APRs) before balances with higher APRs.
  2. Claims and disputes are subject to arbitration.
  3. As described in the Business Card Agreement, we reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account.  (emphasis in original)

Conclusion:

Our government leaders and our regulators failed to protect this country from unsafe and unsound lending practices, which brought our economy to the brink of collapse.  As they develop their new-found focus on Small Business lending,  they need to ensure that credit, in every form, adheres to the principles of safety and soundness and of honesty and integrity throughout our financial system.  These principles must be adhered to by BOTH the borrowers and the banks.  And sadly, perhaps neither can be trusted to simply “do the right thing”.

Yes, we certainly do need to make loans to the small business community.  I feel their pain.  But, America, as a world leader,  needs to set an example and do it right and do it NOW.  The securitization market isn’t going to magically improve because our tax dollars temporarily guarantee the risk to investors (TALF).  And without a strong securitization market, credit in this country will remain frozen.  Lending will only improve when we implement strict and meaningful regulations that govern the safety and soundness in our lending system for all forms of credit.  The ultimate investors in these loans must feel secure in the likelihood that these loans will be repaid.  It’s an issue of confidence.  Banks and Wall Street have a long way to go in winning back the trust of the public.  I don’t think they can get there on their own.  I think we need to bring them there  (and they’ll be kicking and screaming all the way). 

For your reading pleasure:

National Small Business Administration Survey 2008

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Anonymous Banker: The Worst is Yet to Come. An estimated $1 Trillion in New and Legacy CMBS TALF funds to bailout the financial industry

December 6th, 2009

I’m a small business advocate.  Always have been, always will be.  It colors my thought process and separates me from our leaders who  believe that this nation’s economic recovery rests in the hands of big business, big banks and Wall Street.

Our leaders publicly  pronounce  the importance of small business.  They publicly sell many of their economic recovery plans under the guise of supporting small business.  The reality is that many of their plans, and in particular the New and Legacy CMBS TALF program, have absolutely nothing to do with supporting  small business recovery.  It is all about recapitalizing the banks at the expense of the taxpayers for generations to come.  It is all about profit distribution at the highest level of the food chain …. and I’m sorry to say, small business doesn’t fall in that category.  The $50 Billion and soon to be $1 Trillion dollar TALF program, including both new and legacy CMBS, is a prime example of  taxpayer sponsored programs touted to be in support of small business.  But it IS NOT!!!

The Rhetoric

In March 2009, the FRBNY explained why they were establishing the TALF program

The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (SBA)-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

 In April 2009, Ben Bernanke wrote a letter to the Congressional Oversight Panel stating:

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility through which the Federal Reserve Bank of New York extends three-year loans collateralized by certain types of ABS that are, in turn, backed by loans to consumers and small businesses. The facility is designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of those ABS.

Also in April 2009, Thomas Baxter, General Council to the FRBNY stated in a letter to the Special Inspector General for the Troubled Asset Relief Program that “We remain committed to advance the policy purpose of the TALF — to make credit more readily available to U.S. consumers and businesses, a critical cornerstone for the recovery of the U.S. economy.”

In October 2009, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation stated:

The FDIC has been vocal in its support of bank lending to small businesses in a variety of industry forums and in the interagency statement on making loans to creditworthy borrowers that was issued last November. (2008)  I would like to emphasize that the FDIC wants banks to make prudent small business loans as they are an engine of growth in our economy and can help to create jobs at this critical juncture.

And as recently as October 2009, President Obama  gave a presentation    describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

The “Small Business Mantra” is heard from every level within our government.  But from where I sit, it is all just rhetoric.  And so I challenge them, in these writings, to put meaningful programs in place.  Most recently, I challenged the fact that TALF had not provided any financing for newly issued CMBS but had only been used to finance existing CMBS. 

At the time of that writing , I foolishly believed that  CMBS TALF funds would be used to encourage banks to lend to small businesses purchasing an existing piece of commercial property or building a new piece of commercial property or perhaps refinancing a current commercial mortgage into a lower rate.  I must have been in la-la land to even have imagined such a thing. 

The First New TALF CMBS Deal -  DDR 1 Depositor LLC Trust 2009

On November 27, 2009,  the Federal Reserve Bank of New York through the CMBS TALF program made the first $72 Million loan collateralized by a new CMBS securitization.    Here is how they are using our tax dollars (and its is not in support of small business!).   Developers Diversified Realty Corp  is a REIT that owns shopping malls across the United States.  As a group, these properties already   carried substantial loans. Goldman Sachs Mortgage Company is reported to have refinanced these 28 shopping malls  with a loan of $400 Million dollars. 

It was reported   that Developers Diversified Realty Corp.  used the proceeds of this  $400 million, five-year loan to pay down debt and reduce balances on revolving credit facilities.

The blended interest rate on the loan is 4.2 percent.

The company has repaid more than $270 million of mortgage debt with a weighted average duration of 1.2 years and an interest rate of 6.2 percent, the real estate investment trust said.

This $400 Million dollar package of  SHOPPING MALL loans  was then transferred into a securitization (Commercial Mortgage Backed Security)  called DDR I Depositor LLC Trust 2009.    The Federal Reserve Bank of New York then used this pool of shopping mall loans  as collateral to a $78 Million dollar loan to the Investment Bank within Goldman Sachs.  The lender, Goldman Sachs Mortage Company received the $400 Million dollars back from a combination of the loan proceeds from the Federal Reserve Bank of New York and the sale of the rest of the Commercial Mortgage Backed Security (CMBS) to other investors.    In reality, this transaction simply swapped old debt for new debt, and one set of investors for another set of investors …… with the Taxpayers having invested $78 Million dollars.  

Where exactly in this scenario do you see a benefit to small business?  There isn’t any.

What we need are innovative ideas and meaningful programs  in support of small business

I recently read an article entitled:  Learn the Five Secrets of Innovation in which Hal Gregersen told CNN, “What the innovators have in common is that they can put together ideas and information in unique combinations that nobody else has quite put together before.”

It is time for our government leaders to show some innovation in their thinking and in the programs they support.   Everyone, at all levels of government and within the financial industry,  recognizes that Commercial Real Estate  will create the next round of substantial losses for the banks and Wall Street Financial Companies that have been deemed too big to fail  and  for  other institutional investors and REITs.  We cannot allow the TALF program to become just another bailout for the $3 Trillion dollar Commercial Real Estate bubble that is about to implode.

In June 2009, William Dudly, the President and CEO of the FRBNY stated that:

“One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses among many of the firms that dominate the financial industry. As the magnitude and widespread nature of these problems became evident in the early part of 2007, there was an abrupt loss of confidence and a sharp and sustained increase in risk aversion among investors. Liquidity in short-term funding markets seized up as concerns over the viability of many bank and non-bank financial institutions increased.

After all, in recent years, the CMBS market has satisfied about 40% of the credit needs of the commercial mortgage sector. If this market is closed, then the refinancing of maturing mortgages will be exceedingly difficult and this will exacerbate the drop in commercial real estate prices, loan defaults and the pressure on bank capital.

I am confident that we will continue to build on our initial success, reopening credit channels to consumers and businesses.”

Well, Mr. Dudley, I am a taxpayers and therefore, through TALF, an investor in these new and legacy CMBS.   I have absolutely no confidence in the program that has been laid out.  I believe that this economy will only recover through  ongoing support of credit programs to consumers and the Small Business Community.  We need programs  that adhere to the many guidelines set forth to ensure safety and soundness in lending.  This is my percolate-up theory of economics as compared to your current trickle-down theory.  

Try some these  ideas on for size.  I’m sure you have some highly paid thinkers in your group that can tweak these ideas into effective programs.

1.  If you are going to use the TALF program to REFINANCE malls, then tag on conditions that favor small business.  Require the owners of the property (the REIT’s for example) to pass some of  savings from the reduction in the loan’s interest rate on to their Small Business tenants.  These small business tenants should  qualify based on revenue size or store size  and perhaps would have to document a reduction in revenue to receive the rent reduction.  In the Developers Diversified refinace deal there was a 2% interest rate reduction on a $400 Million dollar loan which translates into a savings to the REIT of  $8 Million dollars a year.  Even if that savings was shared by half,  the  small business tenants of these 28 malls would benefit from a combined rent reduction of  $4 Million dollars a year.  

In this manner, everyone has a chance to recover.  I have interviewed countless small business owners that rent properties in malls and I’ve recommended that they ask their landlords to grant a rent concession. Big malls always answer the same:   No way!   And yet they often write into their lease agreements that the small business tenant has to pay an increase in rent if their sales exceed a certain dollar size (for example $1 Million).  If the REITs want to share in increased earnings during prosperous years, then they should also have to share the cost savings benefits we, the taxpayers, are affording to them through the CMBS TALF program. 

I have also noticed that many of the smaller strip mall operators are making these concessions.  Where are we on this?  Is our government only capable of designing programs that support  the big boys by allowing them to reap all the cost benefits, but at the expense of small business and the taxpayer? 

2.  I understand that one of the tax requirements of a REIT is that they must pass on 90% of their income to their investors.  This rule does not encourage REITs to reserve for a rainy day and set aside capital to weather future economic storms.  Our government regulating agencies, the IRS and the SEC for example, must  work in concert to prevent a recurrence of this financial crisis.  All parties with a vested interest in the transaction must be prepared to absorb their own losses without benefit of bailout through our tax dollars.  Requiring 90% profit distribution is simply setting us all up for failure. 

3.   Set aside a portion of the TALF dollars specifically to fund newly issued CMBS comprised of commercial real estate loans under $3 Million dollars currently held on the books of  community banks across America.    Let all the community banks participate in a securitization pool and lay off their best small business commercial real estate loans into that pool.   As a group, they will share in the losses.  But since the FRBNY is lending on a non-recourse basis, the losses are limited to the “haircut”, and each bank will know exactly how much future exposure they have to losses from their investment in this pool.  In this way, the community banks will be able to participate in the recapitalization currently only afforded to the big greedy banks and Wall Street firms.  This process should  reduce the number of community bank failures and make Sheila Bair a very happy woman indeed.

When the loans are taken off the balance sheet of the community banks through this mechanism, these banks will enjoy a financial benefit.  The value of this benefit must be passed on to the borrowers through a reduction in their interest rates or at the very least shared between the community bank lender and the small business borrower.   The lower rate will translate into lower default rates and the savings experienced by the small business owner could potentially mean more jobs and lower unemployment.  All good things for our economic recovery. 

4.  The big banks, those deemed too big to fail, are not meeting their fundamental obligation to lend during this economic crisis.  And yet, I see them raising capital and paying back the government TARP loans.  I’m glad to have the funds back in our coffers.  But these same big banks are also recapitalizing on the backs of the consumer and small business owners as evidenced by the spread on rates they are paying the depositors and the usurous rates they are charging their borrowers.  In particular, I speak of the systematic rate increases applied across the industry to credit card holders.  

These are the same banks that were saved from insolvency a year ago when our tax dollars bailed out  FANNIE MAE and FREDDIE MAC.    Afterall, the financial institutions carried and are still carrying billions, perhaps trillions,  in toxic loans disguised as government guaranteed MBS’s in their capital accounts.  Yet, these “too big to fail” financial institutions continue to pay increasing dividends to their shareholders instead of using these funds to recapitalize and prepare for the next round of losses.  And there will be a next round of losses  from the commercial real estate bubble that is about to burst. 

Our government leaders know who these banks are or they would not be making such a great effort to bail them out through the TALF program.  Our government leaders need to grow a set of balls and initiate legislation that curtails  dividend payments.  These financial companies and banks must accumulate additional capital through a dividend reduction program.   The reduction in dividend payments to shareholders should also help fund some meaningful modifications of the consumer mortgages they still hold on their books.  These same banks should not be allowed to finance mortgage servicing requirements through TALF.

TALF is not about Small Business

It’s time to examine the TALF program from a different perspective because the direction it is taking today is not working for me and my fellow taxpayers.  The FRBNY, to date,  has financed $53 Billion dollars worth of ABS and has committed  over $1 Trillion dollars in support through this program.  To date, over $22 Billion has been used to divest the big banks of toxic credit card assets (43%), toxic auto loans of over $10 Billion dollars (20%), toxic commercial real estate loans of over $7 Billion dollars (14%) and a mere $1.6 Billion dollars in SBA loans (3%).  

Additionally,  our government leaders have seen fit to extend the TALF program for newly issued (which simply means refinanced) CMBS to June 30, 2010 but have only extended TALF with respect to Small Business Loans to March 31, 2010.   This is reflective of their true lack of commitment to the small business sector.  While they all talk-the-talk, their programs clearly prove that they do not understand the tremendous  contribution the small business sector could make to our economic recovery.   

How can our leaders expect us to believe, based on these results, that TALF truly has,  as its mission statement, the goal to:  

Help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

TALF is a financial industry bailout program through and through.    As Mr. Dudley so eloquently stated:  “One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses amoung many of the firms that dominate the financial industry.”   While the recapitalization of the banking and financial sector IS a vital component of this nation’s economic recovery, it is time that our leaders ensure that government programs, sponsored by our tax dollars,  provide equal benefit to the consumer and small business sector.  Without this, there is no hope of recovery.

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Anonymous Banker: TALF’s Legacy CMBS program is an abuse of our taxdollars

November 7th, 2009

You know that feeling you get when you eat ice cream and it gives you that pain in the side of your head?  Try making sense out of the government program:  TALF – Legacy CMBS and you’ll get the same pain: brain-freeze.

I understand the need to jump-start the securitization markets.  That process is vital to ensuring that banks meet their fundamental obligation to support the credit needs of individuals and businesses, which in turn is vital to our economic recovery. 

However, the Legacy CMBS program has absolutely nothing to do with helping market participants meet the credit needs of households and small business.  I’ve looked at this program from several different angles.  I’ve spoken to folks “in the know” about the processes and procedures in the CMBS market.  I’ve learned a lot and I admit, I still don’t understand it all.  But of one thing I’m certain:  it ain’t helping to get the banks to lend to the small business community.

My question, and the basis for this writing, is to figure out how the Legacy CMBS program meets the fundamental goal of TALF.  It begs to be asked, and answered,  in light of the fact that there have been ZERO newly issued CMBS processed through the TALF, while there have been over $6 Billion in Legacy CMBS processed.   

Let’s start with the easy stuff:  The initial premise of WHY the TALF program was created in the words of the Federal Reserve

The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

The premise makes sense.  Years ago, banks held loans on their books. They retained the credit risk and therefore were diligent in applying safe and sound lending practices to all the forms of credit described above.    As the need for more credit expanded through our society, the banking industry’s lending functions were limited by the amount of capital they carried.  The securitization process was born.  Banks made the loans, bundled them together and sold them off to Wall Street.  They got their money back (and a nice profit to boot) and began the process anew.  Credit flowed. 

Wall Street, in turn,  purchased these pools of loans (commercial mortgages, residential mortgages, credit cards, auto loans, SBA loans, student loans, etc),  divided them up into segments called tranches that had different ratings:  investment grade and non-investment grade.  Each of these tranches were converted into what the layperson might know as a bond issue, which is really the same as an “asset backed security”.  The bonds were then sold in large and small pieces to lots of different investors:  some individuals, mutual funds, banks, pension plans and other institutional investors. Through this step,  the funds returned back into the hands of the Wall Street firm,  who, in turn,  purchased more loans from the banks.  Credit flowed.

The tranches or classes, defined by CUSIP numbers,  are paid to the bond-holders in a particular order.  The highest rated classes are paid first, both from the monthly loan payments that the “original borrower” makes and from those loans that are perhaps refinanced and paid off in full.  Those tranches at the bottom of the list have the highest risk, since they are the last to be paid out.

Okay, I’ve over-simplified, but hopefully you’ve gotten the gist of things without the brain-freeze.

As the demand for new loans increased, banks started to make loans without any consideration to the rules governing safety and soundness in lending.     We all know where that led us:  right here in the middle of our nation’s economic collapse. 

As our economy deteriorates,  loan default rates by the original borrowers increases.    That, in turn, lowers the value of the bonds.  First problem:  many of these bonds are held in the capital accounts of banks, insurance companies and investment firms.  When the bond values decline, so does the financial industry’s capital.  The second problem is that as the bond market’s performance deteriorates, there are less investors willing to buy the bonds and the market dries up.  Basically, no one wants to buy this crap.  If there isn’t a buyer, then you can’t sell.  Bond prices plummet some more, and therefore financial industry’s core capital  plummets. 

Additionally, if no one will buy the bonds,  Wall Street stops buying the loans from the banks, and the banks stop making the loans.  Financing becomes virtually impossible to find and the credit market is frozen.

TALF… to the rescue.  We need to get the securitization market flowing.  Through the TALF program the government virtually guarantees payment to the bond holders.  Under TALF, Wall Street, conceptually,  will start to buy new loans and put out new bond issues through securitization.  The banks know they have a market in which to sell the loans they make, and so they begin to lend again.  If  only that was actually happening!!!   If there were newly issued CMBS being processed through TALF, then I’d see some hope in the success of this TALF scheme.   But alas, it’s not to be.

What value, then,  does the TALF Legacy CMBS program have in fostering lending activity?  Legacy CMBS’s represent  loans that were ALREADY made, ALREADY sold to Wall Street, ALREADY packaged up and divvied up and sold to individuals and institutional investors.  When the FRBNY takes a piece of an OLD securitization as collateral and makes a loan, using those bonds as collateral, NO NEW MONEY goes to the banks.  The bank already got that money  years ago.  No new money means no new lending.  The Legacy CMBS TALF program is one big act of smoke and mirrors. 

The CMBS TALF program is supposed to spur the lending functions of banks when the FRBNY finances the purchasing of NEW commercial loans.    Consider this fact:  To date  TALF financing  has not been used to purchase any NEW commercial mortgages.  Conversely, it has been used to purchase over  $6 Billion in Legacy CMBS

How, then, has Legacy CMBS TALF  helped promote lending?  Simply put…. It hasn’t!!!!  Which firms are utilizing the Legacy CMBS TALF program?  Sorry, says the FRBNY:  TALF rules say we don’t have to share that information with the public.  So much for the new age of transparency.   What, then, is the purpose of the Legacy CMBS program?  I have my own theory, which I’ll share with you here. 

For those of you who are willing to risk a little brain freeze, here is a great site to visit:  http://www.cmbs.com/securitization.aspx?dealsecuritizationid=292

It’s a perfect picture of one of these securitizations.  The loans were originated mostly by Bank of America and then to some extent by Barclays and Bear Sterns.    The securitization’s name is BACM 2005-3.  You’ll see here the list of all the properties that were financed, the interest rate charged, the maturity date of the loan, the type of property and where it’s located.  It’s an interesting conglomeration of loans which include $250 Million in financing to the Woolworth Building, $74+ million in financing to the Queens Atrium,  various hotels, Walgreens and CVS stores and  sundry other  multifamily, industrial, retail and office properties across the United States.

I thought it was fascinating to look at.  I came upon this report when I searched the TALF site for CUSIP numbers that were approved for collateral in a Legacy CMBS transaction:  namely CUSIP number 05947UR42.  I’m not singling this issue out for any reason.  They just happened to win my web-surfing lottery.

Here’s what I learned.  A Wall Street firm (perhaps a bank or their investment firm counterpart) will go out buy a bulk of bonds, that carry the same CUSIP number, from the market.  They need to put together a minimum of $10 Million in one bond issue to borrow against them from the FRBNY. 

In step one, the Wall Street firm comes up with funds to buy the bonds in the secondary bond market….. not a terribly difficult task for them.  Then, they take them to the FRBNY, pledge them as collateral, borrow money from the FRBNY and in doing so they get …… most of their money back (minus the haircut).  Now, if , or maybe more accurately when, that  bond portfolio, backed by commercial real estate,  fails to perform, the investment firm or bank counterparty simply turns their bonds over to the FRBNY in full payment of their loan.  Any future losses on those bonds from that portfolio will be funded by the taxpayers.  

What does the investment firm or bank counterparty do with the cash they received from the loan they got from the FRBNY.  They go out and buy MORE previously issued bonds.  Then they take those bonds, bring them to the FRBNY, pledge them as collateral, and once again, get most of their money back.  Each time they do this, they pass the risk of that Commercial Mortgage Backed Security (less the haircut) on to the taxpayer. 

Furthermore, they are now holding an investment which they can value on their books without having to mark-the-value to market, thanks to the TALF program and our taxpayer guarantee.  They have limited their losses and any depreciation in value of their bond holdings.

The Legacy TALF program only benefits the Wall Street firm that has the resources and means to buy up the bonds and bring them to the FRBNY’s window for a loan.  It isn’t helping the smaller community banks that are sinking under the pressure of ever higher default rates on commercial mortgages they hold.  And it isn’t getting the big banks to start lending again.  If the government wants to argue that shoring up the  capital positions of these few firms taking advantage of the Legacy CMBS TARP program is helping to stabilize these  financial firms, I’d buy that argument.  But then, they shouldn’t be promoting the program under TALF whose primary mission is :   to help market participants meet the credit needs of households and small businesses through new securitizations.

Legacy CMBS TALF is not doing THAT!!!   Churning previously issued commercial real estate bonds for a few savvy Wall Street financial companies does not promote lending to consumers and small business.  It provides absolutely no incentive to promote new lending functions  and it isn’t.  A better acronym might be:  SUC OFF which stands for “Shoring Up Capital by Overextending Federal Funding”.

By the end of the TALF program, which the government estimates will finance up to $2 Trillion dollars of Asset Backed Securities, these firms will have accumulated tens of billions of dollars in bonds guaranteed by our tax dollars which they will simply hold in their capital portfolios.   I’ve been called cynical.  Well so be it.  Until I see the CMBS program under TALF used to finance NEW commercial loans, I will continue to call it like I see it:  A government bailout in sheep’s clothing and an inappropriate use of our tax dollars.

Related Articles:

Looming Crisis:  CMBS Defaults Pit Banks Against Each Other in Senior, Junio Fights (Nov. 8, 2009)

Fed to Add Older CMBS to TALF Lending Program in July (Update3) – May 19, 2009 

Fed Announces Expansion of TALF to Legacy CMBS – May 26, 2009

TALF:  Introduction of Commercial Mortgage-Backed Securities (CMBS)  – June 16, 2009

 

 

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Anonymous Banker: FDIC Chairman Sheila Bair’s speech portends the end of the era of “too big to fail”

October 30th, 2009

Today, FDIC Chairman, Sheila Bair presented on Systemic Regulation, Prudential Measures, Resolution Authority and Securitization before the Financial Services Committee and U.S. House of Representatives.  It’s a must read for those of us who favor the philosophy that no institution should be ‘too big to fail’ or allowed to act  in ways that can threaten the financial stability of our country and the global economy. 

She stated, quite eloquently, the need for a system that makes our regulators accountable both for their actions and their inactions.  She proposes that a Council be established that would effectively ‘regulate the regulators’.

Primary regulators would be charged with enforcing the requirements set by the Council. However, if the primary regulators fail to act, the Council should have the authority to do so.

As always, with grace under pressure, Ms. Bair has publicly acknowledged the need for our regulators to practice their authority outside the sphere of political influence.  As we await implementation of this proposal that will surely strengthen the future economic stability of our nation, it would help if our current regulators would stop “asking” the financial institutions to comply with their directives and instead, use their powers of enforcement to make them comply.

In designing the role of the Council, it will be important to preserve the longstanding principle that bank regulation and supervision are best conducted by independent agencies. Careful attention should be given to the establishment of appropriate safeguards to preserve the independence of financial regulation from political influence.

On one major issue, I do beg to disagree.  Whether Ms. Bair likes it or not, our Regulators -  the FDIC, the OCC, the FRB and the OTS,  DID, in fact, identify the systemic risks of sub-prime and non-conventional real estate lending and they knew it was wide-spread.  Our regulators addressed this issue with ALL banks in 2005 through an interagency regulation that was put out by the  FDIC, FRB, OTS and OCC , the regulating authorities of all banking institutions and which came about through Regulation H.    Our regulators recognized the extreme risks of the sub-prime and non-traditional mortgage products and they failed to exercise their authority and curtail the banking industry’s careless lending practices.  Instead, the Regulators chose to merely issue guidance letters to the banking institutions in 2005 and then again in 2006.  The links I have provided in this paragraph are essential to understanding exactly how badly our Regulators failed us.  It proves that they knew the extreme consequences of the banks continued participation in sub-prime and non-conventional mortgages products and moreso, that the banks lax lending standards represented a systemic risk.  For Ms. Bair to publicly state that the regulatory supervisors failed to identify the systemic nature of the risks is simply not true.  I’d prefer if she would simply acknowledged that our regulators did a piss-poor job of stopping the banks from doing what they knew they shouldn’t be doing, instead of saying:

Supervisors across the financial system failed to identify the systemic nature of the risks before they were realized as widespread industry losses. The performance of the regulatory system in the current crisis underscores the weakness of monitoring systemic risk through the lens of individual financial institutions and argues for the need to assess emerging risks using a system-wide perspective. The current proposal addresses the need for broader-based identification of systemic risks across the economy and improved interagency cooperation through the establishment of a new Financial Services Oversight Council.

If you believe what Ms. Bair said, then our regulators were ill-prepared to recognize the systemic risks of unsafe and unsound real estate lending practices.  In my book, that is called incompetent.   However, if you subscribe to my position:  the regulators knew it and failed to act, then that makes them complacent.

Either way, our nation cannot afford to have  incompetence or complacency in our regulatory system.  While I agree with the need for the Council that Ms. Bair describes, I have to wonder who will be regulating the new regulators of our old regulators and will they be armed to act swifter and surer the next time around.

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Anonymous Banker: Small Business takes it on the chin from our Congressional Leaders and Regulators

October 27th, 2009

I recently posted a blog saying that our Congressional leaders and regulators needed to redefine the term small business.   Over the next weeks, I’ll be following up with more blogs on that theme.  Here’s my first:

Our President, Treasury Secretary Geithner and our Congressional leaders have all, during the course of this economic crisis, blathered on about their commitment to small business.  For once, I’d like to see them put their laws and regulations where their mouths are.

Congress passed consumer credit card regulations designed to stop deceptive practices in credit card lending.  Yet Congress intentionally left  out all business credit cards that can be peddled to the 26 MILLION small business owners across the United States. One can only assume that this means that it’s still okay for the banks to be deceptive when issuing credit cards to these valued members of society that are the backbone to our economic recovery.   And banks certainly will…. I promise you that.

Let’s remember, that banks do not issue business credit cards without the support of personal guarantees of the small business owners, who I might add could also be referred to as ‘consumers’.   

Well, let me correct that.  Many banks do issue “Commercial Credit Cards”, which should not be confused with “Small Business Credit Cards”.  Commercial Credit Cards are reserved for corporations with revenue typically in excess of $2 Million dollars, and then, only if the entity isn’t privately owned and operated.  Commercial Credit cards are reserved for businesses like not-for-profit corporations, where personal guarantees would not be available since there is not direct private ownership.  But if a personal guarantee is available from the business owner, the banks take it. 

The banks themselves differentiate a “Commercial Credit Card” from a “Small Business Credit Card”, so WHY aren’t our Congressional leaders doing the same? 

Probably because they don’t really have any interest in protecting the small business owner and just like to hear themselves talk.

I dare Congress to prove me wrong and amend the new protective credit card laws to include Small Business credit cards.  Till then, I will continue to advise all my small business customers NOT to apply for any small business credit cards, but to apply instead for a consumer credit card and use that card only for business expenses.  It does not change the deductibility of the expenses.  And, at least then, the business owner will get the benefit of the new protective regulations when they go into effect next year.

On the question of direct personal liability vs. personal guarantee:  You can’t be half pregnant, my friend.

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Anonymous Banker: It’s time for our leaders to redefine the term “Small Business”

October 22nd, 2009

I consider myself a small business banker. In that role, I’ve dealt with start-up companies with, initially, zero revenue to companies with revenue of $160 Million.  I’ve worked for relatively few banks over the last thirty+ years, and the “small business market” has been defined by the industry in various ways. 

Most banks define small business lending by the dollar size of the loan, regardless of the revenue size of the company.  Small Business loans  typically fall under the $3 Million dollar mark for term financing and $1 Million for working capital.    Once a company’s  borrowing needs exceed those limits, both the company and the bank are best served by reassigning that account to the bank’s middle-market group.  Above that is Corporate and Institutional Lending.

While it’s not a hard and fast rule, most Small Businesses  typically have working capital needs under $500,000.  Loans under $100,000 are the hardest to underwrite because there usually isn’t much in the way of collateral for the bank to wrap their arms around and often significantly less historical data on which to measure performance. 

 The SBA defines Small Business by industry type, and sets a revenue size and/or size by number of employees  that a company can be and yet still qualify as a small business for Federal Government programs.  If you review this chart, you will see clearly how they define Small Business and what your business size needs to be to qualify for SBA loans or government contracts.     

The US Senate Committee on Small Business and Entrepreneurship’s website says that

“America’s 27 million small businesses are the nation’s engine of growth, pumping almost a trillion dollars into the economy each year, creating two-thirds of all new jobs annually and making up more than half the U.S. workforce.  I invite you to explore this site and discover what we are doing to promote and protect our nation’s innovators and job creators.”

Today, President Obama gave a presentation describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

 Here, Here!!!!

Obama’s newest plan calls for increasing the size of SBA 7a and 504 loans to $5 Million.  It also calls for increasing the limits on micro-loans, although I noticed that he didn’t place any dollar value to that plan.  The plan will lower rates (the bank’s cost of funds) for small community banks and provide them with greater ability to access capital.  This last, presumably to be able to lend money in the communities in which they do business.

I won’t criticize the plan as more rhetoric, just yet.  However, in my book, the prior plans to stimulate small business lending, to be kind, were unsuccessful and I don’t hold out much hope for President Obama’s newest plan either. 

  1. The Financial Stability Plan reduced SBA fees and increased government guarantees to 90%.  It also said that the Treasury would buy $15 Billion dollars in SBA loans that were newly issued by the banks.  But the $15 Billion came from TARP money and they couldn’t find an intermediary to involve themselves in the transaction for fear that they would then be subject to the the government’s new restrictions on salaries and bonuses.
  2. The ARC program has been an unmitigated failure.  While it certainly would help many of the small “small businesses” weather this economic crisis, its hard to find a bank that is participating in the program.  Most of them are “big” banks who simply don’t want to allocate any of their resources to the administration required on these credits.  They can take, but they find it hard to give some back.
  3. The TALF program, designed to jumpstart the securitization market which is the engine behind bank lending, provided financing to buy credit card, auto loans, student loans, commercial real estate loans, equipment loans and yes, SBA loans off the balance sheets of the banks.  $21 Billion were credit cards, $10 Billion were auto loans and a mere $580 Million were SBA loans.

I believe that part of the problem lies in how Small Business is defined.  There are some interesting statistics out by the Small Business Administration, Office of Advocacy, based on data provided by the US Census Bureau.  and a chart depicting how small business is segmented into 25 class sizes, by number of employees.  This does not include the other 21 million non-employer firms. 

 The chart that breaks out the 25 class sizes is from 2006.  I’d love to see the SBA present some updated information.  Additionally, you need to examine it quite carefully, for in its very presentation, it is deceptive. 

 Here’s my summary, which excludes the 21 million non-employer firms and farm workers.

 5.3 million firms employ under 20 people each, and in total they employ 21 million people.   Annual payroll for this group was $726 Billion.

 406,464 firms employ between 20 and 49 people each, and in total they emply 12 million people.  Annual payroll for this group was $420 Billion.

 129,401 firms employ 50 to 99 people each, and in total they employ 9 million people. Annual Payroll for this group was $321 Billion.

 99,534 firms employ 100-999 people each, and in total they employ 24 million people.  This segment had annual payroll of $906 Billion.

 9097  firms employ over 1000 people and in total they employ  over 53 milion people with annual payroll of $2.4 Trillion dollars.  More than half of that is from companies that employ over 5,000 people. 

 From where I am sitting, our government needs to decide where this country and our economy will get the best bang for our buck.  It is the truly small business owner, the one that employ less than 20 people that will make a difference.  There are over FIVE MILLION of these firms across America.  If only one quarter of them are each able to employ one additional employee that would create 1.3 million new jobs.  These folks have an average salary of $34,000.  The heart of mainstream America.

Conversely,  the 9097 firms that employ over 1000 people would each need to hire an additional 142 people to have the same impact on employment across America.  And it is this size company that seems to be producing the greatest number of cross-the-board job losses so devastating to our economic recovery.

I’m not a statistician.  There are better people than me qualified to evaluate these numbers.  But when I hear President Obama  speak about increasing the size of SBA 7a and 504 loans from $2 Million to $5 Million, it makes me wonder exactly how HE defines Small Business and if there is any hope for economic recovery.

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Anonymous Banker asks you to write your Congressional Leaders in Support of the Federal Reserve Transparency Act – HR 1207

October 18th, 2009

In July I wrote to the Federal Reserve Bank of New York and asked them which banks divested themselves of $31 billion dollars of toxic credit card and auto loans through the TALF program. After all, if my tax dollars will ultimately be used to offset losses from these portfolios financed on a non-recourse basis by the FRBNY,  then surely I must have the right to know who’s creating them and who’s selling them.

Not so…..

Reply from TALF@NY.FRB.ORG (cut and paste – actual response)
Thank you for your inquiry. This information is not publically available. We do not disclose specific borrowers of any 13.3 loans.

If ever there was a time for the people of this country to band together in support of legislation, this is it. Please  write your Congressional Leaders (links provided here on AB blogsite). Let them know that if they are representing YOU, then they need to support HR 1207

Original Message from Anonymous Banker to FRBNY
07/22/2009 10:28 PM
To TALF@ny.frb.org
Subject:  Questions on TALF

I’ve been following TALF and I’ve noticed that there is no information on which financial institutions are selling the assets, only the cumulative total of assets purchased under the program.  I would like a breakdown of TALF assets sold by financial institution and then by asset class.  Please let me know what I need to do to obtain this information.

Please take a moment to watch this You Tube Video

Services Subcommittee on Oversight and Investigations hearing of May 5, 2009.
Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

and read this Article on Bloomberg

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Anonymous Banker: Please join me and Congressman Alan Grayson in Taking on the Fed

October 13th, 2009

I know I’ve been harping on  the TALF program which  is divesting banks of toxic credit card and autoloans.  TALF was supposed to get credit flowing  by breathing life into the securitization market for bank loans. Our country’s economic system became dependent on the securitization process to manage the flow of credit.  Securitization translates into banks initiating  loans, then packaging them together and selling them off through a product called Asset Backed Securities (ABS). 

The ABS’s are purchased by investors such as insurance companies, mutual funds and pension plans.  Ultimately, we, as individuals are the purchasers through these other investors.

If you were going to buy a pool of assets, and in this case I focus on credit card and auto loans, what level of due diligence would you expect the bank to perform in evaluating these loans?  Most banks today have a pre-programmed “scoring” system.  It puts significant weight on the credit score of the borrower. In large part, this scoring process is governed by Regulation B, the Equal  Credit Opportunity Act.

During the years of sub-prime mortgage lending, what the banking industry did was grant loans on what was called “stated income”.  The borrower simply “told” the bank what they earned and the bank simply took their word for it.  Today, we are calling these loans “liar loans”.  The banks failed to apply even the most basic of credit underwriting processes to these loans:  income verification.   Banks simply stopped caring because they knew they would be divesting themselves of these loans when they sold them to Fanny Mae and Freddie Mac.  We all know how that turned out.

You’d think we would have learned our lesson.  But we have NOT!!

Go into a bank today and apply for a credit card or go into a car dealership and apply for an auto loan.  All you need is a credit score over 680 and you are likely to be approved.  You will be asked for your basic information:  Name, address, social security number, phone number, date of birth, etc. 

Then you will be asked to “state your household income” and if it’s a business credit card you will be asked to “state your annual revenue”.   The bank does not verify this information.  They ask for no tax returns, they ask for no pay stubs.  They ask for NOTHING!! 

In the August 18, 2009 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, it states:

What types of non-mortgage receivables are TALF eligible?

Auto-related receivables will include retail loans and leases relating to cars….

Eligible credit card receivables will include both consumer and corporate credit…

How are subprime versus prime defined for auto loan, auto lease, and credit card ABS?

Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus.

Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.

Consider this:  Small Business working capital lines of credit issued by banks cannot be sold through TALF.   And early on in this financial crisis, the banking industry systematically cancelled credit lines across the nation to the small business community.  No warning.  They simply mailed the customer a letter stating that their credit line had been cancelled.  These decisions were not based on any repayment history and point-in-fact, many of these borrowers never missed a payment.  The banks decision was based primarily on the credit score they pulled.  If the score was less than 720, the line was cut.   This was the banks way of divesting itself of risk on these lines.

These lines, over at least the last five years, were granted to businesses without the banks verifying any financial information on the companies or the owners that personally guarantee these loans.  Lines of $5000 to $100,000 were the most affected.  The banks wrote to the customers and said they could reapply, if and only if they submitted current financial information to the bank.  The reconsiderations were done on a case by case basis.  Today, all new credit applications to small businesses require tax returns, both personal and business, for proof of revenue and proof of income.  Thank goodness!

Over the last year, over $21 Billion dollars in credit cards and over $10 Billion dollars in auto loans have been sold by the banks through the TALF program.  And these loans were ALL granted without any form of income verification.  Yet the amounts are the same  ($5000 to $50,000) as those of the working capital lines which are held to a much different credit underwriting standard.

Our bank regulators, all of them, have put in place regulations regarding safety and soundness in lending.   The foundation of these regulations come from  the Federal Deposit Insurance Corporation Act of 1931.   Included in these regulations are guidelines on lending which speaks to loan documentation and credit underwriting.  The regulations state:

C.  Loan documentation. An institution should establish and maintain loan documentation practices that:

1.  Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;

2.  Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;

D.  Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:

1.  Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;

2.  Consider the nature of the markets in which loans will be made;

3.  Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;

Here is  the thorn that pricks me each and every day as I witness the banks granting credit cards and auto loans to so many borrowers that have no hope of ever repaying this debt and to those that continue to incorrectly state their level of income.  This  interagency regulation governing safety and soundness does NOT state that the banks don’t have to apply the basic rules in lending  if they are going to sell off the loans through TALF and stick the taxpayer with the risk.   Yet, in the face of this regulation, which is supposed to be enforced by our bank regulatory agencies:  FDIC, OTS, OCC, and FRB, there comes along a program, TALF, which ENCOURAGES the banks to violate the most basic directive for safety and soundness:  income verification.

And the banks flaunt this behavior in their Regulating Agency’s  face.  With one hand, banks pull back credit to the small business community, because these loans must  continue to be carried on the banks books.   Banks are  now (thank goodness!) requiring tax returns for all business loans.  They generally refuse to lend to a business whose owners have a  credit score of under 720.  Some banks even set different underwriting criteria for “customers” and for “non-customers”.  Chase Bank, for example defines a business customer as one who banks with them for more than six months and maintains average deposit balances in excess of $5000.  Their approval rate for non-customer loans is a mere fraction of those for customer loans.  (I have to wonder if this special evaluation criteria would be supported by CRA which is designed to ensure that banks lend in the communities in which they do business and not just to the customers with whom they do business….. but that is for a different article).

On the other hand, compare the underwriting standards used by these same banks for credit card loans to businesses and consumers and consumer auto loans.  The amounts of the loans are, again, in the same range:  $5000 to $50,000.  Yet the banks refuse to apply ANY safety and soundness standards in underwriting these credits simply because …. they are going to absolve themselves of the risk when they sell them off through TALF.  Additionally, they are granting these loans to borrowers that have credit scores as low as 660 and 680, again, because they are going to divest themselves of the risk through TALF and those scores make the loans eligible for the TALF program.

What can you do about this? 

The New York Fed has  established a 24-hour telephone and internet-based hotline for reporting of fraudulent conduct or activity associated with the TALF.  The hotline can be reached at 1-866-976-TALF (8253) or www.TALFhotline.com.

I seriously have no personal vested interest in correcting this situation.  In fact, I probably risk losing my job each time I write one of these articles.  But I feel quite strongly about TALF’s  risks to us, as taxpayers, and to the future of our country’s economic recovery.  We cannot recover if we continue to allow the banks to make the same mistakes over and over.   

As citizens of the United States, we enjoy a democracy that provides us with a level of freedom not experienced elsewhere in the world. Written into the framework of our constitution is the idea that if we, as a people, demand a change, it must be made. The change may not be the will of Congress, but if the people call for a change in a law that they feel is unfair and detrimental to the health of our nation’s economic foundation, then it is incumbent upon our Congress to listen and to act.

I hope after reading this article you will take a moment to send your email to the TALF hotline, protesting both the use of our taxdollars to divest the banks of these new toxic credit cards and auto loans and demanding that our Regulators force the banks to apply reasonable verification of income for all forms of credit, not just the loans the banks will hold on their books.   I will also provide links on my website that will guide you through the process of writing to your Congressional leaders.  You may feel free to use this Anonymous Banking article to express your concerns.

When you write to the TALF police, please also ask them why, in this new age of so-called transparency, the TALF rules do not require the disclosure of the names of the banks that are selling these assets, how much each bank is selling and what form of credit they are selling.  I asked them.  They emailed me back and said TALF rules don’t require them to share this info.  Transparency?????

Let’s be heard on this issue. If you don’t do it for yourself, then please consider doing it for the security of our future generations.

Please share this article with your friends, family and business associates.

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Anonymous Banker: Banks are the primary barrier to Small Businesses Obtaining Government Contracts

October 10th, 2009

Why is it that Small Businesses have such difficulty obtaining government contracts? 

According to the US Committee on Small Business and Entrepreneurship,  “Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,”  at least, according to Senator Landrieu. 

To understand the true reasoning behind this phenomena, Congress and President Obama need to look closer at the banking industy.  The general consensus among banks is that they do not want to lend against government receivables.  When asked why, the answer is that “it’s hard to collect from the government”.  Imagine that!  The very banks that are willing to be bailed out by the government and that are willing to sell their toxic assets through government programs, don’t believe that a receivable from a government agency is worth the paper its written on.

Don’t take my word for it.    Ask any underwriter.  Banks HATE to lend against government receivables.  It’s practically a mantra in the small business banking industry.  While the customer isn’t told this,  underwriters verbally cite the banks unwillingness to lend against government contracts and receivables as a primary reason for not approving the loan when they are challenged on the declination by business account officers.   Perhaps the government needs an oversite committee that requires banks to report how many loans they turn down to borrowers that have government contracts or are seeking financing for new government contracts.  This would be a worthwhile project for the Small Business Administration.

Additionally, the typical small business that can actually make it through the paperwork and obtain the contract, usually needs to borrow significantly more than they have historically borrowed in the past.  Winning the contract usually means that they will need to obtain additional working capital financing  in order to support the cash flow requirements to meet their new contractual obligation.  Banks don’t lend on the come.  These small business owners need to have established past revenue, profitability and debt service capabilities in order to obtain new lines or line increases they’ll need to service  these contracts.   And SBA guidelines hold them to similar standards and therefore they are not a solution to this problem.

If the business has done work for the government in the past and those receivables are aged over 60 days, the banks discount them completely. 

Then there is the general lending guideline prohibiting loans where there is a concentration of receivables.  If a small business wins a government contract, it is likely that that the contract will create a concentration in revenue stream and receivables (those from the government)  as compared to  the rest of the borrower’s customer base.  Banks can easily use this as an excuse not to make the loan.

Another likely reason to be declined is the new “debt service coverage” analysis that each working capital line is now stringently subjected to.  While we all know that working capital loans are repaid from asset conversion:  Inventory into Cash or Receivables into Cash;  the banks now take the working capital line and hold it to full debt service coverage ratios typically calculated using a three year amortization.  This normally can’t exceed  1.5;  and that’s only if the banks are being generous.    The average company that wins a government bid cannot pass this test…. which I might add is being imposed on the banks by the regulators.

These small business could go to non-conventional sources of funding like accounts receivable financing companies.  AR Funding is a good example.  And while the business owner will have a better chance of getting the financing through these funding companies, the cost of funds are significantly higher than conventional bank financing.  Profit margins on government contracts are typically low and so non-conventional sources for working capital can translate into losses on the jobs taken.  No business can be expected to fullfill government contracts at a loss or on margins so thin the risk of taking the job is not justified. 

Perhaps during this crisis, the government could provide an interest subsidy written into the value of the contract, so that more small businesses can effectively compete for their share of these contracts.  That’s a direction I wouldn’t mind seeing my tax dollars go.

I am always disappointed to read government press releases like this one.  Our Congressional leaders are letting the banks get away with their refusal to meet the financing needs of the small business community which is a fundamental obligation of our banking industry.  Small Business doesn’t have a chance in hell of fighting the system from the bottom up, on a case by case basis.  The only way this will change is if our Regulators and Congress stop all their rhetoric and become small business advocates.   It is time that they hold the banks accountable for putting up barriers that stop our government from meeting their statutory goals in small business contract programs. 

  September 22, 2009  WASHINGTON – United States Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu, D-La., today held a roundtable focusing on ways the federal government can increase contracts awarded to small businesses by improving government contracting programs. In 2008 small businesses received $93.3 billion in federal contracts, an increase of almost $10 billion from 2007. However, these contracts made up only 21.5 percent of contracting dollars. The government’s statutory goal is to spend 23 percent of contracting dollars on small businesses.

The roundtable, “Small Business Contracting: Ensuring Opportunities for America’s Small Businesses,” discussed the challenges small businesses face in obtaining government contracts, including: contracting under the American Recovery and Reinvestment Act, contract bundling, size standards, and a lack of protections for sub-contractors.

“Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,” Senator Landrieu said. “We can do better. President Obama has pledged to help expand small business contracting by increasing public knowledge of federal contracting opportunities and I will continue to do the same. We all know that there is still much work to be done.”

“Federal contracts provide vital economic benefits for small business – yet, regrettably, the Federal government consistently fails to meet its goals for small businesses in general and service-disabled veteran-owned, women-owned, and HUBZone firms in particular,” said Ranking Member Snowe. “This is simply unacceptable, and the testimony from today’s witnesses offered specific and realistic solutions for increasing small business participation in Federal contracting and for the government to not only achieve the statutory small business goals, but to exceed them.”

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Anonymous Banker: The foundation of this Economic Crisis: The Community Reinvestment Act or the Regulators that enforce it?

October 4th, 2009

Several months back, I wrote an article:  Our Nation’s Ball-less Wonders in which I lambasted our Regulators for not enforcing Federal Reserve Regulation H  that governs safety and soundness in lending.  That regulation sets forth guidelines that banks must follow in evaluating mortgages.  I proposed that it was our Regulators’  failure to enforce these guidelines that caused our nation’s economic crisis.

Over the last months, as I listened to various news interviews on our economy, I kept hearing commentary on how the CRA, the Community Reinvestment Act, played a large role in this crisis.  For the most part, I discounted this as rhetoric.

Then, while clicking around various government sites, I accidentally came upon a “corrective action directive” put out by the Office of Thrift Supervision.  Reading this document brought my focus to bear down on CRA’s possible effect on the state of our economy.  Before I share my findings, I must first apologize to the now defunct Guaranty Bank of Austin, Texas.  This bank is the winner of my web-surfing lottery.

Follow me on this:

The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low-moderate income neighborhoods, consistent with safe and sound banking operations.  It was enacted by Congress in 1977.

It is a good Act that prevents banks from red-lining and discrimination.  It ensures that low-income communities will be afforded access to banking services, including loans.  The banks receive CRA ratings from their respective Regulatory agency:  FDIC, OTS, FRB and OCC If the bank receives a good report card, then the regulators support, for example, the bank’s applications to open or close branches or to merge with or acquire other financial institutions.  Conversely, if a bank receives a bad report card, they are prohibited from merging with or acquiring other banks.  Over the last fifteen years, with the birth of regional and national banks, getting a good CRA report became an ever-increasing priority within the banking industry as it was a key to their ability to expand through acquisition.

What the Regulating authorities fail to remember is that the Community Reinvestment Act was designed to ensure that low to moderate income neighborhoods, previously abandoned by most banking institutions, would have equal access to financial services.  But at CRA’s core, in each pronouncement of its rules and intent, it states that the bank’s practices must be “consistent with safe and sound banking operations”.

Reflecting on this, CRA was to-be to lending in the low to moderate income communities what the SBA is to Small Business Lending.  The SBA doesn’t allow banks to abandon all reasonable credit criteria.  Quite the contrary. They relax certain standards to make it easier for the small business owner to obtain financing, perhaps extending repayment terms or providing lower rates.  SBA borrowers still must be able to support their ability to repay these loans. 

Likewise, CRA standards, as I remember them, provided for lower down-payments (10% instead of the conventional 20%), lower rates and lower closing costs.  The borrower still needed to show their capacity to repay.  It was never intended to be,  by any stretch of the imagination of our dillusional regulators, a give-away program.  It was designed to help a lot of worthy, qualified low to moderate income people buy their first home.

In fact, the regulation itself  states,

“Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals, only if consistent with safe and sound operations.”

It was the banks greed that morphed this excellent law into the disaster that occurred over the last years.  Where were the regulators, the protectors of the public, in this equation?  It remains my humble opinion that our Regulators WERE INDEED our nation’s ball-less wonders.  They allowed the banks to take this perfectly sound and necessary program and bastardize it into a free-for-all by the greedy bankers.

Not only did our regulators fail to impose penalties on the banks that continually reduced all reasonable loan evaluation criteria in violation of Federal Reserve Regulation H, they praised them for it.

Take the CRA report, dated December 28, 2007 issued by the Office of Thrift Supervision for Guaranty Bank in Austin, Texas.   The first interesting observation is the disclaimer that appears on the first page of the report: 

“The rating assigned to this institution does not represent an analysis, conclusion, or opinion of the federal financial supervisory agency concerning the safety and soundness of this financial institution.”

Come ON!!!!!  Our regulator’s first priorty is to ensure the safety and soundness of our financial system.  They can’t be out there writing reports on CRA compliance that issue disclaimers for themselves.  How utterly ridiculous, not to mention dangerous.

In this CRA report, Guaranty Bank received the HIGHEST CRA rating.  Overall rating:  Outstanding.  Lending test rating:  Outstanding.  Remember, this report covered the time period from January 1, 2005 to June 30, 2007 and was released on December 27, 2007.

We all know the financial world has changed dramatically.  I just had to know how Guaranty Bank fared through this crisis after receiving such glowing CRA reports from the Office of Thrift Supervision.  In August 2009, the OTS issued the sad-but-true “prompt corrective action directive”.  Guaranty Bank was failing.  They were prohibited from making most loans.  One exception was that they could originate Qualifying Mortage loans underwritten in accordance with criteria established for residential loans eligible for purchase by the FHLMC or the FNMA.  But they were prohibited from participating in any Sub-prime Lending Program.

This directive equates to closing the barn door after the horse already ran off.  I understand the need for the regulators to have taken these steps.  After all, this institution was FDIC insured and was clearly at risk.  Still, it is my belief that, today, the regulators are being reactionary to the crisis they themselves created.  Instead of always remaining centered on reasonable core practices that ensure safety and soundness in lending, they’ve swung the pendulum so far in the opposite direction that the banks are unable or unwilling to meet the credit needs of ANY community, never mind low and moderate income communities.  It’ll be interesting to see the CRA ratings of the banks across our nation that cover the years 2008, 2009 and 2010.  I’ll be watching for these reports.

The ultimate fate of Guaranty Bank

“On Friday, August 21, 2009, Guaranty Bank, Austin, TX was closed by the Office of  Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver.

All deposit accounts, excluding certain brokered deposits, have been transferred to BBVA Compass, Birmingham, AL (”assuming institution”). 

I had to look further.  I could not help myself.  Interestingly, Compass Bank received a CRA rating of  “Satisfactory” from their regulator, the Federal Reserve Board.  This was one notch below the “Outstanding” rating received by the now defunct Guaranty Bank.

I’ll be doing more homework on this new theory I have:  Perhaps the banks that received lower CRA ratings remain in a position to acquire the failing bank institutions that received the highest CRA ratings.  Perhaps our regulators created a crisis that can be directly measured, even anticipated, by reviewing the CRA reports they themselves produced.  The higher the CRA rating, the more likely the bank is to fail.  The lower the CRA rating, the more opportunity a bank will have today of obtaining approval to merge and acquire other banks. 

This would be a situation that is in direct conflict with what CRA intended.  And it’s all the regulators’  fault!!!  The ball-less wonders!

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Anonymous Banker: Office of Thrift Supervision says SOME crooks can remain as bankers

October 1st, 2009

I was browsing through the  the Federal Register, to see what new rules were being implemented by our Regulators, when I came across an extension of an existing  rule that just baffled my mind. 

Apparently, the Office of Thrift Supervision (OTS) has a rule in place that “prohibits persons who have been convicted of certain criminal offenses or who have agreed to enter into a pre-trial diversion or similar program in connection with a prosecution for such criminal offenses from occupying various positions with a savings and loan holding company.”  The foundation of this rule is in The Federal Deposit Insurance Act, so this rule is in place as a direct result of a law that governs of our financial institutions.

Sounds like an excellent rule if our Regulators are to ensure the safety and soundness of our financial institutions.  After all, who wants to see banks run by a bunch of crooks?  (are you smiling yet?)

What I found baffling, is the fact that the update to the rule was about how and when our Regulators, like the Office of Thrift Supervision, could issue a directive…… EXEMPTING someone from this rule so that they can continue in the employment of the bank.

Now why in heavens name would any Regulator want to do that?  I throw this question out to the blogging universe and encourage everyone to call over to Donna Deale, Director, Holding Companies and International Activities, Examinations, Supervision and Consumer Protection at  202-906-7488 or to Marvin Shaw, Senior Attorney, Regulations and Legislation Division at 202-906-6639 who are listed in the Federal Register as those employees of the OTS that can answer this question.

By the way, this is not the first time the OTS extended their ability to exempt certain people from this rule.  According to the Federal Register, “This temporary exemption originally was scheduled to expire on September 5, 2007.  OTS has extended the expiration date several times, most recently to September 30, 2009.”  Their most recent action extends it again to September 30, 2010.

These questions beg to be asked and perhaps one or two of our esteemed journalists might want to place a phone call and pose the following questions:

  1. How many exemtions have been granted?
  2. Exactly who is the OTS protecting?  I, for one, want names.  I want names of the bank employees that were granted these exemptions and the positions they hold and the names of the banks they work for that are, by the way, FDIC insured Thrift Institutions.
  3. How long does the OTS expect to allow them to continue in their employment, despite the rule in effect that prohibits them from holding these positions?  Is the OTS planning on extending the exemption each year until someone, the media or perhaps a group of concerned citizens holds them accountable?
  4. Who is being paid off to champion these extensions?  (Do I go to far to imagine that this could actually happen?)

My final comment is this:  With the deterioration of confidence in our banking industry, in our Regulators and in our Government, does the OTS really believe that NOW is the time to extend this rule?

Perhaps this type of action is the perfect argument in favor of our administrations efforts to bring banks under one new single bank regulatory authority.  Perhaps, through that agency we will see some streamlining in the rules and the ways in which they are enforced throughout our financial market.  Perhaps a new Regulating Agency will actually enforce the very rules designed to protect the safety and soundness of our financial industry and will be less inclined to issue rules year after year that allow crooks to continue working for the banks.

One can only hope!

(As an aside, I would recommend that everyone browse through the Federal Register.  You’ll be amazed at what you’ll find and it will give you a much clearer understanding of  what is really happening)

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Anonymous Banker: More bank bailout? Less Credit for Small Business?

September 26th, 2009

FDIC press release dated September 24, addresses the sharp decline in the performance of   loan commitments of $20 Million or more.  These loan commitments are shared among US and Foreign bank organizations and non-banks such as securitization pools, hedge funds, insurance companies and pension funds.  For the layperson, a shared loan is one whose risk has been divided up among several institutions, each taking a smaller piece of the total loan commitment. 

I’ll let you read this yourself.  But here are some highlights:

  1. $2.9 TRILLION dollars in loans were reviewed.  Total borrowers:  5900
  2. There was a 72% increase in criticized loans, now  $642 Billion
  3. There was a 174% increase in classified loans:  $163 billion to $447 billion
  4. Special mention loans decreased from $210 billion to $195 billion
  5. Loans in non-accrual status soared from $22 billion to $172 billion
  6. Leveraged Finance Credits represented 40% of criticized loans:  $256 Billion
  7. Other Industy leaders?  Media and Telecom Industry: $112 Billion; Finance & Insurance:  $76 Billion; Real Estate & Construction:  $72 Billion
  8. FDIC Insured institutions have exposure to 24.2% of classified loans or $108 Billion, and 22.7% of non-accrual loans or $39 Billion.

This is not good news for bank capital requirements and therefore, not good news for small businesses that keep hoping and praying that the banks will start to improve  lending activities to their sector.  Simply put, if the banks are struggling with capital requirements, they simply will not loosen the purse strings anytime soon.

I’ve seen this several times in my career:  Corporate and investment banking runs amok and this results in Retail and Middle Market Banking taking the beating, right along with Retail and Middle Market banking customers.  Small and mid-size  businesses, along with consumers, will pay higher fees and higher rates, earn less in interest, and have less access to credit they depend on to run their businesses.  The banks will look to the small  business community to make up the losses created in their corporate and investment banking divisions.   30% interest rates on consumer and small business credit cards is a perfect example of this, especially when combined with banks PAYING interest on savings accounts at rates as low as .01% (Yes, that is one one-hundreth of 1%).

In the midst of these losses, Treasury Secretary Geithner proposed to the House Financial Services Committee that bank capital requirements be increased.  While I’m all for that proposal, and  I agree with most of his assessments, the immediate effect does not bode well for the small business community.  In the face of increased loan losses, Geithner’s proposal for higher capital requirements will  only increase the banking industry’s unwillingness to lend to the small business community. 

How then does Secretary Geithner expect to resolve this dilemma?  Well, that brings me to my favorite topic:  TALF.  Since April 7, 2009  the TALF program  laundered $46 Billion dollars in loans off of banks’ balance sheets and virtually guaranteed these loans with our tax dollars.  For the record, $21 Billion were credit cards loans, $10 Billion were auto loans, $4 Billion were Commercial Mortgages and a mere $580 MILLION were SBA loans.  As an aside, despite the new policy of transparency in these programs, I have been unable to obtain information which reveals which banks are selling these assets and participating in TALF.  This means I can’t tell which banks we are bailing out the most. I’ve been told by the FRBNY that this information is simply not available to the public.  Transparency, my tush!

Since the rules of the TALF program keep changing, it would not surprise me one bit if TALF morphed into allowing these Shared National Credits in on the deal.  First it was to be AAA rated loan portfolios, then they added sub-prime credit card and sub-prime auto loans and then they added commercial mortgages. Treasury Secretary Geithner indicated that he expected $1 TRILLION dollars in loans to be processed through TALF.   Perhaps the next change in TALF will allow the banks to divest themselves of  the $147 Billion plus dollars in toxic Shared National Credits, held by FDIC insured institutions.  

That move would certainly help improve the banks’ capital requirements.  But where would it leave the small business owner?   Without some form of strong government intervention, the banks will not move back into lending in the small business market anytime soon.  A move, I might add, that every government leader agrees is vital to our economic recovery.  Merely asking the banks to increase lending functions to the small business community, just isn’t working.    

I, for one, will hold Secretary Geithner to his closing remarks:  

“We must act to correct the regulatory problems that have left our financial system so fragile and prone to further trouble that Americans come to distrust it as a reliable repository for their savings and a stable source of the credit they need to conduct their lives and build their businesses.”

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Anonymous Banker Weighs in on the FDIC’s Advisory Committee on Community Banking

September 24th, 2009

The Federal Deposit Insurance Corp. has a new advisory committee on community banking. Except for one professor, it is made up entirely of Presidents and CEOs of community banks. A small problem with this set-up is that there should be one or two regional or national bank representatives to give perspective to the discussions. But what strikes me even more, is that there are no people on the committee whose job it is to actually go out and meet business owners, kick the boxes, and feel their pain. There should be folks on the committee that mix and mingle with the businesses they serve, directly, and that actually perform the credit analysis.  The committee needs underwriters who can see and comment on where the industry is falling short in meeting the borrowing needs of the small business community. But there aren’t any.

There was an opportunity here that I don’t think the FDIC capitalized on (no pun intended!) as well as they could have. Instead, given the mix, the agenda for this committe will not be improving lending in the markets these community banks serve.  Rather, it will be on improving these banks’ balance sheets and positioning these banks to take advantage of some of the bailout opportunities and improve their share prices.

What should an FDIC advisory committee on community banking be dealing with?. How about the two-faced message regulators are sending to the banking industry, with one group yelling “lend, lend, lend” while the second group holds the banks’ working capital lines to an ever higher debt service coverage ratio and requires them to reserve for loan losses before the approval signature is dry on the offering sheet–thus making it very difficult indeed for them to “lend, lend, lend”. The lenders are getting their direction from the  very folks that are serving on this committee. Yet its very composition limits the type of dialogue so desperately needed within the group, and between the group and the regulators.   As it stands, I am not confident that this group will have any impact on the banking industry’s ability to meet its fundamental role as lender to the small business communities they serve.

I hope I am wrong. I always seem to hope I am wrong.

 

Cross-posted in Bizbox:  The Problem With the FDIC’s New Small Bank Committee

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Anonymous Banker Takes On Congress and the Banks

September 16th, 2009

It’s been almost one year since I wrote to the New York Times’s Joe Nocera and predicted that the Worst Is Yet To Come, and specifically pointed to the economic risks posed by the credit card industry. I’m saddened to say how accurate that prediction was. The banks did, in fact, come back to the Federal Reserve with their hats in their hands, and the Fed duly assumed their exposure from sub-prime credit card debt, disburdening the banks on behalf of the taxpayer. This program, among others, is considered by many to be the government intervention that saved the economy.

In truth, without the bailout of Fannie Mae and Freddie Mac, and without the TARP funds handed out to recapitalize many of the leading banks in this nation, and without the increase in FDIC insurance and the Money Market Mutual Fund Stabilization Program, our entire financial system and the very core of our economy would have been shattered. I do not dispute the necessity of these programs.

However, to declare victory–to even allude to the hope that, as Treasury Secretary Geithner stated, “We are back from the edge of the abyss”–is a tremendous miscalculation of what our future holds, and more importantly how the future is viewed by the people and small business owners of this nation. For above all confidence is the necessary ingredient, and it simply does not exist out here in the real world. Without a feeling of hope in our future, consumer spending will continue to lag, putting a tremendous strain on our nation’s small business community–on which there has been little, or dare I say, no focus by our government leaders.

While there is much rhetoric around programs to promote small-business lending, know this: the granting of SBA loans is in the hands of the very banks that have tightened credit until the small business owner cannot even breathe. The SBA has lending guidelines that the banks are ostensibly supposed to follow. But in the institution where I am employed, whenever I submit an SBA loan, it is declined. And when I inquire as to why it has been declined, I am given reasons that the loan does not qualify under the “bank’s” lending criteria. When I ask why they are holding the credit to the bank’s criteria and not to the SBA criteria (which is somewhat less restrictive), I am consistently told that the bank has a right to hold the credit to a higher standard than that imposed by the SBA. The banks that are given the authority to grant these loans have simply refused to apply the less stringent SBA criteria to the underwriting process!

Additionally, Congress would do well to implement regulations protecting business owners from deceptive credit card practices, deceptive merchant service credit card practices, usurous credit card rate increases, the passing of FDIC insurance premiums onto business banking accounts, the cancellation of credit lines when business borrowers have not missed any payments, and the increase in bank fees across the board for services such as wire transfers, checkbooks and ACH services.

Back to the banks. Of course they need to tighten underwriting standards. But most bankers state that the key reasons for making less loans is twofold: (1) lower demand for loans because borrowing needs declined, and (2) deteriorating credit quality of applicants.

Well, golly-gee-wiz! If the banks measure credit quality, as they do, by analyzing revenue and income trends, then clearly few applicants will qualify for loans during this economic depression! But I see business owners taking extreme steps to reduce expenses, commensurate with reduced revenues, and demonstrating their ability to manage their companies through this crisis. They still need funding, though, and there is simply no place for them to go since the banks have abandoned their fundamental obligation as lenders.

The lack of available capital to support our nation’s businesses has a direct impact on unemployment: if the business owner does not have confidence in his ability to obtain reasonable levels of financing, there will be no new job creations, and worse, an increase in unemployment.

Do I really need to spell out the domino effect that invariably ensues when that happens? Just one reason why I predict that unless there is a reasonable focus on small business lending, we will continue to totter on the edge of the abyss. The SBA has been known to lend directly in emergency situations, such as 9/11 and Hurricane Katrina. Is this economic crisis, combined with the banking industry’s general reticence to lend, perceived as less of a crisis than these events? Personally, I am not confident that our government will enact the necessary legislation to stimulate lending. I hope my prediction in this regard is less accurate than the one I made last November on the credit card bailout.

Reprinted from Bizbox

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Anonymous Banker says please PIN your debit card purchases

September 12th, 2009

I can’t even watch a golf match without getting pissed off at the banks.  Chase’s Sapphire card and their television commercials, run during the FedEx Golf  Tournament, are a perfect example of how the banking industry systematically screws over the small business owner.  This ad is Chase’s attempt at brainwashing the consumer into using their debit card in a way this is most costly to the business owner and most profitable to the bank.

First, Chase issues a “reward” debit card to every new consumer or business opening a checking account.  In fact, when you open a business or personal checking account with Chase, you can’t even “opt-out” of getting a  debit card because Chase’s computer system won’t let the banker open the account without issuing a rewards debit card.  This should be no surprise since Chase is one of the largest providers of merchant services to the business community.  And debit cards with reward points provide higher returns to the bank and higher costs to the business merchant that accepts the card.

Second,  Chase trains their consumer customers to use their debit card as a credit card.  Their mantra is “Don’t PIN the card”.  In fact, Chase Bank waives basic personal and business checking  monthly maintenance service fees if the account owner uses their debit card five times each month, but only if they don’t PIN the card.  Don’t PIN the card, don’t PIN the card, don’t pin the card….. says Chase Bank!

Chase has all types of rewards programs.  Some are free to the cardholder.  Upgrades can cost the consumer $25 to $65 a year.  And here are the terms, from the Chase website, defining how you earn your rewards:

 ”Qualifying purchases” include all Debit Card purchases made without using a Personal Identification Number (PIN).  “Non-PIN” purchases include purchases you sign for, Internet purchases, phone or mail-order purchases, small dollar purchases that don’t require a signature, bill payment (where billers process the transactions as a credit card), and contractless purchases (purchases made by holding your blink (sm) – enabled card to a secure reader.)  Purchases authorized with your PIN and ATM transactions do not earn points.  For a full description of Qualifying purchases, please see the program terms and conditions.

With all the different rewards programs and Merchant service rates, it’s hard to be precise.  But even estimating on the side of the bank, the consumer would have to spend at least $1875 to earn a $15 gift card.  Those same purchases generate merchant service costs to the small business owner of about $30 to $48.  The profit goes to the bank.

When you, the consumer, think about the rewards you get off your debit card (if you remember to actually cash in your rewards), consider this:  All those extra fees that are paid to the bank by the store owner are really paid by YOU in the form of higher prices.  You lose and the small business owner loses.  The only one that gains is the bank.

Consider the cost of prime time TV advertising and how costly this is to the bank.  And Chase Bank uses this air-time to brainwash the consumer into developing a habit specifically designed to screw over the small business owner.  Chase is trying to instill buying habits that are very costly to YOU.  If your purchase is more than $15, then please, PIN THE CARD!!!  Perhaps then, Chase won’t run these ads while I’m trying to relax and watch a good golf match and I can forget, for that brief span of time, just how despicable the banking industry really is.

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Anonymous Banker’s Call to Action for Small Business Owners

September 7th, 2009

I’ve been a small business advocate for thirty years.  About a year ago, I brought up the Perc-up.Org  site in an attempt to gather people in support of needed changes in credit card laws.  My site didn’t have much of an impact.  But in the end, credit card reform DID get enacted.

When our congressional leaders passed the regulations inhibiting banks from deceptive credit card practices, they abandoned the Small Business Owner.  In fact, despite all their rhetoric, nothing has been done to provide any assistance to this group that drives our nation’s economy.  SBA plans, be damned.  They reach so few and are handed out by the very banks that have turned their backs on Small Business customers.

The Perc-up site encouraged the people of this nation to write to their Congressional Leaders and provided the links to do so.  I personally wrote several letters to various Congressional leaders and received back boiler-plate emails, completely unresponsive to my queries.

Therefore, I recommend that we all attack this from another direction.  Call your Congressman’s office and request a face to face meeting to discuss your issues.  Bring your credit card statements with you.  Make them take note of the financial hardship you are enduring due to the banks unrelenting increases in credit card rates.  Vocalize your support for new legislation that will set a national usury rate.

Each day I encounter consumers and business owners that had been able to keep current on their revolving debt.  But with each rate increase in the midst of declining revenues, brought about by this economic crisis CREATED BY THE BANKING INDUSTRY, more and more consumers and business owners are falling behind.  The rate increases are a self-fullfilling prophesy.  The banks say they need an increase in rates to help offset the increase in credit card losses.  I say, the increase in rates is CAUSING a good portion of the credit card losses.  Yes, the banks need to recapitalize; for without a banking system, this country’s economy is doomed.  But we have supported every plan to help banks recapitalize as reflected in our nation’s debt which ultimately translates into debt that each American must bear.  In the matter of credit card interest rates, the banking industy must relent and they will never do so on their own.

The Perc-up site was meant to be inspiring.  I wanted to give the people of this nation a sense that if we all worked together towards a common goal that we COULD make a difference.  Our government is counting on our complacency on this issue.  Let’s show them that they are wrong.  Take some action -  ANY ACTION.  Call your congressional leader’s office, set up a meeting, send an email, send an email every day, mail them a letter with copies of your credit card statements (black out your account number please), and if you are a group with perhaps a Ralph Nader’s influence: organize a March on Washington in support of usury laws.

We all must DO something.  My Mom used to say:  If you don’t vote, you lose your right to complain.  (Actually, she was more colorful in her words).        

I say:  If you take no action, then you lose your right to complain.

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Anonymous Banker weighs in on Money Market Funds – Risk and Reward

September 3rd, 2009

I still follow Joe Nocera’s column and I feel the need to respond to his most recent article, It’s Time to Admit That Money Funds Involve Risk.  The difference between having my responses on his site and having them on mine….. besides reaching about fourteen million readers,  is that now I get to write as many words as I think it takes to tell the whole story.

 

Joe needs to recollect Tim Geithner’s response to the question: What do the banks owe this nation?  The government guarantee that the money funds would not “break the buck” is a perfect example of government intervention to restore confidence and prevent disaster, all at no real or apparent cost to the taxpayer.

 

It is not the “average Joe” who has their money in money market funds.  These investors are substantially more savvy than the average American that opens a savings or money market account with a bank.  And to imply that they are led to believe that there is safety in the Money Market Fund product is ridiculous.  These investors knew better…. and know better.

 

So here’s my take on Money Market Funds.

 

First, there are some banking rules that you need to know.  Banks, by federal law cannot pay interest on checking accounts.  Not surprisingly, this is one federal regulation that the banks don’t violate.  With the exception of NOW accounts that have always paid a miniscule amount of interest to the individual, sole proprietor and not-for-profit business, banks reap the rewards and profits that come from checking accounts. They pay you nothing and they earn a lot on them by lending it back to you through credit cards at 30% interest.

 

Banks also have to reserve ten percent of all checking account deposits.  That means that they have to keep those funds on hand, ready to pay the checks you write.   When they pay interest on an account, like a savings or money market, they have to limit the number of transactions on those accounts to six per month.  So the average individual and business owner cannot earn interest on their liquid bank checking accounts and are severely limited in the number of checks they can write on their bank money market account.  Therein lies the difference between a checking account, a bank Money Market Account and a Money Market Fund.

 

The first Money Market Funds popped up in brokerage houses.  If you had your  account with say, Merrill Lynch, you could open a Money Market Fund and earn market rates AND write as many checks as you wanted.  As a banker, I’ve been competing with this account for twenty years.  So imagine this:  In 2006 a liquid Money Market Fund was paying about 4.25%.  A bank money market about 3%.  And a bank checking account …. Zero.  

 

If you are a savvy investor and if you don’t need the services of the bank to take your deposits, cash your payroll and petty cash checks, provide you with coin and currency, etc. you opened your “business operating account” (alias Money Market Fund) with a brokerage firm and earned interest.  If you needed these other services, then you opened a small checking account with the bank and kept the rest of the funds in the Money Market Fund….earning interest.

 

 

It’s important to note that the Fund Manager or Broker, receives fees for managing these portfolios of investments, typically between 1% and 1.5%.  The investor’s return is AFTER these fees are deducted. 

In 1999, with the repeal of the Glass-Steagall Act, the playing field was leveled.  Banks bought investment firms or partnered with outside investment firms and began to offer these Money Market Funds in their retail stores and business banking centers. 

 

Still, they are not products that are well advertised.  The banks want employees to bring in accounts as checking accounts that pay no interest.  Only  if we are unable to win the business by offering conventional bank products, are we then allowed to ‘sell’ these Money Market Funds to our customers.  The idea behind this is that the bank makes more money by using the depositors checking account funds than they make on the management fees on the Money Funds.  Has anyone in this country ever received a mailing from their bank recommending that they convert their checking to a Money Market Fund.  Never!

 

Along with this product line comes pages of disclosures and a Prospectus.  Still, it baffles my mind how the SEC can allow this product to be sold in the retail bank by unlicensed folks like myself.  But they were, and they are.  Our regulators once again turn their back on the laws they are obliged to enforce.  But I digress.  

 

The consumer or business owner, selecting this product receives and signs all sorts of documents with the following types of disclosures:

 

Risk Factors for all Mutual Funds

Please remember that an investment in a mutual fund is:

            Not guaranteed to achieve its investment goal

            Not a deposit with a bank

            Not insured, endorsed or guaranteed by the FDIC or any government agency

            Subject to investment risk

 

Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds.

 

What part of this can be misinterpreted?

 

 

 

The Dollars and Sense of it:

Let’s take the most conservative of these Money Funds:  The Treasury Money Market Fund and look at the return to the investor that kept an average of $50,000 in balances.   The average ANNUAL RETURN  from 1994-1998 was 4.74%,  and from 1999 to 2003 it was 2.76%.   I can’t give more updated numbers because I’m taking them from a prospectus released in 2004.  Still, these levels of returns remained through at least 2006. 

 

This Money Market Fund investor earned $18,750 on their $50,000 liquid account over ten years, used the account in lieu of a bank checking account and were able to write an unlimited number of checks. The same bank depositor that had a checking account earned …. Zero.

 

If the fund breaks the dollar and drops even as low as  $.90 per share, they would  lose $5000 of their $50,000 investment and are still ahead $13,750.  They had all the disclosures and were  a type of investor that knew the rules and the risks. 

 

On a larger scale, if these funds hold 3.5 Trillion dollars in assets, under management, the management fees which average at least 1%  provide a minimum of THIRTY BILLION dollars a year in income to the Wall Street Fund Managers.  With these types of returns enjoyed these many past years, perhaps they should be the ones to step up to the plate and provide the guarantee.

 

I have a hard time feeling sorry for these folks.  Nonetheless, I still have to agree with the government’s decision to temporarily provide a guarantee against “breaking the buck” and return confidence to the people.  But now, more than ever, these investors have been warned and going forward they must evaluate their risk and act accordingly.

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Anonymous Banker’s Fantasy on how to lower credit card rates

August 27th, 2009

I don’t watch much TV, but a friend of mine thought I’d enjoy the show Boston Legal which is now in re-runs.  He taped a few episodes to whet my whistle.  It is soapy and at times ridiculous but incredibly fun.  And, in each episode there is a message on some social or political issue that is so remarkably well thought out and well delivered as to give me pause.  I have to admit that I’m now addicted to the show and have purchased five years of episodes.

 

In 2005, there was an episode called Legal Deficits in which attorney, Alan Shore played by James Spader goes head to head with legal council of a bank credit card company.  Shore’s secretary found herself in debt to the tune of $50,000, a direct result of her bank raising her rate to 30%.  She simply could no longer remain current on her payments.  Alan agreed to negotiate a settlement with the credit card company and if unsuccessful, was prepared to bring suit. 

 

It was my intent to post a copy of this show’s transcript  here.  But I discovered upon re-reading it that it was James Spader’s delivery that brought the words to life.  I encourage you all to take advantage of your tax dollars at work and visit your local library that is sure to have all seasons available on DVD.  Or buy them.  They will give you hours of pleasure, some of it mindless but always with that touch of thought-provoking wisdom artfully mixed in.

 

This episode originally aired in 2005.  It speaks on the issues of zero percent teaser rates, bait and switch tactics,  30% interest rates, the lack of usury laws, universal default, the lack of OCC regulatory enforcement, the power of credit card lobbyists and Congresses bowing to their every whim, the credit card industry’s nickname for credit card customers who pay off their debt (they are called deadbeats because the credit card company doesn’t make any money off them), the targeting of people who they know won’t be able to pay,  the ‘too big to sue’ power of the banks and credit card companies, the deceptiveness of the credit card contract, and the analogy of credit card companies and heroin pushers.  It speaks to seven million families that filed for bankruptcy in five years and Congress changing the bankruptcy laws to make it almost impossible for people to discharge credit card debt.

 

This spot, of course, had a happy ending and the secretary’s debt was discharged.  Well, it is a TV show and Alan Spader never loses.  So I forgive the unreality.

 

But imagine this.  The show aired in 2005 and it was not until 2009 that Congress finally passed credit card reform.  And even then, it doesn’t go into effect until 2010.  And today the banks are taking mighty advantage of this time lapse and raising every interest rate they can to 25% to 30%.  Each day, more and more Americans find themselves unable to pay their credit card bills because of this systematic rise in rates.  So it should not be surprising that credit card default rates have risen above the 20% mark for the first time and are expected to go even higher as our economic crisis grips our country and unemployment rises.

 

Clearly, James Spader, in the role of Alan Shore, is not going to appear before Congress and argue in favor of a national usury law, win and get those rates down.  So what can be done?  What if we, as a people came together and refused to make ANY credit card payments until the banks either reduced all credit card rates to some reasonable level or Congress enacted a federal usury limit.   

 

Fantasy, you bet!  But what a fun thought, eh? 

 

 

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