Archive for February, 2009

Anonymous Banker weighs in on the coming business debt debacle

Saturday, February 21st, 2009

We’ve created a need in our society for “immediate gratification”.  So it comes as no surprise that the general public is screaming for an immediate fix to an economic crisis that finally erupted after over ten years of abuse.  This is NOT a problem that is going to go away over night.  It is going to be a long, painful process.  It can’t be fixed by reactive solutions, like pouring billions of dollars into a broken system.  There needs to be a well thought out, methodical process that has a high level of forward thinking worked into the solutions.  I often imagine the top six sigma gurus gathered together in the building where they house the space shuttle, diligently working out the process, with post-it notes covering the walls from ceiling to floor.  Personally, I think they would do a better job than our current congressional leaders who don’t seem to understand the systemic issues that, still today, are not being addressed.


Every day I work with small business owners that are buried in debt.  They are sitting on a pile of loans that have absolutely no chance of  being repaid in the face of declining revenues and profits.  Lines of credit granted without any exit strategy.  SBA loans that were made as interest only lines of credit, only to be converted to seven year term loans at the precise moment that profits are tanking.


The downward spiral goes like this:  Companies, large and small, are burdened with debt.  Revenue declines, and they have to cut expenses to make enough money to meet their fixed obligations such as rent and loan payments.  They have to cut somewhere, so many start with slashing benefits such as health insurance.  When that isn’t enough, they reduce payroll, by laying off some of their workers.  When they’ve reduced expenses they have control over, and realize that they are still can’t meet their loan payments, they attempt to re-negotiate the loans and their rent.  When that fails, they close and file bankruptcy.  The loans get discharged, and the commercial real estate remains vacant.  Their employees join the ranks of the unemployed and unemployable.  Loans that were sold to investors,  default.  The securities that hold these loans plummet in value.  Retirement plans no longer provide income needed for retirement.  Commercial real estate loans go into default resulting in more write-offs for the banking industry.  Etc, Etc, Etc.


There is no point in talking here about the stupidity that went into the lending processes that banks incorporated to bring us here.  It serves no purpose, the damage is already done.  But congress would do well to address this for all loans that are made going forward, particularly those that will be securitized.


Modification is the name of the game.  And it has to start happening today.  Everyone, and I mean everyone….. is going to have to make concessions, and be willing to bide some time through a slow but meaningful recovery.  Debt needs to be repaid.  There is just too much of it for the taxpayers to absorb.  In every game there are winners and there are losers.  The question is not if there will be losers, but how much they will lose.


The businesses need some breathing room in order to remain in business.  Just like the homeowners need some breathing room in order to remain in their home.  Some form of payment is better than no form of payment.  When are we finally going to realize this?

  1. SBA has to force the banks to extend the repayment terms.  They should include some level of monthly principal payment and interest.  How much principal?   Any amount is better than no amount.  Slow and steady reduction of debt is better than immediate write offs.  Loans need to be modified so the companies can stay in business.
  2. The liar loans, those loans that the banks made to businesses for up to $100,000, on stated income, are usually converted to three year term loans.  They need to be ten year term loans.  Banks should be reducing interest rates, not increasing interest rates, allowing for higher application of principal paydown instead of interest maintenance.. 
  3. Commercial real estate owners need to engage their banks and their tenants in a comprehensive evaluation of income requirements and tenant cash flow.  Each needs to make that concession that works for the whole. 
  4. The investors may not get paid for awhile.  And they may not have any return on their investments.  They may, in the end, see a portion of their principal investment returned.  But again, some is better than none.
  5. Banks are not going to recapitalize over-night.  The regulators need to recognize this and encourage the banks in their role of modifier.  If the loan has to be written off, time will tell us that as well.  But forcing the banks to write-off debt that has any reasonable chance of being repaid under a modified process will doom our economy to failure.  The regulators failed us by not imposing penalties on banks when they applied unsafe and unsound lending practices.  And they are simply making matters worse by imposing capital requirements that they surely know the banks cannot meet anytime in the near future.   



Suspend all dividend payments to bank shareholders, cap interest rates on all forms of loans starting with credit cards, extend terms of repayment so that there is some level of principal reduction made each month,  provide for no-penalty skip payments, and I’m sure there are other plans that will help as well.


Time heals all wounds.  But it is the passing of time that has a truly meaningful effect.  We will recover, but it will require our society as a whole to shed their need for immediate gratification.  That is the one thing that is not going to be part of our recovery process.

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Anonymous Banker seeks advice on Foreclosure Litigation

Wednesday, February 11th, 2009

Anonymous Banker received the answer to the question posed below:  The answer is NO….. An individual may not use the bank’s violation of Regulation H as a Private Right of Action in its defense against foreclosure.  Too bad – the banks should be held responsible for violation of this Regulation, which I believe is at the root of our economic crisis.


This time, I’m looking for advice.  I have a theory that I’d like to have reviewed by attorneys that have some knowledge of foreclosure litigation.

Here are my thoughts.  Perhaps you could tell me if my plan has any merit.

There’s a law on our books called Reg H.  The law and the related Interagency Guidelines defined what procedures banks needed to follow with respect to lending secured by real estate.  Banks must, “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.”


My thought is that banks that issued sub-prime mortgages, specifically no-income and no-asset verification loans, violated Reg H.   The Regulators must have identified these violations and cited them in the examination reports, but these reports are not available to the public. 


I believe that we must stop the foreclosures in order to begin the economic recovery process. While the banks say they are modifying mortgages in an effort to help the economic recovery of this nation, their efforts are nominal. In the scheme of the problem that they themselves created, they must be required to do more.  They continue to foreclose on properties and withdraw credit from the business marketplace.  They are merely making knee-jerk reactions, rather than effectively evaluating credit on a case by case basis.  In many cases, credit lines to businesses are being cancelled even though the business owner has not missed even one payment.


While I do not believe that any form of class action suit would be beneficial to our economic recovery, I do believe that individuals have been directly harmed by the banks violation of Regulation H.


What I want to determine is whether or not an individual can utilize, in their defense against a foreclosure action, the banks violation of Regulation H.   I believe this has to do with “private right of action” with respect to a Regulation such as Reg H.


My thought is this.  If banks begin foreclosure proceedings and it is found that they approved the application in Violation of Reg H and Safe and Sound Banking practices, perhaps the courts could rule in favor of the homeowner and prohibit the foreclosure.  What can’t happen is that the courts negate the debt.  Rather, they must find a way to force the banks into modifying the terms of the mortgage.


The theory is not a perfect one, I’m sure.  But I think it deserves further consideration by the legal industry and our judicial system.



Exerpt from one of my previous articles that might help support this position:

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.


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 knew 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.


From PNC’s 10K statement:

We are subject to examination by these regulators, which results in examination reports and ratings (which are not publicly available) that can impact the conduct and growth of our businesses. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. An examination downgrade by any of our federal bank regulators potentially can result in the imposition of significant limitations on our activities and growth. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations. We are also subject to regulation by the Securities and Exchange Commission (”SEC”) by virtue of our status as a public company and due to the nature of some of our businesses.

As a regulated financial services firm, our relationships and good standing with regulators are of fundamental importance to the continuation and growth of our businesses. The Federal Reserve, OCC, SEC, and other domestic and foreign regulators have broad enforcement powers, and powers to approve, deny, or refuse to act upon our applications or notices to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations.


Sources:   12 CFR 34.62        


                 12 CFR 208.51      


                 12 CFR 365     

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Anonymous Banker comments on TALF update released Feb 6, 2009

Saturday, February 7th, 2009

Earlier this week, I responded to an article on TALF in the WSJ by Alan Blinder

Since then, the FRBNY has released additional information and I’ve modified, slightly, my response to address the information in the release.   I sent the following into Scott Lanman in response to his article in Bloomberg entitled, Fed Steps Back From February Plan to Start TALF Loans “

As an aside, I don’t actually think the FRBNY has “stepped back” on TALF.  My read of the releases, November, December and this most recent, all indicate that the program was due to start in February.  I don’t see anywhere that they have pulled back from that date.

Here is my take on TALF.  It is not going to accomplish what our government proposes it will accomplish.  And I believe they know it.     

While I agree with Mr. Blinder’s opinion that “a market by market approach makes a start on a cure”, I vehemently disagree that TALF “offers a transparent rulebook”.
Let’s all agree on one thing. It was the banking industry failure to apply safe, sound and prudent underwriting criteria to mortgages they issued over the last six to ten years that created the economic crisis we are in today. Zero down payments, no income verification, no loan to value standards. They knew they would be divesting themselves of the risk when they sold these loans through mortgage backed securities. The direct result of this act was the devastation of our country’s economic foundation, which was previously built on a level of confidence and faith and trust in our banking institutions. (Our regulators also failed us when they allowed the banks to continue in this manner in direct violation of Regulation H….. but that story is for another day).
Prior to the age of securitization, banks funded loans through balance sheet activities. They underwrote the credits and held the risk as their own. Securitization of assets was designed to allow for off-balance sheet funding of loans, provide investors with a reasonable return on their investment with a measurable and reasonable risk and provided the overall credit market with reduced funding costs that perpetuated the lending cycles. It was brilliant. Until it was abused.  Now, because of the banking industry’s greed, there is no more CONFIDENCE in the assets being underwritten by banks, and that is across all categories and specifically those loans that TALF will fund: Credit Cards and Auto Loans.
With respect to credit cards and auto loans, I am absolutely certain that the banks are still not applying any income verification to these loans. I tested they system with a car loan and a credit card loan and both were approved based on falsified information and therefore, only on credit score. No income verification was applied and no debt to income measurements were applied. You can read my report here:
Until our government ensures that the banks start to apply reasonable credit underwriting guidelines to all forms of credit (yes that means income verification for all loan requests and an understanding of the consumers debt level in relation to their income), investors will never have any confidence in asset backed securities absent a government guarantee. And I, for one, do not want my tax dollars to go towards any program that absolves the banks of their responsibilities to the public and to this country by perpetuating their lax credit standards. We need confidence based on the quality of the underlying loans and not based solely on the government guarantee. Without addressing credit underwriting standards, the TALF program is simply just another bail-out program designed to transfer existing and new credit risk from the banks, through the investors and then onto the taxpayer by virtue of the new government guarantee.
Additionally, the transparency that Mr. Blinder states he sees in the TALF program is, in my opinion, distressingly absent. In fact, the word I would use to describe the Federal Reserve Board’s release on the T.A.L.F program is …
Duplicitous: given to or marked by deliberate deceptiveness in behavior or speech.

 Let’s look at the proposal: What is a non-recourse loan? Non- recourse means that the F.R.B.N.Y takes the bundle of loans that were underwritten by the banks without any income verification as direct collateral to their loan to the investor. If too many loans default, and the investor is unable to meet the principal and interest payments due to the FRBNY, then the F.R.B.N.Y will seize the collateral. This simply means the FRBNY will take ownership of the consumer and small business loans. The F.R.B.N.Y’s recourse is limited to the value of that collateral, which consists of the original loans made by the banks to the consumer and small business. This system of non-recourse lending puts the F.R.B.N.Y in the first-loss position with these bundled loans, not the investors and certainly, not the banks!



 Non-recourse financing only protects a lender that utilizes prudent underwriting guidelines and, by its very nature, encourages them to only lend a reasonable percentage of the collateral value.


 Banks that originate the consumer and small business loans, cannot directly borrow from the FRBNY to securitize these loans. What this means, is that they can’t make new toxic loans or take existing toxic loans they currently have on their books, and borrow through TALF to securitize them ……within the same transaction. What does this really mean? Let’s say that Chase bundles up $20 million in loans they originated. And Bank of America bundles up $20 million in loans that they originated. Chase could not use their loans as collateral to borrow through the TALF program. But there is nothing to STOP THEM from selling their $20 Million in toxic loans to Bank of America through the program. And in turn, Bank of America could sell their toxic loans to Chase through the program. In truth, the TALF program COULD be used to simply ‘launder’ the toxic loans between the banks that are already receiving funds from the Emergency Economic Stabilization Act of 2008. And I think that ‘launder’ is exactly the right word because this process will allow the banks to take the toxic loans off their books, pass them through the TALF program, and bring them back onto their books, nice and clean and fully guaranteed by our taxdollars!!!



This loophole does nothing to encourage the banks to improve their credit underwriting standards. Furthermore, TALF fails to require banks to direct the funds they receive, when they sell the loans, back into the market in the form of new loans. The government is assuming that the banks will do this on their own. Our government also assumed that the capital they injected into the banks would be directed towards lending and the bankers have basically hoarded those funds. Without clear direction, the banks cannot be counted on to meet the underlying intentions of TALF and improve credit availability to the public.
Further examination of the TALF program must make one focus on its definition of the term “recently originated”. The latest FRBNY release states that: Auto loans must be originated after October 1, 2007; Small Business Association (SBA) loansafter January 1, 2008; student loans must have had a first disbursement date after May 1, 2007; and for credit card loans, the new asset backed security must be issued to REFINANCE existing credit card Asset-Backed Securities that MATURE in 2009. That’s the worst rule of all because it doesn’t matter when these credit card accounts were initially granted. It permits banks to transform old toxic credit card debt that’s on the bank’s books into government guaranteed credit card debt.
TALF also states that eligible collateral must have a long-term credit rating in the highest investment grade category. There is an apparent contradiction of terminology: “recently originated” and “long-term credit rating” are mutually exclusive terms. You can’t be both at the same time.
On Feb 6th, the FRBNY finally released the conditions for what they call the “haircut”, that portion of risk that will be borne by the investor.  For credit cards, it ranges from 5% to 11% and for auto loans, it ranges from 6% to 16%.  When a bank grants credit to a small business to purchase commercial real estate, first, as an abundance of caution they almost always require the personal guarantees of the owners.  In the larger commercial loan transactions, these loans may be granted on a ‘non-recourse’ basis, but then the loan to value is almost certainly 80% and more often than not, 60% to 70%.  If this is standard for bank non-recourse  lending secured by real estate, why then would our government agree to a lower percentage for unsecured debt.   
Additionally, when banks make real estate loans they calculate cash flow or capacity to repay on the property and take into consideration a vacancy rate.  Prudent lending practices govern this  process. Through TALF, our government is guaranteeing loans on which the banks have not performed the most nominal form of income verification, and then they propose to apply a loan to value of  between 95% and 84%  when using these loans as collateral.  This is not prudent application of our tax dollars!  
My final observation is that T.A.L.F does not clearly define how that $200 Billion dollars must be allocated between the various loan types: student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Since S.B.A loans, by their very nature, carry a government guarantee of between 50% and 75% to the banks, then isn’t there a double guarantee under this program? One guarantee from the S.B.A and one under T.A.L.F? It doesn’t seem possible that the government wants to give two guarantees on the same loan! If they are unconcerned about this, it is because they KNOW that the TALF funds will NOT BE USED to stimulate SBA financing by the banks.
More to the point, however, is that if the program doesn’t require the banks to allocate a percentage of these resources specifically for S.B.A. lending, it is unlikely that the banks will increase their S.B.A lending functions. They will direct these resources to the other unsecured loan categories that carry higher interest rates and therefore higher immediate returns upon their sale under TALF.

 I understand what the Federal Reserve Board is trying to accomplish, and applaud it for its efforts. I just think they should be more transparent and forthcoming in the way they describe the plan. And our leaders should finally realize that the ones that have the money, and ability to commit our taxpayer dollars, get to make the rules. This program, absent major re-regulation of the lending procedures currently used by banks; and minus a clearly defined requirements on allocation of these funds, is just another accident waiting to happen.



 If this program was designed to meet it’s fundamental goal: to increase confidence in the Asset-Backed Securities market so that banks would once again lend to the consumer and small business, here’s what they need to do.

  • Make the TALF funds available ONLY as a means to finance newly generated loans- specifically loans issued after January 1, 2009, and for those loans issued in compliance with the newly defined credit underwriting standards set above.
  • Require that the proceeds from the sale of loans sold through the TALF program be put BACK into these same types of loans so that banks cannot merely divest themselves of loans already on their books and hoard these new funds.
  • Enact legislation that will impose credit underwriting standards on the banks that make the loans. This policy will create confidence in the loans that are being granted and subsequently sold. Confidence based on the actual value of the loan and not based on a government guarantee. The guarantee would be gravy.
  • The program must direct specific amounts of the TALF funding towards specific loan categories such as SBA loans. Without such direction, banks will simply focus on credit cards and other loans that have higher interest rates and that will provide them with higher levels of immediate income. Nothing will be done to help the business owners in this country.
    Over the course of this crisis, we have maintained that the confidence in the banking industry and its leadership has been thoroughly eroded. Confidence in our political and regulatory agencies has also vanished. As long as there is no confidence, there can be no recovery.  The Federal Reserve Board’s apparent dissemblance in its presentation of the T.A.L.F program will simply make things worse. False assurance is worse than no assurance. Transparency is more than a virture, it’s a necessity, and the devil in the TALF lies in its details, or lack thereof.

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Anonymous Banker Weighs in on Banks Bad Advice regarding Mortgage Reductions

Tuesday, February 3rd, 2009

I’ve recently had discussions with several clients that have tried to modify their mortgage, and I was appalled at the advice they received from their lenders.  So I took a peek around the net to see what was happening in the industry.   As usual, I am appalled at the under-handed tactics of the banking industry.


Here is my advice.  Verify all information you receive and if it sounds “to good to be true”, believe me, it is.  Seek advice from trusted friends and business associates such as your accountant and attorney.  Or write in to me.  The banks are not to be trusted.  They are not your friends.  They are there to cover their own back first, even if it is at your expense. 


From the website of  “Wamu is becoming Chase”

 Other sources of payment

Your checking and savings accounts are not your only sources for making payments.

You may be able to repay your home loan using:

  • Using funds from your 401(k) account—ask your employer about making a “hardship withdrawal”.
  • Selling stocks and bonds you may own.
  • Requesting the cash value of any life insurance policies.

Before you use any of these other sources to pay your home loan, please make sure you understand any penalties or tax issues that may result.

What they fail to tell you here is that if this economic crisis forces you into bankruptcy, your 401(K) and the cash value of your life insurance policy and your IRA up to $1 Million dollars is exempt from the bankruptcy filing.  The banks can’t get their greedy hands on these funds no matter how much money you owe. 
If you cash-out your 401 (K), IRA or life insurance and apply these funds to your mortgage, or for that matter any of your outstanding debt such as credit card debt and then later still have to file bankruptcy, you will not have your nest-eggs to fall back on.

The absolute worst advice anyone can give you, in my opinion, is to take bankruptcy-protected assets and use them to reduce your debt in the face of this economic crisis.

The only one who could possibly benefit from you doing so, is the bank!


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