The New York Times came out with this article on Saturday For Banks, Wads of Cash and Loads of Trouble. The jist of the article has to do with a subject we have dealt with on the blog in the past, "brokered deposits". We wrote a piece about this last year Not to be a Drag But the FDIC Needs Money Too. Here's some of our highlights and then I'll get to the point (from September 25, 2008);
Somehow it doesn't surprise me that we have been caught unawares here. It is stunning to see that despite the S&L crisis being a historical event for only twenty years, we allowed it to happen again with regard to regional and local banks. The banks, like the big boys, are over-burdened with bad residential and commercial mortgage debt. As they say, the worst loans get made in the best times and small to mid-size banks certainly didn't miss out on the party. Just like the 1980's, the bankers wanted to roll with the high-flying local developers. So they backed project loans and probably relied on the same crappy fantasy cash-flow projections that the big boys did in commercial real estate. They probably expanded outside their areas of expertise and probably moved out of their locale to participate in syndicated project loans with other banks. I saw all this in the 1980's as a bank examiner with The Office of Thrift Supervision, so nothing surprises me, except maybe this;
Despite the fact that wholesale or brokered deposits were the enabler for the thrifts and banks (by allowing them quick access to funds to leverage up) in the 1980's, and despite the fact that in 1991, regulations were passed forbidding the use of what we called "hot money", unless the bank was "well capitalized", brokered deposits have fueled another disaster. In the 1980's this was a major battle. Don Regan, President Reagan's Secretary of the Treasury squashed efforts by bank regulators in the early 1980's to stop brokered deposits. He did this because before running Treasury, Regan was the CEO and Chairman of Merrill Lynch. Merrill made LOTS of money funneling brokered deposits into S&L's and banks. Therefore, what was bad for Merrill Lynch was bad for America. If Bill Isaacs, the head of the FDIC, could have stopped brokered deposits, there would not have been a S&L crisis....period. It could not have happened.
You would think that stark lesson, learned only twenty years ago would have been good enough right? Of course not! Because, probably out of respect to the needs of Wall Street, the regulations banning the use of brokered deposits left the "Well capitalized" loophole, according to Bloomberg;
"The law left open a loophole, and the FDIC made it wider. Banks that are just ``adequately capitalized'' are allowed to petition the agency for exemptions from the law. From 2005 to 2007, 88 banks asked the FDIC for waivers, according to agency records. The FDIC granted approval to all of them."
Ahh, you can't make this stuff up! Brokered deposits flooded in as the banks in question, fighting a losing battle with the big boys popping up on every street corner, needed them "to stay relevant." I guess the good news is now hardly anybody is "adequately capitalized", so no more brokered deposits.
"Clean up in aisle two!!"
Now here we are a year later. What's horrifying is, I was wrong! The brokered deposit train has kept right on chugging along! The Times does a good job painting the picture. The most important part of the picture in my opinion is the portrait of the various regulators telling the sad tale of how they would have liked to stop the explosive growth in brokered deposits, and hence the explosive growth of bank balance sheets, but couldn't due to their fear of the powerful banking lobby. Here's some snippets,
Don’t get in the way, don’t take away the punch bowl,” Ms. Bair said, describing the approach taken by regulators, including her own agency. (Ms. Bair heads the FDIC)
Looking back on the reluctance to slow the growth, Timothy W. Long, chief national bank examiner in the comptroller’s office, asked: “When do you tap on the brakes versus slamming on the brakes? It is a hard thing to do sometimes, particularly when management is pushing back hard.”
Management pushing back hard? Again from the NYT;
Late last year, the F.D.I.C. proposed a new rule. Banks that rely too heavily on brokered deposits to accelerate their growth will have to pay a higher insurance premium to help cover losses if they fail. The proposed limit was 10 percent brokered deposits and a growth rate of 20 percent over four years.
Just as it did in the early 1980s, industry opposition emerged almost overnight.
“Brokered’ is not a 4-letter word!” Dennis M. King, chief credit officer of North County Bank in Washington State, wrote in one of hundreds of letters the agency received condemning Ms. Bair’s plan. “They are especially important to community banks in our present economic environment.”
The banks won important concessions. The regulator relaxed the part of the rule that required higher premiums if banks grew too fast with brokered deposits, allowing a growth rate of up to 40 percent over four years. And it left open a loophole that lets banks — even those considered unsound — turn to a “listing service,” a source of hot money by another name. Instead of paying a broker, banks pay to subscribe to an electronic bulletin board of credit unions with money to park.
Here's a question for you. Just who do the banks lean on to get away with this crap? Could it be Congressmen and officials in the Executive Branch? Hell yeah! This has been going on FOREVER. Therefore, lets follow the money and find out who pressed for these concessions on safety and soundness EVEN WHILE THE FINANCIAL SYSTEM WAS GOING UP IN FLAMES! I bet you it's the same pompous asses in the Senate and House banking and finance committees that give daily lectures about fiduciary responsibility. Probably some folks that served in the Bush and now Obama Administrations too. You don't need to reform the financial system by rearranging the deck chairs. You need to reform the way the industry can twist the arms of the day to day regulators trying to do their freaking jobs!