Posts Tagged ‘Anonymous Banker Weighs in’

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

Thursday, September 24th, 2009

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

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

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

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

 

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

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Anonymous Banker says please PIN your debit card purchases

Saturday, September 12th, 2009

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

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

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

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

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

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

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

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

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

Thursday, September 3rd, 2009

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

 

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

 

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

 

So here’s my take on Money Market Funds.

 

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

 

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

 

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

 

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

 

 

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

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

 

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

 

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

 

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

 

Risk Factors for all Mutual Funds

Please remember that an investment in a mutual fund is:

            Not guaranteed to achieve its investment goal

            Not a deposit with a bank

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

            Subject to investment risk

 

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

 

What part of this can be misinterpreted?

 

 

 

The Dollars and Sense of it:

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

 

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

 

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

 

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

 

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

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Anonymous Banker says TALF is laundering bank bad debt with our taxdollars

Wednesday, June 10th, 2009

I’ve written extensively on the TALF program.   And while I always suspected as much, I now have come to the certain conclusion that TALF is the goverment’s way of laundering new and existing subprime auto loans subprime credit cards loans, that are currently on the books of the banks or their investment bank subsidiaries, with our taxdollars.  The program is complete thievery.  And shame on everyone for not being up in arms about what is happening.  Journalists… I’m putting you all on the top of that list.  You are failing this country miserably.

I, for one, don’t want my tax dollars used to purchase sub-prime car loans and credit card loans.  I don’t even want to hear the word sub-prime again, in my lifetime.  I want the banks to be responsible lenders and verify income and debt when they issue a credit card or an auto loan.  And I don’t want my office computer spurting out a pre-approved offer of a credit card to any customers.  Yes, this is still happening and will continue to happen because our Regulators are allowing it to happen in direct violation of all the laws governing safety and soundness in bank lending.  And why are the banks still willing to grant credit in this irresponsible manner?  Because they know they can sell these toxic assets off through the TALF program and any losses on these bad loans will be paid for by our taxes and the taxes paid by our children and our grandchildren, and for generations that follow.

If a bank is allowed to sell its toxic assets through the TALF program, and if the TALF program is funded with TARP funds,  then any bank that sells its assets through TALF is still benefiting from TARP.  Therefore, any bank that is selling their bad assets off through TARP  should still be subject to executive compensation limits and restrictions on dividends, among other rules.  If  banks want to be truly independent of our government’s meddling, then let them live and die by their bad lending practices and eat all the sub-prime credit card and auto loans they granted and continue to grant. 

The government has set aside $200 Billion dollars to fund the TALF program.  On June 2nd, the banks laundered $3.3 Billion dollars in auto loans and $6.2 Billion dollars in Credit Card loans (out of a total of $11 Billion dollars in total loans laundered in just that day). 

In light of President Obama’s wonderful new plan for “transparency”, I think the TALF program should publish, along with the list provided above,  the dollar amount sold by each bank in each category.    Let’s see which of our banks are truly  independent and unconcerned and don’t need to be bailed out.  Does anyone believe that JP Morgan Chase, American ExpressCo., Goldman Sachs Group Inc., U.S. Bancorp, Captial One Financial Corpl, Bank of New York Mellon Corp., and State Street Corp are NOT participating in the TALF program?  Then prove it to me.  Tell me which banks are selling these assets through TALF!!!!! 

TALF program rules require that  the “ABS have a long-term credit rating in the highest investment-grade rating category”.  How does our government dare to defend this term in light of the fact that they are using TALF to strip SUB PRIME credit card and auto loans off the banks’  balance sheets.  I’m not guessing at this.  It is on the TALF website.

Please, join me in my outrage.  Reach out to your Congressional leaders, IN PERSON.  Challenge them on these decisions.  Bring them a copy of this blog and ask them to defend the actions I’m describing.  Make them accountable for the programs they are approving.  Write to your journalists.  Demand that they give these issues the media attention deserved and needed to inspire our people into action.  Each and every one of us must take responsibility and become part of the solution.  They are counting on us to quietly follow, like sheep.  Show them that the people of this country have back-bone and will stand up for what we believe in.   If you fail to do this, then, in my opinion, you have relinquished your right to bitch.

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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 weighs in on why the government should not allow the return of TARP funds, just yet!!!

Monday, April 20th, 2009

Let’s see if I understand this.  The banks and investment houses violate Federal Regulation H which governs safety and soundness in real estate lending.  Over a period of ten years, they issue trillions of dollars in sub-prime loans.  Then they sell these loans to Fannie  Mae and Freddie Mac, and in the process, make a huge profit and basically absolve themselves of all risk associated with these loans.  Then, because there is an implied guarantee by our government on these Mortgage Backed Securities, they buy them back from Fannie Mae and Freddie Mac to hold in their capital accounts.

 

When the entire thing starts to unravel, the government steps in and stands behind the implied guarantee bolstering the world’s confidence in our markets.  Had they not done this, every bank, even the best of them, would have been insolvent.

 

When more needs to be done, our government commits our tax dollars and those of our future generations to bolstering these financial companies by providing TARP money, in exchange for preferred shares in these companies.  These two moves, revitalize the financial markets and perhaps we should see some return on our investment in the future.

 

However, the government foolishly fails to put reasonable restrictions and implicit directions on how TARP funds can be used.  Some of the greedier companies fail to do their part by controlling reasonable costs such as executive compensation and dividend payments.  Our government steps in to protect our investment and changes the terms of the TARP contract, adding these restrictions.

 

The financial companies cry foul play.  Well surprise, you greedy bums.  Take a look at Federal Circuits, 4Cir. (November 02, 1992)  Docket number 91-2647, 91-2708 which can be found here:   http://vlex.com/vid/charter-thrift-supervision-own-37480633

 

Now pay special attention, my friends, to Section III – B.  If my interpretation is correct, a sovereign (that would be the US Government) can nullify a contract by change in legislation.  Basically that makes no government contract binding to any other parties.  The power lies in OUR hands.

 

Smacks similar to those wonderful contracts that banks put out to consumer and small business credit card holders in which, BANKS get to change the rules at any time.  I love old adages, like this one:  What goes around, comes around.

 

To our leaders, let’s let our bet ride for a little while longer and see if we can get a return on our investment.  Why let the financial industries have our money when they are failing and then take it back when their new-found profitability comes from our investment.

 

Can you ever imagine a scenario in which an investment banker makes a loan to a company in exchange for stock and  then simply allows that company to pay back the loan when the company starts to perform well, giving up all upside potential on their investment?  It’s laughable!!!!!

 

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Anonymous Banker weighs in on SBA and the Economic Recovery Act: Rhetoric or Redemption – Time will tell

Friday, April 10th, 2009

Is the new SBA lending program simply more bailout for banks or truly designed to help the stuggling small business owner? 

 

Well, really, who cares?  With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner is a good plan, in my book. 

 

I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community.  That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

 

The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees  to the banks of up to 90% .  Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital.  It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

 

The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans.  In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York  agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks.  The reasons are obvious:  First, in this economic environment the investors don’t want even the small risk associated with SBA lending.  And secondly, because the confidence in these asset backed securities  has been completely eroded, no one really wants to buy them.  And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

 

So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

 

It’s TALF with a twist.  While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them.  With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”  

 

And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner.  These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer.  The broker/dealer will gather these loans together, from the originating banks,  and sell them….. directly  to the government.

 

Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed.  It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation. 

 

Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation.  Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department.  The Treasury cannot be expected to purchase one loan at a time from the banks across our nation.  In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury.  There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction.  Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.   

 

This is a plan that will work.   It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community.  New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

 

ARC Stabilization Loan

The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital).   These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government).   The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars. 

 

The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program.  Borrowers will not have to start repayment for twelve months and full repayment is expected within five years.  Since the SBA will  subsidize the interest on these loans,  the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery. 

 

Once again, I’m counting on Ms. Mills to move this program along to where it needs to be.  I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined.  The big question is this:  Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner?  Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner. 

 

These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks?  I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000.  And they are not alone in this process.  I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria.  Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit.  Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks.  Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.   

 

Make no mistake about it.  The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry.   But let’s put that aside for the moment.  My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help.  Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm.  We need to help them keep their workers employed, pay their rent and remain in business. 

 

Don’t be fooled.  This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality.  The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined.  Borrowers should expect to provide financial information regarding sales/revenue and income.  So for those small business owners that over-extended through the business liar-loans,  businesses that ‘stated income’ that they now cannot support with tax returns:  I don’t think you will qualify.  And if you are one of the small business owners that like to make money, but don’t want to pay taxes:   You won’t qualify either.  If you can’t make it on your own, then the banks will be writing off your debt and taking the loss.  Shame on the banks and shame on you.  

 

I’d like to add one final observation.  When a bank cancels a business credit line, they do this without warning.  The line is simply frozen and no additional draws are allowed.  A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked.   In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition.  In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit:  (a)  Decrease in revenue and/or profit (b) weaknesses in cash flow  (c)  debt to income too high. 

 

Well, no s_ _ t, Sherlock!   We ARE in a recession, and I dare not use the “D” word here.  Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

 

We are now caught between a rock and a hard place.  These loans are the hardest to underwrite.  The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds,  simply don’t have anything for the banks to wrap their greedy little arms around.  And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors.  Furthermore, simply terming out working capital lines will not provide the relief needed.  We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out.  SBA already has the product matching this description.  Now the SBA has to give the banks specific criteria so they are comfortable  with the conversion.  There can’t be any second guessing or Monday morning quarterbacking on this process.  If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT.  Jump in with both feet.  Yes, there will be losses.  But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.    

 

The third program, which is already in effect, is the expansion of the existing Micro-loan program.  These loans are granted by special non-profit community-based lenders  throughout the country (microlenders), and not typically by banks.  It provides for fifty million in new loans.  But don’t count on any special rates.  SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit.  Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range.  I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner. 

 

For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult.  You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

 

Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California,   Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York,  Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia.  If I left any out, I apologize.  But COME ON – SBA site developers.  The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area. 

 

And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months.  Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290  7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month.  However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70  7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued.  These figures support that over the last five months, SBA  7(a) loans decreased in number by 75% and in dollars of loans granted by 56%. 

 

SBA should require that every district office post up-to-date SBA lending results.  It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs.   The New York District Report indicates that  JP Morgan Chase, who accepted $25 Billion in TARP funds,  dropped from the number one SBA lender to number  9, having made a total of 40 SBA loans totaling just over $2.8 Million.  Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33.  BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000.  And Citbank, who previously held the number 5 ranking,  made a total of 3 SBA loans totaling  just over $1 million dollars.  This nation provided Citibank with $50 Billion dollars.  I leave it to the reader to draw their own conclusions from these numbers.

 

To America’s small business owners and to each and every individual, I offer the following advice:  Stop complaining and DO something.  Go establish a banking relationship with one of your local community banks and reward them with your bank accounts.  If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here:  http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts.  Yes, it will be inconvenient to make a move.  But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them.  We will not do business with them, when they have failed us, and continue to fail us,  so miserably. 

 

And to President Obama and our Congressional leaders:  We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan.  Please hurry!!!

 

 

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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 seeks advice on Foreclosure Litigation

Wednesday, February 11th, 2009

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

 

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

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

There’s a law on our books called Reg H.  The law and the related Interagency Guidelines defined what procedures banks needed to follow with respect to lending secured by real estate.  Banks must, “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

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

 

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

 

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

 

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

 

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

 

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

 

  

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

From PNC’s 10K statement:

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

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

 

Sources:   12 CFR 34.62        

 

                 12 CFR 208.51      

 

                 12 CFR 365             

http://edocket.access.gpo.gov/2005/05-24562.htm

http://edocket.access.gpo.gov/2006/06-8480.htm

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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: http://anonymousbanker.com/?p=42
 
Until our government ensures that the banks start to apply reasonable credit underwriting guidelines to all forms of credit (yes that means income verification for all loan requests and an understanding of the consumers debt level in relation to their income), investors will never have any confidence in asset backed securities absent a government guarantee. And I, for one, do not want my tax dollars to go towards any program that absolves the banks of their responsibilities to the public and to this country by perpetuating their lax credit standards. We need confidence based on the quality of the underlying loans and not based solely on the government guarantee. Without addressing credit underwriting standards, the TALF program is simply just another bail-out program designed to transfer existing and new credit risk from the banks, through the investors and then onto the taxpayer by virtue of the new government guarantee.
Additionally, the transparency that Mr. Blinder states he sees in the TALF program is, in my opinion, distressingly absent. In fact, the word I would use to describe the Federal Reserve Board’s release on the T.A.L.F program is …
Duplicitous: given to or marked by deliberate deceptiveness in behavior or speech.

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

 

 

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

 

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

 

 

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

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

 

 

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

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

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Anonymous Banker Weighs in on Banks Bad Advice regarding Mortgage Reductions

Tuesday, February 3rd, 2009

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

 

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

 

From the website of  “Wamu is becoming Chase”

 Other sources of payment

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

You may be able to repay your home loan using:

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

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

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

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

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

 

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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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