Dodd Defends His Legislation

Christopher Dodd - as in co-author of Dodd-Frank - defended a few criticisms in the Washington Post a few days ago.  A gem from this article:

"Small community banks were victims of the crisis, with hundreds failing as a result of the big banks’ risky gambles. That’s why they came to Congress and asked us to modernize and strengthen financial regulations, leveling the playing field against the shadow banking industry — entities such as payday lenders and mortgage brokers that had been created to avoid regulation.

"In one of the recent GOP debates, former Massachusetts governor Mitt Romney said that Dodd-Frank is “a killer for the small banks.” In fact, community banks, which were not responsible for the crisis, will pay lower premiums for deposit insurance and continue to work with their existing regulators. And in a nation with more than 6,000 banks, the bulk of the bill’s new regulations apply only to a few dozen of the largest ones, each holding more than $50 billion in assets.

Many community banks are concerned that regulators such as the FDIC have become overzealous. But that is a product of the post-crisis environment and not a result of this law, which, by design, will help community banks continue to serve as a lifeline to small businesses." -Chris Dodd, 2011

FDIC Exposer begs to disagree, as we have throughout this blog.  We wonder exactly what community banks Mr. Dodd is referring to.

Mr. Dodd quotes Mitt Romney above, and this is the statement he is referring to:

"What's happened in this country, [is] the absolute wrong time to have the absolute wrong people put together a financial regulatory bill was right now and Barney Frank and Chris Dodd. They were the wrong guys at the wrong time. Because what they did with this new bill is usher in what will be thousands of pages of new regulations. The big banks, the big money center banks in Wall Street, they can deal with that. They have hundreds of lawyers working on that legislation. For community banks that provide loans to business like yours, they can't possibly deal with a regulatory burden like that. Small community banks across this country are starving and struggling because of inspectors that are making their job impossible. It's a killer for the small banks. And those small banks loaning to small businesses and entrepreneurs are what have typically gotten our economy out of recession." -Mitt Romney, 2011

This may be a presidential candidate pandering to the little guys, or it could be the real deal.  Either way, this is an opportunity to make community banks, and their ties to small business, a major campaign point.

We're Still Here!

Just a quick update -

We're keeping an eye on some interesting developments before resuming our ranting and raving...

In the meantime, Bank of America's announcement to charge $5 a month for using a debit card led to outrage, to the point of sparking a nationwide exodus to credit unions.  Community banks are seizing on this opportunity to draw in angry bank customers (see here and here).

Banking is a business, and the bottom line matters.  Luckily, community banks recognize that customers are assets, not faceless masses that can be nickled and dimed.

Sheila's March Through Georgia (Part 3)

The 2% Rule

It is often said that generals are always fighting the last war.  The same could be said of the regulators in the current Great Recession.  Here, the last war was the savings and loan debacle. The S & L as a business model was destroyed by interest rate deregulation in the late 1970s and early 1980s.  Previously, S & Ls borrowed short by taking deposits and lent very long by extending home mortgages.  That model only works in a market with regulated interest rates. Rather than letting S & Ls fail when the inevitable rate mismatch took hold, Congress and the regulators rewrote the rules to permit the S & Ls to expand their operations to include enterprises with different risks.  Also, S & L regulators kept institutions open long after they were hopelessly insolvent because those regulators did not have funds available to do much else.  None of these thumbs in the dyke held, and the inevitable had to be faced and paid for.

Congress, declaring never again, and attempting to shift most of the blame to the regulators, amended the banking laws to require regulators to close financial institutions as soon as their GAAP leverage capital ratios fell below 2%.  There is no way to say it tactfully, that was a stupid response to a unique crisis primarily created by market pressures to deregulate rates.

Banks need not fail because their tangible capital ratios fall below some bright line number. Banks are liquidity businesses.  They can continue to operate with no capital (or even less) as long as they can continue to generate cash necessary to meet their customers’ needs.  If this 2% closure rule had been in place in the 1970s, all the banks in Atlanta and most throughout Georgia would have been closed.  Hindsight tells us that would have made no sense and would have impaired Georgia’s economic development for decades.  History, tells us that in dire economic circumstances, given the deposit insurance system’s protection against “runs,” banks with stable core business usually can overcome their problems with time and build back capital deficiencies.  The fact that “watchful waiting” could not solve the mismatch problem created by an obsolete S & L business model is not a lesson usefully carried over to the current economic dislocations.

The 2% rule was supposed to reduce failed bank losses to the deposit insurance fund.  Whether it succeeded in reducing average FDIC losses per bank failure is impossible to say based on available data.  Bank failure loss data since 1986 is available at the FDIC web site.  That data indicates that prior to the 2% rule failures cost the insurance funds 17.9% of the average failed bank’s (or thrift’s) assets from 1986 to 1991, the height of the thrift crisis.  Subsequently, after the 2% rule, average failed bank losses as a percentage of assets dropped precipitately.  Then, in 2009 to 2010 losses increased to 23.4% of the average failed bank’s assets.  It is thus apparent that losses are larger as a percentage of assets under generally adverse economic conditions than they are under more favorable conditions.  The greater financial distress during 2009-2010 compared with 1986-1991 precludes any confident conclusion about the impact of the 2% rule on relative loss ratios.  However, one thing is striking, though not surprising, about the numbers.  They demonstrate that, assuming problem assets are fully written down at the time of failure, the remaining “good” assets are disposed of in depressed economic environments at a substantial loss averaging more than 15% of total bank assets.  In that context, 2% of assets does not seem like much to save if you can avoid a distressed disposal of the “good” assets. 

The banks in Georgia that failed did not do so because they continued to “incur” losses after it became apparent that we were in a very serious real estate led recession.  When that realization occurred, lending came to a dead stop.  Those Georgia banks failed because of losses on loans already on their books before that realization.  Whether anyone is entitled to claim “I told you so” or not, any damage was done and not then curable.  What has been euphemistically called deterioration in asset quality leading to failure was really gradually growing realization of the amount of damage already done.  In that context, since any loss had be incurred and was not increasing, I do not believe that a rational insurance company, and that is what the FDIC is supposed to be, would close a bank that was making money before its provision for loan losses and other real estate expense (but after deposit insurance premiums) just because its estimated tangible capital had fallen below some bright line number.  Doing so needlessly forces the insurance company to absorb the 15% liquidation loss on the “good” assets, a loss that can be avoided, absent an intervening liquidity failure, by letting the bank earn its way back to health.       Yet, those are the facts relating to a number of failed Georgia community banks with core businesses.  The insurance fund, the communities involved and the Georgia economy would have been better off had those banks been permitted to remain open.  GAAP is flexible enough to have allowed that result even with the congressionally imposed 2% rule. 

Regulators want all problem assets written down to the absolutely lowest realizable value.  Bankers generally do not disagree with that philosophy.  In good times when failure is not an issue, there is much to be said for that approach, though I admit to a level of frustration when I see such values become “target values” in workouts while I know they originally were “worst case” values.  In bad times perhaps such values could be used in the regulatory process to instill discipline and measure performance toward regulatory required goals.  However, when GAAP is more flexible, and Congress requires banks to be closed when tangible GAAP capital falls below 2%, good judgment mandates that regulators take advantage of GAAP’s flexibility in the best interests of the insurance fund, the communities served by local banks and the economies in which they operate.

That sounds like something Shelia might have said to Ben and Tim.

Sheila's March Through Georgia (Part 2)

Balance Sheet Reconstruction

The law recognizes two types of “insolvency,” balance sheet and equity insolvency.  Balance sheet insolvency occurs when an entity’s recorded liabilities exceed its recorded assets.  Equity insolvency results when an entity cannot in the ordinary course of its business pay its obligations when due in accordance with their contractual terms.  All commercial banks are equity insolvent by that definition all the time.  A large percentage of all banks liabilities are due on demand.  Banks do not maintain enough cash on hand or other assets that are immediately convertible to cash on established markets to pay all of those demand obligations immediately.  That is why no bank can survive an unrestrained bank run.  Thus, the traditional equity insolvency definition is not applied to banks.  Instead, banks are only deemed insolvent under a liquidity, or equity, test when they fail to pay their obligations when those obligations are declared due by the bank’s customers.

Two insolvency tests are necessary because we expect businesses to pay their debts when due and because we require business owners to have “skin in the game” before we allow them to take business risks with other peoples’ funds, be that borrowed, trade or employee debt.  A balance sheet is indicative of the latter, but it is not designed to indicate effective liquidity management.  Asset balances on traditional balance sheets generally reflect the historical costs of investments made by management to generate income.  Except for inventory the assets reflected are not intended to be sold.  Instead, for a non-trading business, assets are intended to be held for their useful lives to generate income.  Whether those assets can be sold for immediate cash in the amount reflected as their “value” on the balance sheet is in most cases doubtful.  Assets can be sold for cash at optimal values only where there are liquid markets for assets of that type.  For liquid markets to be maintained, assets have to have a high level of fungibility as well as a substantial pool of interested and reasonably knowledgeable buyers.  Non-trading business assets generally do not meet that test.  Nevertheless, assuming that GAAP has been followed, asset values reflected on a balance sheet are indicative of “skin in the game.” 

In recent years finance academics sold on “efficient market” theories and enamored with college sophomore mathematics, together with analysts interested in creating volatile markets to increase trading profits, have united with like thinkers at the SEC to push “mark to market” balance sheet accounting for most financial products.  Much of the finance theory on which this movement was based has been discredited by economic events since 2008, but the movement has influenced the way many think about balance sheet values of financial assets.  There has developed a tendency toward the uncritical assumption that “market value” is in some sense the right “value.”  That tendency has infected the bank regulatory process and has been a significant factor in the failure of a number of banks, banks which I believe were improvidently closed.

Commercial banks serve as financial intermediaries making credit available to those whose needs are not served by the securities markets.  To qualify for credit in the securities markets a company usually has to be public and large.  Generally, such companies incur substantial costs in making all of their material business information available to the public where it is analyzed by numerous professionals such that those companies’ businesses and prospects become public knowledge equally available to all participants in the securities markets.  Their reward is credit on better terms than that generally available to bank borrowers.  To serve the non-public debt market, banks have to develop such company information over time and analyze it on their own.  That requires detailed knowledge of the customer’s operations and people.  To do that effectively, a long-term relationship is often invaluable.

Given these contrasting circumstances, it should be no surprise that bank loans cannot be immediately sold for cash at their recorded values.  Even if the market could immediately learn all that the bank knows about the customer, given the typical size of a bank loan, there would never be enough market participants willing to learn that information to assure a fair market price since learning has a cost which can only be justified if you have a reasonable prospect of making the investment.  Generally, the only market for such loans is a limited number of “vulture” investors willing to take a chance with less than ideal information in exchange for extraordinary returns.  The prices they will pay represent a significant discount to the bank’s investment.

Thus, the immediate liquidation of any traditional commercial bank will result in a loss almost without regard to capital levels within whatever ranges are considered prudent.  Advocates for “mark-to-market” balance sheet values don’t seem to understand this phenomenon.  Banks are in business for the relatively long haul.  Their balance sheets reflect that.  Bank loans earn rates higher than those available for equivalent publically traded bonds to enable the bank to recover its greater costs associated with making those loans, but they cannot front load their charges to cover those costs or cash out at the drop of a hat and make a profit.  The bank business model requires a longer view.

This difference in business assumptions between the academic finance/securities professionals and bankers was demonstrated a few years ago when the SEC called SunTrust to task for overstating its allowance for loan losses.  Bankers believe that they should set aside a percentage of all loans they make for possible loan losses in good times and bad.  They manage the bank to the best of their ability to get through the normal business cycle which includes highs and lows, and loan losses are in part a function of making loans in a cyclical economic environment.  The SEC, on the other hand, believes loan losses are a function of bad times and that during good times very limited reserves are appropriate.  That’s a trader’s mindset, that profits and losses are attributable to market moves, not longer term strategies.  Traders make money on volume and volatility, taking advantage of the cycles.  Bankers save in good times to survive the bad times.  The SEC calls that “managing earnings.”  Bankers call that managing.

To their credit, the bank regulators largely sided with the banks in the SEC’s attack on bank loan loss reserve methodologies, and an uneasy truce resulted.  However, it appears that regulators only supported the banks reflexively because the bankers’ position resulted in a “more conservative” balance sheet with less capital.  There is no indication that the regulators understand accounting theory and why a trader’s balance sheet is fundamentally different from that of an entity engaged in a long-term business enterprise.  This misunderstanding is illustrated by the FDIC’s current examination practices in Georgia related to reserving for loan losses and determining the “fair value” of troubled assets.

In reserving for loan losses GAAP requires reserve percentages to take into account a bank’s lending history.  If a bank has historically incurred losses equal to 0.50 % of total loans, the current loan loss reserve for loans not identified as being problems should reflect that history, larger reserves being required for specifically identified problem loans.  There can be legitimate differences of opinion as to how history is defined.  Is it, say, a one year average or a five year average?  There may be rational reasons for selecting one historical period in preference to another.  However, in examining Georgia banks recently, the FDIC has insisted that bank reserving formulas shorten the selected historical period to the last two years or even the last six months, whichever yields the highest percentage loss history, asserting that the shorter, current period is “more indicative of recent experience.”  That makes no sense by any standard. 

The reason historical percentages are applied to pools of loans not specifically identified as problems is not because you expect that you will lose that percentage of each loan.  Instead, you expect that some percentage of the pool will become problems resulting in losses totaling that percentage of the pool.  Theoretically, if you have a static pool of loans, as the pool ages and individual problem loans are identified, the expected loss percentage applied to that part of the pool not identified as problems should go down because the identification of the problems eliminates the need to apply the historical percentage to the remaining pool of performing loans in order to reserve consistent with the historical loss experience.  That is exactly the position of most banks in Georgia today.  In the last two or three years they have not been making many new loans.  The old pool has aged and problems have been identified.  Loans that are continuing to perform represent credits either unaffected by the Great Recession or those able to withstand its reversals.  To reserve as if that pool will suffer greater losses because extraordinary losses have been incurred by those less prepared for economic reversals is nonsense designed for no purpose other than depleting capital and avoiding any conceivable subsequent criticism for being “too soft” on troubled banks.  Perhaps if the Great Recession continues forever, most banks and businesses will eventually fail, but I know of no legal or accounting standard that compels that assumption.

This same approach has been followed by the FDIC in determining “fair value” for Georgia banks’ troubled assets.  Generally (but over-simplified), GAAP requires troubled bank assets to be recorded at “fair value.”  Accounting literature defines “fair value” as follows:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale). The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the objective of a fair value measurement is to determine the price that would be received to sell the asset or paid to transfer the liability at the measurement date (an exit price). [FASB Standard No. 57]

“Fair value” as defined is currently a true “hypothetical” price in Georgia representing what someone would sell for as an alternative to continuing to hold for better market conditions, giving rational consideration to the costs to hold as well as the timing of predicted market improvement.  That price is very subjective, and the FDIC does not like subjectivity.  Therefore, the FDIC forces Georgia banks to write down troubled assets to a demonstrable immediate cash value which inevitably is a distress price, taking comfort in the “theory” that cash prices are what should appear on balance sheets under “modern” mark-to-market accounting, accounting only appropriate for traders and others with very short term time horizons.

The FDIC’s current examination practices in Georgia relating to reserving for loan losses and determining the “fair value” of troubled assets have destroyed a lot of banks’ shareholders’ “skin in the game” by insisting that loan loss reserves and asset values be based on prices below which any rational investor with the ability to hold would voluntarily sell.  Selling at distress prices might be required to stop a “run,” but banks buy, and pay dearly for, deposit insurance to limit that risk.

Shelia Bair’s last speech as chairman of the FDIC was an attack on “short-termism” as the destroyer of modern business and our economy.  She should have given that speech to her troops long before she left.

Sheila's March Through Georgia (Part 1)

Loan Participations and Too Big to Fail

Loan participations provide smaller banks, including community banks, the ability to compete with their “too big to fail” brethren in providing loans to business entities needing credit in excess of the smaller bank’s legal lending limit.  As historically structured, the originating bank agrees to lend its large customer an amount in excess of its own legal lending limit.  Before the loan is advanced the originating bank sells participation interests in the loan to one or more other banks, retaining only a credit exposure within its legal limits.  On paper, the borrowing customer need not know that the loan is in fact being funded in part by other banks.  As far as the customer is concerned, it is dealing with its own bank which has the ability to meet the customer’s needs on an equal footing with its “too big to fail” competitor. 

Silverton Bank, N.A. was a Georgia bank that failed in early 2009.  Silverton originally started doing business in the 1980s as the Georgia Bankers Bank.  As a “bankers’ bank” one of Silverton’s principal businesses was facilitating participations by its small bank customers, either by purchasing participations or connecting those customers with other Silverton customers interested in buying participations to diversify their loan portfolios or to invest surplus funds.

Because of the unique nature of Silverton’s business, the FDIC was unable to find another bank to take over Silverton in a typical purchase and assumption transaction.  Thus, Silverton’s closure was essentially treated as a deposit pay out and liquidation with the FDIC as receiver.  The FDIC’s treatment of other parties involved with Silverton in participations has caused major disruptions in the operations and credit exposures of banks throughout Silverton’s markets.

As receiver, the FDIC’s current mantra is “least cost alternative.”  That language comes from thrift crisis amendments to the FDIA aimed at minimizing resolution costs.  It seems as if FDIC receiver personnel spend most of their time developing facts to support their file closing memos, demonstrating they complied with “least cost alternative” requirements in resolving a particular problem or asset.  The difficulty with this approach is that problems and assets are not always isolated.  For example, the cheapest way to get rid of a diseased tree in the middle of a forest may be to burn it, and you can write a very convincing “least cost alternative” memo closing the file on that tree if you ignore the fact that you burned down the forest.

One of the major participation problems resulting from the Silverton receivership relates to unfunded commitments.  Construction loan commitments are made before construction commences and are funded as the project is built.  Participated construction loans require each participant to fund its share as draws are approved.  When a real estate recession hits, pending construction loans cause major angst.  Because the economic assumptions on which the project was based have changed, the project is likely to be worth less upon completion than its total cost.  Yet, the only thing that may be more distressed in a real estate recession than an empty completed project is an abandoned uncompleted project.  Whether to complete the project and accept your loss or stop construction and abandon the project is a difficult decision which depends on the peculiarities of the project and the progress of construction when the recession hits.  There is never a “right” answer, but a bank with a partially funded commitment must make a decision knowing that it likely has a loss either way.  If it stops funding, and assuming the customer has not breached the commitment, it will most certainly lose what it has already funded and will be liable to the customer for damages, which may be quite substantial.  If it funds, and the project is completed, the bank also usually has a loss because the project is in a single purpose entity with limited assets other than the project, and the loan guarantors, who probably had large net worths centered in real estate when the loan commitment was made, have seen their net worths go deep south as a result of the recession.

Whichever the decision, generally accepted accounting principles (“GAAP”) require that a bank fully recognize its expected loss when the facts first show that a loss will result.  Thus, assuming Silverton reported earnings in accordance with GAAP as required by the FDIA, its imbedded losses in outstanding loan commitments should have been booked at the time of its failure.  Thus, one would assume that those losses would be absorbed by the receivership, like all other losses incurred by Silverton before it was closed.  That is the “macro” view.  However, that is not apparently a view shared by the FDIC’s “least cost alternative” asset managers.

I know of at least two instances where the FDIC as Silverton’s receiver has simply refused to fund its legally enforceable participation obligations, leaving the originating bank, which contractually is the only bank directly obligated to the borrower, to fend for itself despite legal lending limit, credit concentration and other safety and soundness issues.  In the FDIC asset manager’s view that is the “least cost alternative” because any damages caused by its breach will be subordinated to the FDIC’s preferred position resulting from the “National Deposit Preference Act,” and the injured banks will recover nothing.  Thus, for the FDIC, the previously recognized existing loss becomes a profit to the receiver paid by the shareholders of the lead bank of as a result of the FDIC’s beggar thy neighbor powers as interpreted by the asset managers.  The risk of loss knowingly assumed by the failed insured bank is shifted by that bank’s insurance carrier to another bank which intentionally refused to assume that risk of loss.  In response to the suggestion that the jilted bank is left with a legal lending limit violation, the FDIC has publicly argued that the originating bank should have included a provision in its loan commitment permitting it to refuse to fund the customer’s draw request if any participant breached its funding commitment.

How exactly is a smaller bank supposed to compete with one “too big to fail” if it must tell its customer that its loan commitment depends on the whims of other parties the customer doesn’t know and that their whims can destroy the customer’s project unilaterally without recourse to any remedy?  Shelia?  Oops, I didn’t mean to interrupt when you were talking to Ben and Tim. 

Sheila's March Through Georgia (Intro)

A rather eloquent and knowledgeable source has done an excellent job characterizing the FDIC's treatment of community banks.  The introduction to several parts:

I agree with much of what Sheila Bair said about “too big to fail” and the injustices associated with bailing out the traders, brokers, mortgage promoters, “hedgers” and their associated quants who are largely responsible for our current economic conditions.  She provided insights entitled to more respect than they received from the Wall Street influenced government financial establishment.  However, as a close observer of what might be called, a bit unfairly, “Sheila’s March Through Georgia,” I wish she’d spent more time on her day job and less time kibitzing.  The FDIC would have benefited from her creative strategic thinking. 

The FDIC Ms. Bair recently left is an agency staffed by intelligent and generally fair-minded people lacking leadership with the courage, foresight and creativity to define a consistent and constructive mission, an agency which has degenerated into a mob of uncoordinated micro-units with individual business plans focused primarily on avoiding adverse mention in an Inspector General’s report.  The FDIC’s Inspector General’s office apparently sees its task as reconfirming ad nauseam something that most of us learned when we first touched a hot stove, if you know what is going to happen in the future, you can avoid it, as if that helps in predicting future uncertain economic dislocations.  FDIC personnel are now obsessed with avoiding any possible criticism in the performance of the tasks within their immediate control, without consideration of the appropriate mission of the agency and the impact of their individual decisions on the accomplishment of that mission.  This phenomenon is exacerbated by the Agency’s having to operate for the first time in a depressed banking market under a statute enacted by Congress in response to the thrift crisis, a statute designed more to promote sound-bite platitudes than constructive economic resolution and rehabilitation.

Sixty-seven Georgia banks have failed since the Great Recession began in 2008, about 20% of all the banks operating in Georgia.  Many of those closures were because Georgia was relatively late to the state-wide banking game, and the lure of profiting from natural consolidation by starting and quickly flipping de novo charters continued to attract investors, principally in the Atlanta market, long after there was meaningful market support for new “community” banks.  These de novos, funded largely with brokered and other purchased deposits, substantially expanded the availability of residential construction and development lending in an already “hot” market, leading to their own demise and to the failure of other small, less diversified banks in their markets in a residential real estate led recession.  But, many of Georgia’s bank failures were established community banks with core business and core profits.  These banks did not have to fail.  They were closed primarily as the result of myopic (and inexperienced) regulators, fearful of second guessing, punitively and dogmatically applying Congressional platitudes.

Georgia bankers and their advisors have not been innocent bystanders.  The Federal Deposit Insurance Act (“FDIA”) as amended during and following the thrift crisis still leaves a lot of wiggle room between the platitudes.  Where it does not there are substantial Constitutional questions that can be raised.  Georgia bankers and their advisors have passively accepted judgments by regulators which could have been lawfully challenged.  Their typical rationale has been that the regulators will “get even” if opposed.  To get their way FDIC personnel subtly, sometimes overtly, foster this fear.  Yet, in over 40 years in this business, and despite hearing that aphorism repeatedly during most of those years, I’ve seen only one instance where I could truthfully say that I thought a regulator was “getting even” because a banker or bank advisor had in good faith disagreed with a prior regulatory judgment or request.  That instance occurred because an amoral banker punished an individual at the request of a regulatory employee.  The Agency was not to blame.  Regulators may not like your disagreeing with them, but they are, with no more than typical exceptions, good Americans who respect your right to do so, even if that means making their job, as they see it, harder.  Yes, there are bankers who claim they are picked on for disagreeing with regulators.  The ones I’ve seen deserved being picked on.  I don’t see a rational basis for the professed fear, but even if I did, personal fear does not alter applicable legal principles.  Passive acceptance of lawfully challengeable regulatory judgments leading to bank failures or material reversals represent a breach of a banker’s or advisor’s duty to the bank’s shareholders.  That is a duty that trumps peculiarly personal concerns. 

As they say, someone “could write a book” on the closure of these 67 Georgia banks.  To tell the complete story, that book would need to tell two stories, one about the banks and their regulators and another about the banks’ shareholders and their communities.  Shareholders of established community banks are not market players buying stocks like you bet on horses.  Mostly, they are people with simple lives centered in their communities.  They buy the local bank stock because of a combination of interests, investing for their retirement, knowledge of bank management, loyalty to their community and not being worldly enough to invest in a distant stock market.  Because of those factors, they are probably over-concentrated in the bank’s stock just as their lives in some sense may be over-concentrated in their communities.  These shareholders are proud of their investment.  They recognize that the local banks are the economic engines of their community, what makes their community a place, not merely a cluster of bedrooms supporting a nearby city or shopping mall.  Closing a local bank irretrievably damages the lives, hopes, dreams and aspirations of these shareholders.  To them it is both a financial and emotional disaster.  Closing a local bank can change a community from a unique independent economic entity to a spot on a map devoid of opportunities, camaraderie or a social fabric except as determined by its relationship to other spots on the map.  Closing a community bank like that is not just a financial event, it is a personal and collective tragedy.  That’s a story that needs to be told, but one that I am not particularly qualified to tell.  My career has focused on bankers and their regulators.

Telling the complete story of the bankers’ and regulators’ roles in these bank failures will have to wait until the story is over.  There is still unresolved litigation and the threat of additional litigation.  Participants are not yet free to candidly describe the events.  Critical documents are protected by government imposed confidentiality and by privacy considerations affecting bank customers.  But, pieces of the story can be told, and telling them while the whole story continues to unfold may influence the outcome.

Digging Deeper

"Exposing the FDIC" covers alot of ground.  Is this problem political, bureaucratic, economic?  Is this a top-down problem or bottom-up?  Is this a conspiracy or incompetence?

As we hope our previous posts demonstrate, all of the above.

Yes, the economy is in shambles, in a way almost none of us has ever experienced.  But this time is different.  This time Main Street is taking the punishment for Wall Street if only because Main Street doesn't have the right resources or connections.

Politicians and their appointees are adept at shifting the blame, but their policies are the ones that created and maintain the problem.

Bureaucrats are only interested in a paycheck and pension.  Keep your head low, and let the blame keep flowing downhill.  At the bottom of that hill is community banks and the people they serve.

Research papers and news articles can only take us so far at exposing the truth.  If we really want to help community banks, we need your input.  Is your bank the victim of the economy, hurt but recovering?  Are individual examiners passing the buck or exacting revenge?  Is this systemic within the FDIC?  Do politicians have an agenda to support Too Big To Fail by feeding them the carcasses of community banks?

Contribute to the solution by pointing others towards our site.  Then tell us your story at info@fdicexposed.com.  We will never share your information - any stories we publish will have all identifying details removed.

Remember - united we stand, divided we fall.