Archive for October, 2009

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

Friday, 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

Tuesday, 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”

Thursday, 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

Sunday, 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

Tuesday, 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

Saturday, 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?

Sunday, 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

Thursday, 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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