Kabuki Week

Well, this week in banking news ought to go down in the annals of U.S. banking history as Kabuki week... a highly-stylized drama with elaborate make-up worn by its performers.

First, Senator Elizabeth Warren (D-Massachusetts) came out and proclaimed herself a stalwart champion of community banks in an article, appropriately titled, Elizabeth Warren, Champion of Small Banks.  Yes, this is the same Elizabeth Warren who's ideas spawned the Consumer Financial Protection Bureau (CFPB).  The federal agency that is the source of much of today's (and tomorrow's) new regulatory burden for the community banks she so loves and cherishes.

Consumer protection is an important public policy priority, but in the hands of an unaccountable agency with a single head and boundless financial resources, it can become the nanny of all nannies when it comes to layering on burden and compliance obligations for community banks.

The second piece of Kabuki theater came from the Financial Services Roundtable and the American Bankers Association.  Both are squawking about the new interagency leverage ratio proposal for the eight largest U.S. banks.  They claim that the new leverage requirements would put U.S. banks at a significant competitive disadvantage and threaten our economic expansion by adversely affecting the level and cost of credit.

To the first issue, competitive disadvantage, I invoke the concept of American Exceptionalism.  Americans are leaders, not followers.  When the policy leadership is about a stronger, more resilient global banking system, through the mechanism of a stronger U.S. banking system, that's a good thing.  Americans have never thought that keeping company with the lowest-common denominators was a virtuous American value.  Plus fortress-like balance sheets, in our present risk-on/risk-off anxiety-ridden funding markets, ought to be a competitive advantage, not a disadvantage.  

Regarding the level and cost of credit issues, let's start with the level of credit.  Don't underestimate the new lending opportunities that will now accrue to the regional banks and the other 7,500 banks in the United States because leverage requirements are being raised on eight U.S. mega-banks.  In the old days of double and triple the number of commercial banks that we have now, the United States had a highly developed bank correspondent network for syndicating and participating loans so that the largest corporate customers could be adequately served.  Securitization has changed the nature of that business in a big way over time, but the bones of the old system are still there.

As to the cost of credit, the large bank trade groups are probably exactly right.  With the eight largest banks accounting for more than half of the market share in the United States, credit spreads (above the cost of funds) are likely to rise nationwide.  Most economists specializing in market structure and competition would agree that a small group of market participants with a majority share of any given market are, in their parlance, "price leaders" and not "price-takers".  The structural credit spreads above the cost of dollar funding will likely increase to compensate for higher common equity capital requirements.

The Wall Street Journal "prime" base rate, at 3.25% today, is about 3% above the target federal funds rate of .25%.  Any increase might be constrained to some degree, however, by the banks in the next tier of the marketplace, the large regional banks (though some will be free-riders), and potentially lower funding costs owing to stronger mega-bank balance sheets.

Those higher credit costs will be paid by you and me, either directly through the consumer or mortgage loan process, or in the form of higher product prices generally as the higher costs of corporate credit works its way into the national economy.

Maybe also in bank fees, but, in my opinion, the jury is out.  Our glorious news media seems to have over-sensitized retail bank customers to bank fees (overdraft fees, for example) in the same manner that they have over-sensitized consumers to changes in gasoline prices.  A 5 cent increase in the cost of gasoline amounts to only $1 for the driver of a car with a 20-gallon fuel tank, but people will patronize the gas station across town if the price for a gallon of gasoline is a couple of cents cheaper over there.  Go figure.  The same may be presently true for retail banking services.

Higher credit costs are a difficult, but necessary public policy choice.  Would you pay a little extra for the things around you in exchange for a safer and sounder banking system?  Those who saw the values of their homes drop like boulders in the Great Recession... who also saw the value of their retirement savings evaporate or be subject to miniscule rates of return.... and who may have also lost their jobs in the process, would probably say yes.

Higher nationwide credit spreads could also be a very nice back-door market subsidy to community banks that have been valiantly battling net interest margin compression for the last few years.  A banking market-wide structural increase in credit spreads could spell a bit of sorely needed relief.  

Capital Punishment?

credit: macrobuiness.com.au

Was it capital punishment at today's meeting of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC)?

Nope, not capital punishment, just a recipe for a better night's sleep and, with the supplemental leverage ratio proposal, the foundation for a safer, sounder, and more prosperous banking system in the United States.

I was watching the live webcast of today's meeting of the FDIC Board of Directors with intense interest.  Because yesterday, CNBC reported that the FDIC would propose a 5% common equity to assets leverage ratio for the largest and most interconnected U.S. banks - the global systemically important U.S. financial institutions.

The pure joy of such a potential development was driven to exhilarating heights as it comes on the heels of a troubling Basel III report just released by the Bank for International Settlements - the Vatican for Basel III worshipers.   

The Basel Committee on Banking Supervision just released a study,  Regulatory Consistency Assessment Programme (RCAP): Analysis of risk-weighted assets for credit risk in the banking book.   The study looks at risk weighting done by the world's largest banks, using their own models, with regard to the internal ratings-based approach (IRB) to credit risk - an "advanced" Basel III approach.  The report confirms that risk weights for credit risk in the banking book vary significantly across banks.  In fact, during a hypothetical portfolio bench-marking exercise: "...risk weight variation could cause the reported capital ratios for some outlier banks to vary by as much as 2 percentage points from the benchmark (or 20% in relative terms) in either direction."  

That, folks, is what passes as an advanced scientific approach to bank capital regulation!

The FDIC board meeting was a refreshing, but not a totally satisfying, event.  The Board took two substantive votes.  First, the Board voted on an interim final rule for domestic bank capital regulation that was substantially similar to that approved by the Board of Governors of the Federal Reserve System last week.

The vote was 4-1 with Director Hoenig dissenting primarily on the issue that a domestic capital rule should not be promulgated with, what almost everyone seemed to agree, was an inadequate supplementary leverage ratio.

The other vote was on an interagency Notice of Proposed Rulemaking (NPR) on a higher supplementary leverage ratio for the largest U.S. bank holding companies (BHCs).  The vote?  Unanimous for the NPR.

Under the proposed rule, top-tier bank holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) would be required to maintain a tier 1 capital leverage buffer of at least 2 percent above the minimum supplementary leverage ratio requirement of  3 percent, for a total of 5 percent.  The leverage buffer would function like the capital conservation buffer in the  previously-approved domestic capital rule. Failure to exceed the 5 percent ratio would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions.  In addition to the leverage buffer for covered BHCs, the proposed rule would require insured depository institutions of covered BHCs to meet a 6 percent supplementary leverage ratio to be considered "well capitalized" for prompt corrective action purposes.

The supplementary leverage ratio includes many off-balance sheet items and, like all capital minimums, banks are expected to maintain a cushion comfortably above these capital floors.

The proposed rule would currently apply to the eight largest, most systemically significant U.S. banking organizations - JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp.

Plaudits to federal bank regulators today!  While the proposed supplementary leverage ratios may not be as high as some might prefer, federal bank regulators, looking out for the best interests of the U.S. economy, deserve positive recognition for well-executed public service.  They fought the pressure to lower leverage ratio minimums to levels that, internationally, would allow certain large European and Asian banks to appear properly capitalized, while also simultaneously strengthening the U.S. banking system.

As far as the FDIC board meeting not being totally satisfying, unfortunately we are prisoners of an old high school debate tactic...(s)he who frames the issue, controls the argument  (or in the realm of regulation-writing... (s)he who holds the pen, controls the draft).  The basic leverage ratio has been "tagged", by the risk-based capital regulation proponents, as a supplemental, and therefore secondary, capital measure since the inception of the risk-based capital regulation movement decades ago.

The basic leverage ratio has always been framed by the Basel Committee as the poor second cousin of the risk-based approach to capital regulation.  You know, something for the old-fashioned folk who prefer a mug of simple leverage beer to either a chilled glass of risk-based standardized approach Chardonnay wine or a nose-tingling flute of Advanced IRB Champagne.

In a do-over, I would prefer a doppelgänger world where the overly complex and easily gamed risk-based capital approach is itself supplemental to the basic leverage ratio.  The risk-based capital approach being a useful, though imperfect... additional, but not driving... capital surveillance tool.  

My biggest concern is not about risk-based capital regulation's over-complexity, leviathan-sized regulation books, nor the natural propensity for larger banks to game or circumvent the system.  My biggest concern is that risk-based capital regulation has a subterranean steering current that is the covert precursor to a potential world of capital-incentivized bank credit allocation by the Federal government.

Note how the risk-based capital rules follow the political winds when it comes to OECD sovereign debt, public sector enterprises (like the busted Fannie Mae and Freddie Mac), and real estate lending.  In the hands of some future government officials, who may be less sympathetic to the benefits of market capitalism, risk-based capital regulation becomes the slippery slope toward potential bank credit allocation by government incentive, rather than mandate.  Basic leverage ratios, on the other hand, are economic libertarians.

It's not cause to build a bomb shelter or hoard six months worth of food, but it is important to think about the impacts and implications of the regulatory momentum and inertia we have built up on the path we are presently following.  How will our present actions impact the future structure, operation, and risk profile of the U.S. banking system?

Strategic Planning Tools for Community Banks

With the onset of the summer months, community bank CEOs and their boards of directors start to think about updating strategic business plans prior to the autumn budget season and the start of a new fiscal calendar year.  Some do it with facilitated planning retreats, others at regularly scheduled board meetings, others use bank-wide roll-up techniques.  Regardless of the method used, the goal is to set direction, goals, and objectives.  Including fine-tuning performance measures, tweaking product offerings, altering (or validating) geographic presences, and adjusting risk limits.  Then promoting a shared understanding among employees through strong and effective written and oral communications efforts.

Recently, the Office of the Comptroller of the Currency (OCC)  released two free documents that can help make community bank strategic planning more effective.   The first is:  A Common Sense Approach to Community Banking.  I like this document the best from the current crop of community banking-oriented publications coming out of the Federal bank regulatory agencies because this one was developed by bank examiners.

Bank examiners are front-line practitioners of the art of management appraisal, so their best-practice themes about the bank management process, banking risk management, and corporate governance come from personal observations and experiences gleaned from a career of performing examinations of banks of many sizes and in varied locations.  It is one of the reasons most community bankers consistently say that they really value the informal chats they have with members of their examination teams.  They know these examiners have combed through the innards of many banks and have seen the good, the bad, and the ugly when it comes to banking practices.

The guide integrates risk assessment and risk management with strategic planning and strategic planning's critically important component, capital planning.  It is the first publication that lobbies for a structured, but appropriately tailored, Enterprise Risk Management (ERM) process for community banks.  The guide also highlights the benefits of risk management contingency planning through scenario analysis and stress testing.

Frankly, it beats the hell out of the cost of a fancy pants banking consultant... because its valuable advice is free and, if you are a national bank or federal thrift, it also comes with lifetime technical support - your OCC assigned portfolio manager and his or her Assistant Deputy Comptroller.  They can help with the "what to" and learning resources; the "how to" is up to you and your talented staff.

The second document, which complements the first perfectly, is the latest OCC Semiannual Risk Perspective.  The report aims to highlight issues that pose threats to the safety and soundness of banks and thrifts.  The report presents information from four points of view: 1) The Operating Environment, 2) The Condition and Performance of Banks, 3) Funding, Liquidity, and Interest Rate Risk, and 4) Regulatory Actions.

It represents the "T" in the SWOT  Analysis (Strengths, Weaknesses, Opportunities, and Threats) referred to in the Strategic Planning section of  A Common Sense Approach to Community Banking.  It is a must-read for bank CEOs and board members wanting to get a better grasp on external threats to the health of the banking system.

Well-grounded freebies like A Common Sense Approach to Community Banking and the OCC Semiannual Risk Perspective, coming at a time when community banks are sweating every dime, is a helping hand gratefully accepted.  Gosh, the only thing that could make this combination even sweeter would be an assessment rebate from the Comptroller!

"Insanity in Today's Mortgage Market"

That's the title of the latest policy article, written by Jack Guttentag, outlining the present state of the mortgage market since the latest financial crisis.  Bottom line: good mortgage lending opportunities are being overlooked in today's market.  Mr. Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania and one of the nation's premier experts in housing finance.  He also has an excellent website: www.mtgprofessor.com  This article and others in his library make for great reading.  A highly recommended browser bookmark for those following housing policy in the United States.

Many years ago, I was introduced to Jack's work by a colleague of his at Wharton, Dr. Ken Thomas.  Ken is also a  prominent banking consultant, based in Miami, who I have had the pleasure to know for over two decades.

Jack's excellent article trumps what I had on the blog stove-top this week.  Without further ado and because the material is copyrighted, please click on this article title:  Insanity in Today's Mortgage Market

A Single Federal Community Bank Regulator?

It's painful to observe the mega-bank vs. community bank internecine warfare unfolding within the U.S. banking industry.  At a time when unity might collectively advantage the industry more, the dynamics of detrimental fratricide seem to be dominating the banking trade press and Washington politics lately.  Its present incarnation is the Brown-Vitter Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), aimed at hobbling our largest banks with significantly higher capital requirements and assorted other restrictions.

The frustration of community banks is expressed through the Independent Community Bankers of America (ICBA) End Too-Big-to Fail report.  Snippets such as "Community banks are living with the wreckage of the megabanks... their abusive practices have resulted in new consumer and capital regulations... regulatory burden exacerbates consolidation and compounds the problem of too big to fail."   In the report's press release, ICBA President and CEO Cam Fine emphasized the core issue: "But there is perhaps no greater reminder of the too-big-to-fail impact than the constant, oppressive regulatory burdens that community banks face on a daily basis."

Federal regulators and Obama Administration officials have raced to the microphones arguing to let existing Dodd-Frank TBTF powers take hold before layering on additional remedial measures.  To the underlying and core issue of the regulatory burden being imposed on community banks, raised by Cam Fine and the ICBA, they have little that's substantive to show.

While there have been many "Main Street, Mom, and Apple Pie" speeches, showy conferences, glossy economic studies, and high-level banker advisory committees on the topic of community banks and community banking;  the bottom-line is that there have been no visibly significant regulatory simplification or community bank carve-outs coming from the Federal bank regulatory agencies.  

We all know that each Federal bank regulatory agency oversees banks other than community banks.  The core interests of community banks, therefore, are diluted within the milieu of each Federal banking agency's overall responsibilities.  In addition, community banks reside on different islands within the Federal bank regulation and supervision archipelago; most at the Federal Deposit Insurance Corporation (FDIC), many at the Office of the Comptroller of the Currency (OCC), and some at the Federal Reserve System.

Today, in a counter-intuitive way, the Dodd-Frank Act may have opened the door to the possibility of considering a single Federal banking agency devoted solely to the regulation and supervision of community banks.  The powers and responsibilities of state bank regulators could be untouched.

Federal Banking Regulation and Supervision in the United States

In the timeline of federal banking regulation and supervision in the United States, the contours of the regulatory landscape were sculpted by periodic financial crisis, legislative responses, and national priorities.  So we started off Federal regulation with a distinction based on whether a commercial bank was chartered by its home state government or chartered by the Federal government.  Then, with the creation of the Federal Reserve System, and its important lender of last resort function, the reach of Federal banking regulation and supervision was extended to Federal Reserve System member banks, regardless of state or federal charter.  Later, during the Great Depression, the reach of Federal banking regulation and supervision was further extended to all commercial banks and specialized lenders (like thrifts), regardless of charter, that were granted federally-backed deposit insurance.

So Federal banking regulation and supervision literally oozed across the spectrum of depository institutions over time, regardless of size or charter, driven largely by an expanded Federal interest in maintaining a safe, sound, and prosperous banking system.

The Dodd-Frank Act, however, made an important, perhaps watershed, change in the overall nature and focus of Federal bank regulation in the United States.  In Section 165 of the Act, it introduced the concept of increasing the stringency of prudential standards based on the size of the financial institution:

(a) IN GENERAL.— 

(1) PURPOSE.—In order to prevent or mitigate risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected financial institutions, the Board of Governors shall, on its own or pursuant to recommendations by the Council under section 115, establish prudential standards for nonbank financial companies supervised by the Board of Governors and bank holding companies with total consolidated assets equal to or greater than $50,000,000,000 that— 

(A) are more stringent than the standards and requirements applicable to nonbank financial companies and bank holding companies that do not present similar risks to the financial stability of the United States; and 

(B) increase in stringency, based on the considerations identified in subsection (b)(3).

(2) TAILORED APPLICATION.— 

(A) IN GENERAL.—In prescribing more stringent prudential standards under this section, the Board of Governors may, on its own or pursuant to a recommendation by the Council in accordance with section 115, differentiate among companies on an individual basis or by category, taking into consideration their capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk-related factors that the Board of Governors deems appropriate

So the path of the history of Federal banking supervision pivoted and now includes, not only horizontal slicing, based on charter and membership,  but also vertical dicing, based on asset size and other factors enumerated above, with regulatory authority for the largest financial institutions vested in the Board of Governors of the Federal Reserve System largely through their bank holding company structures.  It is within this revised framework that the opportunity arises to create a federal community bank regulator solely devoted to community bank regulation and supervision.

How It Could Look

A Federal Community Banking Commission (FCBC) could be formed by (1) acknowledging and granting the Board of Governors of the Federal Reserve primary Federal regulator status over the regulation and supervision over large banks, large nonbanks, and their subsidiaries regardless of charter or membership.  Then, (2) by leaving the ministerial national bank chartering and licensing authority as a separate office within the U.S. Treasury Department; moving agency staff involved in the supervision and regulation of community banks from the OCC, the Federal Reserve, and the FDIC into the new entity.  The FCBC would be the primary Federal regulator and supervisor for community banks.  The Board of Governors of the Federal Reserve System would be the primary Federal regulator and supervisor of all of the rest.  This is only one option for an institutional arrangement. 

One caveat, however, is that, for checks and balances purposes, the FDIC should retain back-up examination authority, as the deposit insurer, over the Federal Reserve System and the FCBC; and it would also be wise for the FDIC to have Ombudsman and independent examination quality assurance authority over both agencies.

For perspective, according to statistics gathered by the Federal Reserve Bank of Dallas, as of  9/30/ 2012, 12 banks had total assets between $250 billion - $2.3 trillion, and with a 69% market share.  An additional 70 had total assets between $10 billion - $250 billion, and represented a 19% market share.  5,500 banks had total assets less than $10 billion, and collectively represented a 12% market share.  How one decides the jurisdictional cutoff for a Federal Community Banking Commission is part of the negotiation interplay.

The concept deserves serious consideration by community bankers and their spokespeople.  Never underestimate the power of community bankers when they are united.  Community bankers are influential members of the business community in all 435 congressional districts and are collectively influential in all 50 states.  Despite the inevitable push-back that might come from those invested in the established Federal institutional arrangement, community bankers can get something like this if they really want something like this.

...and I suppose no invitations to the OCC Alumni Association dinners for me anymore.

Lashing Out!

Caja Madrid's ex-Chairman, Miguel Blesa, carted off to jail.

The frustration is understandable.  A nation's banking system brought to its knees.  Multi-billion euro bank bailouts required to stabilize the financial system.  Economic wreckage in the form of a deep recession, sky-high unemployment, and homeowners thrown into the streets as the bank foreclosure machines create their own personal and indelible pain.  Families losing life savings after having been sold preference shares marketed in bank branches, while being told, or at least believing, that they were like bank deposits.  Someone needs to pay.  Someone needs to go to jail.

That may sum up the public vitriol directed at bankers in Spain.  So far, over 100 Spanish bankers are under some form of legal investigation for their actions leading up to the current banking crisis.

One of the higher profile figures, Miguel Blesa, Chairman of Caja Madrid between 1996 and 2010, was recently remanded to preventive detention in a Madrid jail, tagged with a 2.5 million euro (US$3.25 million) bail requirement, for alleged criminal "disloyal administration".  This is in connection with Caja Madrid's $927 million 2008 purchase of 83% of the Miami-based City National Bank of Florida ($2.8 billion total assets).  Considered a flight risk, his passport was confiscated.  The bail was set to be equivalent to the severance payment that Mr. Blesa reportedly received from Caja Madrid.  He posted bail the next day.  Formal charges have yet to be filed.

Subsequent to the City National Bank of Florida purchase, Caja Madrid participated in an organizational consolidation, with six other Spanish savings banks, to create Bankia... a banking behemoth and the largest mortgage lender in Spain at the time.  Owing to the rapid and deep deterioration of real estate values in Spain, Bankia later required a $22 billion European Union bailout.  Bankia has now been nationalized by the Kingdom of Spain.  Shareholders, including those holding shares that were sold in Bankia retail branches, have lost billions.

The Spanish magistrate uses an April 2010 report from the Bank of Spain to claim that: 1) the transaction was structured in a way to avoid required government and civic approvals in Madrid; 2) that the price paid for City National Bank of Florida exceeded the prices paid by other Spanish banks (Banco Sabadell and Banco Popular Espanol) for their Miami-area acquisitions at the time; 3) that an (undated) U.S. Office of the Comptroller of the Currency (OCC) examination of City National Bank of Florida was emphasizing the bank's high and growing strategic risk to the bank's executive leadership.  Taken together, the magistrate alleges a loss of value to Caja Madrid of more than 500 million euro ($650 million) and thus the charge of criminal "disloyal administration".

According to the figures listed in the 2010 report from the Bank of Spain, Caja Madrid paid the equivalent of 3.7 time book value  and 32.9 times earnings for City National Bank of Florida in 2008.  While Banco Sabadell, in January 2007, paid 3.4 times book value ($175 million) and 19.4 times earnings for the $600 million TransAtlantic Bank in Miami.  It states that Banco Popular Espanol in July 2007 paid 3.5 times book value ($300 million) or 14.9 times earnings for its purchase of the $1.4 billion TotalBank in Miami.

That's an interesting report from the Bank of Spain, but the numbers don't seem to square exactly with other reports.  Reuters reported that the Caja Madrid/City National Bank deal was valued at 3.4 times book value and 16.3 times earnings.  Raymond James reported the Sabadell/TransAtlantic deal at 3.5 times book value and 20 times earnings.  The publicly-reported Banco Popular/TotalBank deal numbers match those quoted in the Bank of Spain report.

Raymond James estimated that since the beginning of 2006 through 2007, in the southeastern United States, bank deals were going at an average of 2.6 times book value and 26 times earnings.

One web commentator, based in Spain, speculated that because Mr. Blesa was a close friend of then Spanish Prime Minister Jose Maria Aznar and arrived at his post as Chairman of Caja Madrid with no previous banking experience, he must have been taken for a ride by the owner of City National Bank, Leonard Abess, Jr.   Mr. Abess disagrees.  In a recent Miami Herald interview:  "He disputed that the purchase price was too high and said the Spanish conducted substantial due diligence.  He said the Spanish bankers courted him for two years before he would even let them make an offer."  This article in Florida Trend at the time of the deal seems to support him.

Was it a very high price to pay for a bank?  Seems so, compared to the Raymond James regional averages.  Was Leonard Abess, Jr. a talented deal-maker?   Surely so.  There is a saying in Miami banking circles - if Leonard Abess is standing in a hole and he tells you that he is digging for gold.... you had better go run and grab a shovel!   Was City National Bank of Florida worth paying more for?  It had always received the highest ratings from rating agencies.

Criminal "disloyal administration" regarding the City National Bank of Florida acquisition?  I just don't see it from this angle.  Times were frothy in 2007 and early 2008, bank purchase premiums in Florida were very high back then.  During the period the Spanish banks were buying into the Miami banking market, the worst of the financial crisis had not set in.  Every South Florida bank took severe credit losses during the downturn.  Owing to a more conservative credit underwriting culture and support from Caja Madrid, City National Bank of Florida was more resilient than most and bounced back earlier.

Having said that though, underlying this attempt to nail Mr. Blesa is an understandable desire by official representatives of Spanish society to hold somebody criminally accountable for the carnage in their financial system and bring a sense of justice and closure to a painful period for all.

In the United States, we took a pass on that kind of accountability, justice, and closure during the financial crisis that precipitated the Great Recession.   No high profile criminal prosecutions, just an unsatisfying broad societal feeling of numbness, fatigue, and senselessness.

As the New York Times noted in a 2011 story: "This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s.  In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail.  Among the best-known:  Charles H. Keating Jr., of Lincoln Savings and Loan in Arizona, and David Paul, of Centrust Bank in Florida."

By taking a pass on accountability, justice, and closure, the U.S. has created another moral hazard that will sow the seeds for even more dangerous banking practices in the future.

The Schneiderman Show 

I've got my eye on you!

Well, we woke up Monday morning to news that the Attorney General for the State of New York (AG) is initiating legal action against Bank of America and Wells Fargo for allegedly breaching the terms of the $26 billion National Mortgage Settlement.  The focus of the legal action are the settlement's 304 servicing standards, the mortgage servicing rules designed to improve customer service and make it easier for homeowners to seek loan modifications.  The press release from the AG's office claims that it has documented hundreds of cases of homeowners put at risk by the banks' violations of the national settlement terms.  The AG is seeking injunctive relief and strict compliance with the terms of the national settlement.

Most people have heard the old saw that AG stands for "Aspiring Governor" and this effort seems to be a page torn from the Eliot Spitzer and Andrew Cuomo playbooks.  What's a little galling about this stunt, is that the national settlement included the establishment of a Mortgage Settlement Oversight Board and a settlement monitor, the Office of Mortgage Settlement Oversight.  It is headed by Joe Smith, former North Carolina Commissioner of Banks.  Joe Smith is a highly respected veteran regulator with a well-deserved reputation as an honest broker.

Why didn't the New York AG work through the oversight process that was already set up?  Instead the AG chose to do an end run and go gunning for bankers by himself.  This is only understandable in a base political context.

Interestingly, this comes on the heels of another New York State-sponsored attack on bankers by Benjamin Lawsky, the Superintendent of Financial Services for the State of New York, in the matter of Standard Chartered Bank (a British bank).  Specifically, extracting a $340 million dollar penalty for anti-money laundering deficiencies.  All much to the chagrin of his Federal counterparts, who expected the state bank regulator to remain in the Land of the Lotus-eaters suckling on a seemingly endless investigation.  

I was surprised at the Lawsky action at the time and applauded it.  After a career in bank regulation, including a period as Director for International Banking and Finance at the OCC, I sensed a higher-bar was in existence when it came to pursuing actions against banks that hailed from developed countries versus banks from emerging economies.  Maybe it is the Basel Committee common bond among developed-country regulators - like poker buddies or a bromance.  Banks from the developed countries seemed to be held to English common law standards (innocent until proven guilty), while we figuratively hauled out Napoleonic Code standards (guilty until proven innocent) for banks from emerging market countries.

Are we witnessing an artillery exchange between Schneiderman and another potential gubernatorial hopeful, Benjamin Lawsky, using mega-bankers as their cannon fodder?  Six years after the financial crisis began, the mega-bankers are a pitiful lot and easy pickings, what with their bruises, black-eyes, tousled coiffures, and rumpled Brooks Brothers suits.  This sad collection, after a hard day of abuse at the office, takes scant comfort at night, between sobs, only in the fact that politicians have lower approval ratings than our Captains of Finance.