Under the deal reached between House Financial Services Committee Chairman Barney Frank and [Illinois Rep. Melissa] Bean, the OCC could preempt a state consumer protection law by simply writing a letter or issuing a ruling. It would reaffirm the deference given to the OCC’s rulings by the courts.
It would also allow the agency to preempt all equivalent state
standards at once. For example, if the OCC were to preempt an Indiana
credit card disclosure law, it could apply the same standard to other
credit card disclosure laws with similar language.
The bill would also lower the threshold required for the OCC to
preempt state standards by saying that it can override any law that
“prevents, significantly interferes with, or materially interferes” the
business of banking.

That’s certainly a set-back for consumer advocates and state regulators, who had high hopes that the juggernaut of OCC world domination would be somehow forced to grind to a halt. In the messy world of legislation-making, the sausage that results sometimes is not very appealing to those with refined tastes.

Frank also agreed to a legislative maneuver that makes the preemption power provision almost bullet proof.Bean succeeded in convincing Frank to adopt the bulk of her proposal to broaden preemption and roll it into the Massachusetts Democrat’s
manager’s amendment. By incorporating it as part of the base text
without requiring a separate vote solely on that provision, the move
virtually guarantees that her preemption language will stick.

Ms. Kaper also reported that there were further signs of compromise by Frank and the managers of this legislation with moderates, which may mean that a piece of legislation might be worked out with which banks could actually live.

During the negotiations, moderate Democrats also succeeded in convincing House leaders to consider other amendments during debate, including a measure by Rep. Walt Minnick, D-Idaho, that would substitute the creation of a new consumer agency with a proposal that would let a council of existing federal regulators jointly write new safety and soundness standards and consumer protections.

We’ll have to see what amendments are actually adopted (as opposed to merely debated) and what eventually passes both houses of Congress, but if that change is as good as it sounds and makes its way into the final bill, it might address the concerns of commercial bankers who were “fixin’ to open up a can of All-American whoop-ass” on Frank’s bill over the single issue of the new “Consumer Financial Protection Czar.” I think bankers might be able to live with a council of existing regulators who write protections. At least, you wouldn’t have a newly created federal potentate with an axe to grind, and each type of bank’s primary federal regulator would be able to have input as to its “constituents’” concerns. It would be nice if the new council also includes representatives of state regulators, so all interested parties have a seat at the table. Again, we’ll need to see the final language before we get too excited.

The House will also consider an amendment by a group of moderates that would alter the definition of a major swap participant in derivatives legislation to better protect end-users.
The new manager’s amendment from Frank will also take steps to
address another big concern of bankers and modify a provision from
Reps. Brad Miller, D-N.C. andDennis Moore,
D-Kans., that would have required secured creditors to take a 20%
haircut in resolutions of firms that pose a risk to the economy.
Under revised language to be included in Frank’s manager’s
amendment, the haircut would be reduced to 10% and apply only to
short-term lending of 30 days or less. It would also explicitly exempt
any debt secured by government entities including the Federal Home Loan banks, the government-sponsored enterprises, the Federal Housing Administration and Treasury securities.

The 20% haircut is an idea that was launched by Sheila Bair and roundly criticized by experienced expert observers. Bair recently claimed that the 20% haircut “would rarely be used” and that it was designed to target “short-term secured funding.” Critics, including long-time bank consultant Bert Ely, publicly warned that the original legislative language would also apply to long-term secured lending and would, in effect, make it nearly impossible for even small financial firms to get long-term secured funding. It sounds like the latest compromises will address the critics’ concerns.

If this spirit of constructive compromise keeps up, there’s no telling what might happen. Something might actually get passed that will satisfy no one but harm few. That’s about the best you can hope for when Congress is in full action mode.

There is speculation in the banking industry that the Federal Deposit Insurance Corporation could start holding more two-for-one sales, so to speak, for failing banks….[S]ome deals to come in Georgia might involve the bundling of a relatively
desirable bank with another bank that is either in an undesirable
location geographically or that has so little franchise value it is
unlikely to be acquired alone in an FDIC-assisted transaction.

[...]

The failed bank-version of a two-for-one auction is known as a “linked bid.”

Thus far, most “linked bank transactions” have involved related institutions, such as those owned by a single holding company. The “new paradigm” will assemble unrelated institutions into one bid package.

While reporter J. Scott Trubey correctly observes that “bundling banks” reduces “pressure on the resources of regulators and eliminates multiple troubled banks at once,” there are advantages for a buyer, as well, particularly for a buyer that may be an acquisition group currently on the outside looking in or that owns a relatively small bank and wants to build a franchise through failed bank acquisitions. Multi-bank deals can open up the bidding process to a larger pool of bidders who are looking to pump substantial amounts of fresh capital into a new franchise and to employ a management team that can handle the consolidation, integration, and troubled asset management and workout tasks that such deals require. The Southwest Plan transactions of the late 1980s in Texas were classic blueprints for packaging groups of failed banks together based upon various factors (geographic location, for example, or similarity of asset mix) and having a larger pool of interested bidders from which to draw.

While the linked article focuses on Georgia (the elephant graveyard of banks thus far in the current meltdown), there are other geographic clusters that may make sense for such bundling, including Illinois, California, Florida, parts of the Northeast, the Northwest, the upper Midwest, and the Southwest (perhaps a New Mexico/Colorado/Arizona bundle or one centered in Colorado and encompassing a number of surrounding states). The possibilities for bundling are large, and if the 130 institutions that have failed thus far are only roughly twenty percent of what’s heading down the pike, the FDIC is doing the right thing by considering this alternative. Currently, it might merit only a small squib in a regional business paper, but it’s a flashing neon sign to those of us looking for glimmers of hope that there may be solid opportunities to make silk purses out of sows’ ears.

There is speculation in the banking industry that the Federal Deposit Insurance Corporation could start holding more two-for-one sales, so to speak, for failing banks….[S]ome deals to come in Georgia might involve the bundling of a relatively
desirable bank with another bank that is either in an undesirable
location geographically or that has so little franchise value it is
unlikely to be acquired alone in an FDIC-assisted transaction.

[...]

The failed bank-version of a two-for-one auction is known as a “linked bid.”

Thus far, most “linked bank transactions” have involved related institutions, such as those owned by a single holding company. The “new paradigm” will assemble unrelated institutions into one bid package.

While reporter J. Scott Trubey correctly observes that “bundling banks” reduces “pressure on the resources of regulators and eliminates multiple troubled banks at once,” there are advantages for a buyer, as well, particularly for a buyer that may be an acquisition group currently on the outside looking in or that owns a relatively small bank and wants to build a franchise through failed bank acquisitions. Multi-bank deals can open up the bidding process to a larger pool of bidders who are looking to pump substantial amounts of fresh capital into a new franchise and to employ a management team that can handle the consolidation, integration, and troubled asset management and workout tasks that such deals require. The Southwest Plan transactions of the late 1980s in Texas were classic blueprints for packaging groups of failed banks together based upon various factors (geographic location, for example, or similarity of asset mix) and having a larger pool of interested bidders from which to draw.

While the linked article focuses on Georgia (the elephant graveyard of banks thus far in the current meltdown), there are other geographic clusters that may make sense for such bundling, including Illinois, California, Florida, parts of the Northeast, the Northwest, the upper Midwest, and the Southwest (perhaps a New Mexico/Colorado/Arizona bundle or one centered in Colorado and encompassing a number of surrounding states). The possibilities for bundling are large, and if the 130 institutions that have failed thus far are only roughly twenty percent of what’s heading down the pike, the FDIC is doing the right thing by considering this alternative. Currently, it might merit only a small squib in a regional business paper, but it’s a flashing neon sign to those of us looking for glimmers of hope that there may be solid opportunities to make silk purses out of sows’ ears.

Federal regulators on Friday seized AmTrust Bank, a battered Cleveland thrift kept alive this year after local politicians pleaded with the government for a second chance.

[...]

…AmTrust benefited from the advocacy of politicians, including Rep. Steven LaTourette (R., Ohio), who pleaded with Treasury and White House officials not to kill a second Cleveland bank. Cleveland’s Democratic mayor, Frank Jackson — a critic of National City’s forced sale — also sought to protect AmTrust.

At the same time, regulators were hoping that federal rescue programs being rolled out would stem the number of seized banks.

The OTS and FDIC eventually agreed to plans by AmTrust to aggressively shrink its balance sheet, sell branches, and thicken its capital cushions, according to people familiar with the matter.

The “shrinkage” plan didn’t work. On the other hand, unnamed sources “close to AmTrust” told a tale that sounds like it’s straight out of Texas circa 1985.

People close to AmTrust blame federal regulators for some of the troubles. In recent months, OTS examiners demanded that AmTrust write down the value of loans far more aggressively than bank officials thought necessary, these people say.

The OTS also required AmTrust to beef up its reserves to levels that executives regarded as excessive, these people said.

The requirements triggered more losses. Deteriorating finances prompted regulators’ complaints about AmTrust’s health to amplify from “a gradual drumbeat … to a crescendo,” said a person close to the company.

AmTrust officials say they were perplexed, especially after regulators earlier blessed the company’s turnaround plans. “There’s no way loans could have been worth X nine months ago and are worth a tiny fraction of that today,” said the person close to the company.

Once the regulators decide that a bank is doomed, the “mark-to-depressed-market” scythe starts swinging, the death spiral starts, and you can’t pull back on the joystick. You’re headed straight into the ground. Those of us who’ve been through this recently (and many more times in the past) know that as a bank lawyer in such a situation, you’re nothing more than an oncologist whose patient is going to die and there’s nothing you can do other than comfort it on the way out.

The OTS didn’t cause AmTrust to fail. Bad loans and the worst recession since the 1930s caused the failure. Monday morning quarterbacks can argue until the end of time whether the OTS hastened the failure or delayed the failure (or, ironically, both), what the right call in this case should have been, and when it should have been made. One thing is certain, and it’s a point that Paul Jackson at Housing Wire has been making since this bank failure blitz first started: the current crop of failures are costing the FDIC more losses-per-failed-bank than the last time we went through this process. This one will cost the FDIC an estimated $2 billion.

AmTrust’s deterioration over the past year likely resulted in the bank
selling for a lower price than it would have fetched if the thrift had
been seized earlier, said people familiar with the government-led
auction.

Given that result, one more thing is certain: the next politician that shows up at the doorstep of a federal bank regulator requesting that the regulator give a bank more time to work out of its troubled condition will likely be given the AmTrust example and politely shown the door.

“We’re looking now at whether we should provide some
further loss sharing for principal write downs,” Bair said.
“Now you’re in a situation where even the good mortgages are
going bad because people are losing their jobs. So you have
other factors now driving mortgage distress.”

She’s right on the money when she asserts that we’re well into the time where job losses are causing people to default. That’s precisely the reason that Dallas Morning News real estate columnist Steve Brown stated last Friday that all these mortgage modification efforts that people like Sheila have been pushing are a waste of time. Why? Because: “Its the economy, stupid.”

The somber
truth is that most people who can no longer afford to make their
mortgage payments will lose their homes. And no amount of programs out
of Washington will change that. Indeed, so-called loan
modifications or workouts are much less likely to succeed today than
when we first heard about them a couple of years ago.

[...]

No amount of
loan modification will keep someone in a house after he loses a job and
burns through his savings. He needs a job, not a new mortgage plan.
Short of giving people their houses outright, there’s nothing the
mortgage company can do. Almost a quarter of Americans with loans now
owe more than their houses are worth.

[...]

What happens
– as soon as early next year – when the mortgage companies decide to
bite the bullet and take back all of these houses? What will happen to local residential values when a new wave of distressed houses hits the market?

Guess.

My feeling about Ms. Bair’s proposal is that if Congress wants to require purchasers of failed bank home mortgages to write off mortgage principal and have the US government cover the acquirers’ write-offs with appropriated tax dollars, then let Congress
debate such a law and enact it if a majority of both houses agree. What Sheila
Bair is doing is making insured banks foot these costs through their
assessments, since it’s the banks who fund the FDIC and it’s the FDIC that will
lose money by requiring and “covering” those principal write-offs.

Ms. Bair does pay lip service to the notion that the FDIC must engage in such social justice engineering only if it stands to recover more (or pay out less) than it would by not engaging in such unprecedented practices.

The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal writedowns.”

I doubt we’ll ever have accurate analyses that show whether or not the FDIC recovers more from such practices that it would without them. It’s all a matter of populist posturing to curry favor with powers in Congress and the Executive Branch who are setting the political agenda in D.C. these days. Therefore, don’t bet against this proposal becoming a reality.

As someone who represents folks who buy failed bank assets from the FDIC, I can’t say that those clients won’t benefit.

“For the acquiring banks, it’s great because now they get more protection for the assets that they’re picking up and they have more flexibility in dealing with the problems,” John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York and is a former FDIC attorney, said in a telephone interview.

Unfortunately, if the FDIC doesn’t end up ultimately recovering more than it would have without this increase in loss coverage, then the rest of the FDIC-inured commercial banking sector will take it on the chin.

The Office of Thrift Supervision is not preparing for a possible merger
with another regulator, and is looking to hire 40 entry-level bank
examiners “in the next 12 to 14 months,” its acting director John
Bowman told reporters Tuesday.

[...]

Bowman emphasized repeatedly that no bill has been passed.

“The House has yet to pass a piece of legislation dealing with the
issue definitively, and the same is true with the Senate,” he said.

John can be forgiven for his sang-froid. He’s got a tough job to do, holding together an office whose morale must be lower than a Simpson sister’s IQ. He’s got to rally the troops and keep them all from bolting for greener pastures (although in this job market, most pastures have been burnt black). Also, critics in Congress and elsewhere have been calling for the hide of the OTS to be nailed to the side of a barn since it was born out of the ashes of the former Federal Home Loan Bank Board, when the nation’s thrift industry went into a meltdown in the late 1980s. It’s still standing twenty years later, notwithstanding the sniping and carping. Therefore, he can’t be blamed for engaging in a little public yawning.

Nevertheless, if the OTS gets a reprieve, it will be likely to be due to the failure of Congress to pass any meaningful financial reform legislation this year, at least any that will alter the existing regulatory agency turf in D.C. If that’s the case, then there’s always next year or the year after that. As I’ve said before, after public relations debacles like IndyMac, BankUnited, Wamu and Countrywide, the “long knives” slashing at the OTS seem especially deadly this time around. Whatever else might or might not be done with regulatory reform at the federal level in the near future, if I had a gun put to my head (a picture sure to bring a smile to the lips of the legions of my detractors) and was forced to make a guess, I’d guess that by this time next year, the OTS will either be gone or have one foot in the grave and another on a passed or soon-to-be-passed legislative banana peel.

Then again, that’s just my opinion. I could be wrong.

WashingtonFirst Bankshares Inc. has sold a second round of preferred stock to the Treasury through the Capital Purchase Program, part of the Troubled Asset Relief Program.

On Oct. 30, Reston-based WashingtonFirst got a $6.84 million
infusion from TARP, nine months after it got $6.63 million through the
program.

MMMMMM, MMMMM! I’ll bet that Son of TARP goes great with fava beans and a fine Chianti.

The bank says that it will be using that capital to make loans to debt-deprived borrowers (as required by the terms of TARP II) .

Regulators offered the bank the money and it chose to take it, said Shaza Andersen, CEO. “We have a huge amount of requests for loans right
now.”

She said the bank will use the funds primarily to make loans, though
it also is in expansion mode. It is hiring for seven new positions and
is exploring options for new branches and acquisitions in Maryland and
Northern Virginia.

Wait a minute…It’s “also in expansion mode.” I sure hope none of that fine preferred stock bought by Uncle Sam is used to gobble up fellow banks. That wasn’t the announced purpose of either TARP Senior or Junior. The next thing you know, one of these banks might actually use the additional capital to cushion its loan write offs and build its loss reserves. When will the perfidy cease?

As to other banks who gave TARP a cold shoulder, Ms. Anderson thinks their concerns are unfounded.

Many banks didn’t take TARP money because they were unhappy with the frequently changing restrictions and the added scrutiny that came with
it — particularly the limits on executive compensation.

Andersen isn’t concerned about the restrictions, and says that
WashingtonFirst executives don’t make enough to be affected by the
compensation caps.

Those executives may not make enough to meet the caps today, but since there were no compensation restrictions in effect at the time the first round of TARP capital was issued, how can you be assured that Congress won’t lower the caps next week, next month, or next year? How can you be assured that Congress won’t impose some other restrictions on TARP takers that make it onerous to have received “cheap” TARP capital? Well, of course, you can’t be assured. You’re betting on a hope and a prayer, otherwise known as the “good faith” of legislators and regulators.

One thing is certain, however: Ms. Anderson is not concerned about surveys like those we discussed last week, that show TARP-takers take it on the PR chin in the eyes of their customers. If Ms. Anderson is correct, and “there are a lot of small businesses” who need the loans that WashingtonFirst will provide “right now,” then perhaps her bank will eventually end up a public relations “net winner.”

The latest FHA actuarial report calculates the damage SFDP inflicted on
the FHA Mutual Mortgage Insurance Fund in startling detail. If the
government had never endorsed SFDP loans, the economic value of the
MMIF would be $13.2 billion as of September 30 — instead of $3.6
billion — a difference of almost $10 billion. In other words, FHA would
be in stronger financial shape today.

DAP was demonstrably disastrous long before this latest report. More than two years ago, the late Tanta of Calculated Risk blog fame analyzed the bad effects of the practice in a fashion that even members of Congress could understand. Of course, when consumer advocacy groups and home builders exert pressure on Congress, the facts can be ignored. Nevertheless, even Congress eventually got it right, after HUD failed to follow the Administrative Procedures Act. On the bright side, the FHA report notes that at least DAP won’t continue to drag down FHA on loans closed after the practice was finally banned. While that may be small comfort in light of the continued bleak economic outlook, at least the FHA won’t be forced to choke down the type of bilge water that was generated by DAP. For that, the American taxpayers should consider themselves lucky.