Archive for January, 2009

TO FDIC: Issue Cease and Desist orders on dividends and bonuses

Saturday, January 31st, 2009

I read Joe Nocera’s column and recent blog on Wall Street bonuses and quite honestly, I was distressed by his headline titles, “It’s not the bonuses, it’s the principal” and “Bankers gone Bonkers”.   For me, it minimizes the severity of the crime.  There’s an awful lot of whining going on about this issue, but so far, except for verbal “spankings” not much is being done to change it.


There is something truly unseemly about seeing Wall Street executives taking down millions after driving the economy over the cliff. Which is why President Obama called them on their behavior this week in a remarkable scolding.


Bonuses and dividends should not be allowed.  The banks need to recapitalize.  They need to retain earnings.  When a bank makes a loan to a business,  they often write capital requirements into their loan documentation.  These covenants prohibit companies from distributing income, in the form of dividends or bonuses or salaries,  when that income is NEEDED to sustain the business’s operations and protect the bank’s loan.


Well, the people of this country have LENT our tax dollars to these banks and investment companies.  And we should restrict, as part of that loan agreement, the distribution of cash through bonuses and stock dividends, by these institutions.



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Regulators – Our nation’s ball-less wonders!

Wednesday, 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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Percolate-Up Theory of Economics: Join our initiative and be heard

Tuesday, January 20th, 2009
Read More about PERC-UP

Read More about PERC-UP is sponsoring a Citizens’ initiative to urge our Congressional leaders to enact immediate legislation that will enable the people to rehabilitate our economy:  One Household at a Time  →  One Community at a Time    One State at a Time .   Ultimately, the benefits will PERCOLATE-UP throughout our country.

More than two-thirds of our country’s economic activity comes from consumer spending.  It follows, then, that relief provided to the people of this country will percolate up through our economy and help lead us out of this national crisis.

Current initiatives are based on the trickle-down theory of economics, a form of political rhetoric that supports the belief that if the government pours billions of dollars into the financial industries, it will indirectly benefit the broad population. Clearly, this direction is not working.

We all have our stories to tell.  It might be about your personal experiences with unfair and deceptive credit card practices.  Or perhaps you are a business owner whose credit lines have been slashed.  Maybe you are a retired person who just can’t make it through each month because you’ve lost your investment income.  This is the place for all of us to come together and tell our leaders what’s happening down here in the trenches. 

On President Obama’s pre-inaugural website,, our leader expresses his belief in the power of the people.  “Economy – Of the people, By the People.  There is no more important resource for changing the direction of this country and defining the ideas that will transform America than the American people.  Tell us your ideas and be part of the change you are looking for.”

I hope you will visit the site and share it.  Like President Obama, I believe in this country.  And I believe that together we CAN make a difference!

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TALF: The Credit Card Bailout and Auto Loan Bailout in Sheep’s Clothing

Tuesday, January 20th, 2009

On November 25th the Federal Reserve Bank committed two hundred billion dollars of our tax money to the TALF (Term Asset-Backed Securities Loan Facility) program.  It is  designed to get the banks to start lending again by increasing credit availability to consumers and small business owners that need to borrow through auto loans, credit card loans, student loans and S.B.A. Small Business loans. 


One reason why banks aren’t making loans is that the securitization market is frozen.  No one wants to purchase loans from the banks because the banks have proven that they are irresponsible in underwriting these loans.  There is simply no confidence in the market.  The TALF program will provide a level of confidence in asset backed securities through this guarantee program.


The flaw in the plan is that our congressional leaders and regulators have failed to address the issue of QUALITY ….  the application of prudent, safe and sound credit underwriting that ultimately must be used by banks in order to restore justified confidence in this market.  Confidence that is not based on government guarantees, but on assurances that the banks are doing their job when they underwrite loans.


With a little help from my friends, I was able to confirm that Bank of America continues  with their  business-as-usual, laissez-faire lending practices.  And why should they change, when they are handed a way to take their profits up-front while at the same time passing-off  all risk  through the T.A.L.F program?



Here are two loans, approved within the last week.  These scenarios represent loans that will be guaranteed under TALF.


A friend of mine went into a General Motors dealer posing as a person looking to purchase a new car off the lot.  He chose a car that, with tax and delivery, cost forty thousand dollars.  He asked for one hundred percent financing.  He filled out a one page application on which he overstated his income.   He earns $85,000 a year.  He lied and he stated that he earned $125,000 and that he was employed for one year.  He stated that he owned his own home.  He does not.  He stated that he had no mortgage payment and that he paid no rent.  His rent is $1300 a month.


He was approved by Bank of America for an auto loan for 100% financing.  They even agreed to finance the sales tax and delivery charges.  He could pick any repayment term from four years to seven years.


With a salary of $85,000 a year, he has revolving credit available totaling $140,000.  He owes only $3500 on one credit card.


There was no income verification performed.  If there had been, they would have known that he lied and hopefully would have declined the application on that basis alone.  He offered to provide proof of income and was told that it was not needed.


This is a loan that surely would have been sold off to investors purchasing auto loans under the new two hundred billion government bailout program.  Bank of America failed to apply any reasonable credit underwriting standards to this request and based the approval solely on this persons credit score.  Think about the value of the underlying collateral, which is the car.  Drive the car off the lot and it depreciates by 20%.  You now have the government guaranteeing a $40,000 loan with collateral worth $30,000.  Think I did the math wrong.  Think again.  They financed tax and delivery charges too!!!


Another friend volunteered to have her daughter apply for a credit card on-line.  She is a full time college student.  She works part time and earns $10,000 a year.  She has an existing credit card that originally started with a $1000 line of credit, but HSBC in their infinite stupidity has increased her credit line over the last three years to $4200 even though her income has not increased.  Once this year already, she overspent and her parents had to bail her out and payoff her $3000 credit card balance.  She has been late more than thirty days one time, but on her credit report, HSBC reports that she has never been late.


She went onto the Bank of America website where they suggested she search for “pre-approved offers” of credit.  On this site, she put in her name, address, birthdate, social security number and email address.  This time, Bank of America didn’t even bother asking for her annual income!!!   They did ask her to check a box if she was a student.  She lied and left the box blank.  She was immediately approved for a $3000 credit card.    This 21 year old,  that earns $10,000 a year, will now have credit lines totaling $7200.  How could any reasonable person expect her to be able to repay this debt if she went on a spending spree?  While I believe that the consumer should be responsible for their own actions, clearly the banks need to provide the foundation for responsible borrowing through responsible lending.


The TALF program’s fundamental goal is to increase confidence in the Asset-Backed Securities market so that banks will start lending to consumers and small business.  But Congress needs to protect the taxpayer too.  And in order to do this, Congress needs to enact legislation that imposes credit underwriting standards on the banks when they make  loans.  At the very least, income verification must be included in the banks minimum underwriting criteria.  These new laws and proper monitoring by our regulators would put in place safe and sound lending standards that would create confidence in the loans that are being granted and subsequently sold.  Confidence based on the actual value of the loan and not based solely on a government guarantee backed by our tax dollars. 


Absent safe and sound lending practices, the TALF program is nothing more than a credit card and auto loan bailout in sheep’s clothing.



If you enjoyed this article and want to learn more about the TALF program, what it is, how it works and more reasons why it is doomed to fail,  a more detailed article can be found at:


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The Birth of the Anonymous Banker

Wednesday, January 14th, 2009

Blame Joe Nocera!!!!!! He introduced me to the world of blogging and the power of sharing ideas and information over the internet. And like Joe, well, I have things I’d like to say about banking, the state of the economy, the regulations and the regulators, and the bailout. I have banking tips I’d like to share that perhaps will give you an edge when you deal with the banks and the bankers.

But more than that, I believe that people can actually make a difference. I’ve created this blog, so that consumers, business owners and bankers can come together and share information and ideas that might help us all through these difficult times.

And last, but not least, I’m hoping the Anonymous Banker will be able to bring together the power of the people in a call to our Congressional leaders for much needed change in the credit card industry.

perc-up header

Click on the picture above to read about our “Citizens’ Initiative” to promote change in Credit Card laws and other legislation that will contribute to our nation’s economic recovery. Together, we CAN make a difference!!!!!

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