Posts Tagged ‘anonymous banker’

Anonymous Banker Weighs In on the Slashing of Credit to our Small Business Community

Friday, May 8th, 2009
In response to a recent article over at Business Week, “Snipping Credit lines for Small Businesses”, which discusses how JPMorgan Chase and others are slashing small-business lending in an effort to shore up their balance sheets, I must, unfortunately, question the use of the word ‘snipping’–which, to me, sounds like a tiny trim. Au contraire. Dig deeper and you will find that banks are slashing tens of billions of dollars in credit to our nation’s small business owners.

Does the Obama administration care about small-business credit? It certainly says it does. A typical press release from the Treasury Department avows as much.

But is this for real? Or it this simply rhetoric? As a business banker, I sit in my office each day and deal with small business owners, which I define as those with annual revenue up to $10 million, but often less than $1 million. I see their worried faces as they come into the bank, letter in hand, wondering why their credit lines were frozen. These people need help, and so far as I can tell, they’re not getting it from the administration.

I took a random sampling of approximately 360 lines that received letters similar to the one described in the Business Week article. These 360 accounts represented $20 million in potential money loaned out, which actually owed just over $12 million. About seventy accounts had no balances outstanding and represented $4 million in potential credit. This particular bank (and I’m sorry I can’t identify it for our readers) froze all these lines to any further draws, with an intent to term them out. Based on this sampling, the average credit facility was just over $50,000.

At first glance, these numbers don’t appear devastating, especially when the new buzz words being bandied about are in the billions and trillions. But my sampling is just a drop in the bucket. Imagine that this is happening not to 360 businesses but to 36,000 businesses in one bank. That results in $2 billion in cancelled credit lines. Now imagine that each of the five largest banks (and I’m being gracious) have taken similar action, resulting in the systematic cancellation of 180,000 lines. That would mean that more than $20 billion of working capital has been taken away from the U.S. small business community. I personally believe that the results are much larger than even this.

I understand the need for all banks to recognize the quality or deterioration of loans they hold on their books and their need to effectively reserve for losses, particularly in these trying economic times. But it has been my experience that many of these borrowers never even missed a payment and have met their commitments as agreed.

And what about the prospect of converting credit lines to term loans? Business Week points out, “Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments.” Once again, a good point; and once again, a drastic understatement. Working capital lines of credit often have monthly payments equal to interest only. They may, in some cases, carry a minimum principal payment equal to 1% of the outstanding loan amount (it depends on the bank and their rules under the original loan agreement).

Take a $50,000 loan at a rate of Prime +2%. Under the interest-only scenario, the monthly payment would be $218.75. If a principal payment of 1% is required, the monthly payment would be $718.75. However, the same $50,000 loan termed out over five years (and with an increase in rate to between 7.5% and 10%) would now carry a monthly payment of just over $1000! So the end result of converting lines to term loans is that the banks have increased the monthly payments for the small business owner by at least 40% across the board while cancelling their access to future working capital.

Let me make this clear to President Obama. Not only are the banks not making business loans to small business owners, they are systematically withdrawing billions of dollars in credit lines from the small business market.

While our president is rallying our Congressional leaders in support of his positions on credit card reform–reform that is likely to exempt small business owners, by the way–he may want to share these observations from the front lines of the banking world so that our leaders can begin to understand and focus their efforts on protecting our nation’s small business community.

Cross Posted at BizBox


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Anonymous Banker: Why are Working Capital Lines Disappearing?

Friday, March 13th, 2009

President Obama has put together the Financial Stability Plan, which states: “This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.”


President Obama, Congressional Leaders, Regulators: 

The business community of America needs your help.  You must change your focus and consider implementing lending policies and procedures that will allow businesses to remain open, allow them to continue paying their rent, paying their employees, and  paying their loans.


Put aside the liar loans that were granted over the last ten years to business owners that overstated their revenue and income. Those are NOT the loans I am speaking about here.  Our regulators allowed banks to violate every prudent test for safety and soundness in bank lending over the last decade.  And now that you let the proverbial horse run out of the barn, you are empowering the banks to slam the door on all the businesses that are, or may still be, credit worthy.  Your actions will directly contribute to the severity of the depression that is coming upon us so quickly. 


It has been stated to me, by senior credit officers in one of the largest US banks, that  40% of RENEWAL REQUESTS for business working capital lines of credit are being declined, termed out and/or called by the bank.   The loans I’m addressing in this article  are to the smaller to mid-market companies that have not missed any payments, have met all commitments as agreed and still have a chance of surviving.  These are the businesses that support the economic future of the communities across our nation.


These working capital lines are the lifeblood of any business.  They provide the companies with capital that they need to purchase inventory, finance production of goods, carry receivables, and during these cycles, to pay their employees and their rent or mortgages.  It is NOT term financing.  And this is a very important point.  So I will repeat it:  IT IS NOT TERM FINANCING.


Working capital lines are repaid by the conversion of one asset into cash in a short period of time.  It is revolving credit.  A company uses the funds to manufacture goods.  They then sell the goods and convert inventory into receivables.  Then they wait and they convert the receivables back into cash.   The difference between their cost and what they sell it for, is the profit.  From that profit, they pay salaries, rent, etc.    They do not repay working capital lines from PROFIT.  Businesses  repay working capital lines from CONVERSION of assets into cash.  Then they begin the cycle all over again.


A term loan, conversely, IS repaid from profits.  If a company buys a piece of equipment, they should not use their working capital to buy it outright.  They should finance it over a period of time that is typically determined by the useful life of the equipment they are buying.  A computer for example would be financed for two years, a die press machine for seven or ten years, and a building for twenty years.  These loans are paid for by profit over a specified period of time.


There are a number of things that go into the evaluation of a request for a working capital line to a small business owner.  We look for diversification of receivables and timely collection of receivables by our borrower.  We look at turnover of inventory as related to the type of inventory they carry. We evaluate repayment history and the company’s capital position.  Banks want  companies to retain capital and not distribute all their profits to the owners.  We look to see if they can pay the revolving line down during the course of a year.  We look at secondary sources of repayment through personal financial statements:  cash, investments and equity in the business owners’ homes.  (Thanks to the banking industries bad behavior, all business owners have less to offer the bank by way of secondary sources of repayment!)  We also look at the personal credit scores of the owners.  Gross sales and revenue trends also carry significant weight.


I’m not here to give our leaders a lesson on bank lending.  But perhaps it would be wise if you at least understood the principals that should be applied to lending.  You need to understand this in order to understand what is happening that is going to kill this country.


Regulators are now requiring the banks to evaluate existing and new working capital line requests in the following way:    First pass, we look at all the typical things we looked at before as defined above.  But now, Regulators are adding another pass by requiring banks to determine what would happen if the customer could not pay back their working capital line through normal asset conversion.  Regulators are requiring the banks to evaluate if these same customers can repay the debt, at the time the line is made or renewed, from profits over a three to five year period. 


This is determined through a ratio called ‘debt service coverage’.  A business that can and does repay working capital lines from the conversion of assets, oftentimes cannot pass the debt service coverage evaluation criteria.  A $250,000 working capital loan cannot always be repaid if it is converted to a five year term loan, particularly in a declining revenue and profit environment.  Using this as a standard for evaluation means that most companies no longer qualify for their working capital lines and our Regulators are giving the banks a perfect excuse to cancel the lines of credit and demand payment.


Each and every day, in my work as a business banker, I am addressing this issue.  These are not customers that are late on their payments, delinquent in any way, or not meeting their obligation.  These are customers who, without a credit line will be OUT OF BUSINESS.  Their workers will be unemployed and their commercial real estate left vacant.   


Is this your vision of Economic Recovery?    I don’t think it is.  I just think that you are so focused on the big picture that you are not seeing what is actually happening in the real world today. 



This must not be allowed to happen.  Right now there are only two categories of loans on the books of the banks. The good loans and the bad loans.  There are test standards that determine where each  loans fits.  Today, there must be a third category for loans that are being paid and that support those companies that have exhibited every ability to pay.  These companies still have a fighting chance.  Directly addressing the small business owners’ needs will bring a much needed level of confidence to the people of this country.


Give the bank lenders the ability to do our job.  Let us document a file and explain why, in spite of a company not passing the “debt service ratio” the banker still believes that the working capital request represents a viable deal.  And make our regulators live with that decision until we are proven wrong and the loan starts to actually show real signs of default in the form of slow or late payments.  The bank can always classify the loan at a later time and it will be in no worse position than it is now.  I recently challenged one such decision, and I was told by a Senior Lender in my bank that they perceived a deterioration in the credit based on the “debt service coverage” and it would be better to grab any money we can now while the getting is good!  This is the philosophy that the banks are using while they spew their deceitful claims that “they are still making loans”. 


In the rare cases where the lines are being renewed,  the banks are increasing  the interest rates across the board.  Banks are enjoying a historically low cost of funds.  They borrow  through the Fed at zero to ¼% and they pay their depositors between zero and 1%.  Yet businesses  that were previously being charged Prime + 1% or Prime + 2% are now having their rates increased to Prime + 6% to Prime + 11%.  The banks are clobbering the business owner with higher rates at the very time that these businesses need to be cut a break.  I propose that they are doing this to offset all their losses on the liar business loans they made over the last ten years that have no chance of being repaid.  And you, our leaders, are doing nothing to stop them.


I beg our leaders to see the truth in what I am saying.  I know that I am only one person, but perhaps Congress should call various bank lenders into a closed session and have them testify about what is REALLY happening in the industry.  And I don’t mean the CEO’s of the banks and the Senior Risk officers.  I mean the seasoned,  mid-level lenders.  We certainly could tell you a lot, if you would just give us an opportunity to communicate with you.  You will not believe how bad it is out here. 


I urge you all to focus on the details and on implementing effective lending policies and programs that will keep our businesses open and our citizens employed.  Irving Fisher, one of America’s reputed economists, outlined the factors that contributed to the length and severity of the Great Depression.  Fisher saw it as a chain of events that started with debt liquidation and distress selling, the contraction of the money supply as bank loans were paid off and a deterioration of confidence.  Will you allow the banks to create the scenario where history will repeat itself?   Or will you ensure that when history unfolds and our future generations look back at this period of time, that they can say that YOU had the strength of character to make the tough decisions that brought us quickly out of this crisis?  We are all depending on it.


Readers:  Please, take a moment to send YOUR story to President Obama, the Senate and House Banking Committees and your Congressional Leaders.


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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 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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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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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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