Going, Going, Gone
By Stephen M. Klein
October 2, 2009
En Route Again
As I head down to San Francisco for yet another meeting with a federal banking regulator on behalf of a client, I ask myself, “What is happening in this crazy world of banking?” The past year has been littered with historical and severe financial crisis. Now we are facing the ravages that ensue – as bank after bank in the West suffers the consequences.
The New World of Bank Examinations
Our first hand experience is that bank examinations are now a frightening experience. Examiners, by and large, seem to come in loaded for bear looking under every rock, fearful of missing anything for which they could later be criticized. The ALLL calculation has become a nightmare, subject to arbitrary evaluation. Let’s face it, as long as real estate values plummet and appraisers are afraid of their own shadows, collateral values will diminish and write downs will be mandated by examiners and accountants. With “1” rated banks becoming “3s” and “2s” becoming “4s”, a “3” CAMELS rating is now the new “1.” There rarely is a benefit of the doubt given to the banks. At the root of this evil are the FDIC’s “Inspector General” reports which are mandated for all losses to the insurance fund of $25 million or more. Hindsight, using a telescope is 20/20!
The Enforcement Action Explosion
Enforcement Actions are being handed out like Advil. With 50% of the banks in the Northwest rated “3” or worse, MOUs and C&Ds are more common than not. While the regulators have a job to do, the language is often inflammatory and provisions dogmatic and unachievable. If the goal is to rehabilitate the banks, these actions are more like prison sentences. There is a lot of closing the barn doors after the horses have stampeded going on out there.
The Failures
It makes me sick to see banks we know or have worked with in some capacity fail. Without being cynical or paranoid, it seems when a bank gets in serious trouble, the regulators target them for euthanasia. Supporting the conspiracy theory that the FDIC would like to shrink the banking universe is their recent pronouncement extending the three year “lockdown” on new banks to seven years, virtually shutting down any new bank formations for the foreseeable future.
Thank Goodness for Capital
The only real ray of sunshine lately has been the ability of non-C&D banks to raise capital. With bank stock prices at decade low values, investors have shown a willingness to put new capital in selected banks that are seen as survivors and consolidators. This is critical to “refuel the tank.” However, the C&D banks have found the sledding far tougher. How long this capital window will remain open is a big unknown, but now clearly is the time to try to raise capital.
The FDIC Insurance Fund
As I predicted in prior CyberGrahams, the fund is now basically bust. Who would ever have thought of 3-year prepaid insurance or of “Reverse Tarp” with the FDIC actually borrowing from the very big banks Treasury just bailed out. It’s beyond insanity. Further, the FDIC is finding fewer qualified bidders for failed banks and a sharply diminished appetite for failed bank acquisitions – not a good formula going forward.
Does Anyone Have Any Solutions?
Well, apparently restructuring banking regulation is going to solve a (hopefully) once in a lifetime financial crisis, fueled by easy credit and inflated real estate values. I don’t think so. Let’s face it, we are in triage now and the patients are falling fast and furiously. I have two simple suggestions: OTTI treatment for real estate collateral and OREO where the appraised value is at a “fire sale” level and the bank has the capacity to hold for a period of time and tolerance for good management teams that are proactively addressing their problems. This situation will be exacerbated as more banks fail and the FDIC as liquidator aggressively disposes of real estate acquired through these bank failures. Eventually, the real estate market and values will bottom out – and I think we are far closer to the end of the down cycle than the beginning. The banks just need some time to allow the cycle to turn. It’s that simple! The FDIC can’t afford to take down all the banks. Sanity must prevail at last.
