by Joseph Badal
“One told me he discovered a major error in the calculations the OCC examiners used to determine the bank’s loan loss reserve. When he brought it to the examiner’s attention, the guy told him that it didn’t make any difference. That they’d just change one of the other parameters so they’d come up with the same result. In other words, these Gestapo agents came into a bank with a predetermined mindset and then forced the numbers to fit that predetermination.
“Community banks like Broad Street and our bank here didn’t get us into this economic mess. It was the politicians, Fannie Mae and Freddie Mac, and the largest financial institutions that undermined the system. The FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision didn’t enforce regulations on the big banks; now, they’re taking it out on the community banks while the bastards at the big institutions get bailed out.”
“So there’s nothing you can do?” Edward asked.
“I am ashamed to tell you I can’t stand up to these people. They are in absolute control and I don’t know why. But I do have an opinion. I think the politicians screwed things up so badly with the pressure they put on banks and on Fannie and Freddie to make subprime loans, and the regulators were so unaware that they are now all in the same bed covering one another’s asses. They’ve made the bankers the fall guys, which is the same thing the politicians did during the Great Depression and again after the 1986 Tax Reform Act.”
“And the customer is screwed,” Edward said.
Snowden nodded. “We can’t win this game, Eddie. Just look at what New York Attorney General, Andrew Cuomo, did to Bank of America. He’s just another politician to claim bankers are the villains who created the capital markets meltdown and the recession. Sure, the big banks contributed to the problem, but in 1999, who was it, as HUD Secretary, that established new affordable housing targets requiring Freddie and Fannie to buy $2.4 trillion in ‘affordable’ mortgages? Andrew Cuomo! Fannie and Freddie invested in subprime loans that will weigh on all of us for years. Huge losses there. And the tax payer has to cover those.”
“My attorney told me about some of this a few days ago,” Edward said. “But how can lending to good companies just stop? Didn’t I read a little while back that the regulators are working to ensure the availability of credit to sound small business borrowers?”
“You did. It’s bullshit. The politicians caused the problem, demonized the banks, and now they’re very softly questioning the regulators for going too far in the other direction. And as long as there’s money to be made by friends of the politicians and of the regulators, nothing’s going to change. Sol Levin gets gored and Gerald Folsom gets the bank handed to him on a silver platter. That bastard Folsom must be sleeping with someone at one of the regulatory agencies. It seems like he turns up every time there’s a sweet deal available.”
“What’s in all of this for people like Folsom?”
“A damn fortune. The regulators wipe out a bank’s ownership, hand over the bank to one of their buddies who injects capital into the bank in return for a discounted purchase price of the bank’s assets and a loss-share arrangement with the FDIC. The Feds share in any loan losses the new owner might incur. So Folsom is brought in to take over Broad Street at a sweetheart price, starts selling off bank assets at a premium to the discounted price he paid, gets indemnified by the Feds against a substantial share of any losses, and ends up with a bank franchise that has residual value when all is said and done.”
“Unbelievable!” Edward exclaimed. “And who covers the cost of these bailouts? The taxpayers?”
“Indirectly, but yes. The Feds require banks to replenish the deposit insurance fund through higher premiums. In 2008, our annual premium was $300,000. In 2009, the agency forced us to pay $9 million in premiums for two years in advance. That means $9 million less in capital, and then we get criticized for not having enough capital. It also means $90 million less in lending capacity, assuming we can leverage capital 10 to 1. So, our earnings are impacted. How do we compensate? We raise our fees and interest rates on loans and lower our interest rates on savings and CD accounts. Who pays? It’s always the consumer.”
“If the Feds are spending all this money to take over banks and subsidize new owners, why don’t they just do the same deal for the old bank owners and allow it to stay in business?”
Snowden’s features hardened. Edward could see his question had struck a nerve.
“You’re a smart guy, Edward. I wish we could handle your banking needs. You’re the kind of client we normally want. I can’t answer you with any specificity. But I have my opinions, for what they’re worth. I’ve probably said enough on that subject already.”
“When’s this going to end?” Edward asked, feeling sick to his stomach. “Is it going to end?”
“Oh, sure, it’ll end, but it’ll take a few years, at least. The regulators will write down commercial real estate loans despite the strength of the borrowers. They’re setting arbitrary values on collateral, regardless of appraisal values, deteriorating lending institutions’ capital accounts. Then the regulators criticize the banks for being undercapitalized and take over every bank they feel like taking over. They bring in a Gerald Folsom who liquidates the bank’s loan portfolio and forecloses when borrowers can’t pay off their loan balances. After foreclosure, the bank dumps a ton of commercial and residential real estate on the market, depressing property values even further. The sharks ultimately come in and scoop up that real estate at fire-sale prices. Then, when the economy starts to improve, rents will rise and property values will increase, and the sharks will have made out like bandits. But that’s an eight to ten-year cycle.”
“It sounds like a shell game,” Edward said.
“The ultimate shell game.”
“How can you be so sure about the recovery time?”
“Two reasons. First, because it happened before. Someone once said that history is not one damned thing after another; it’s the same damned thing over and over. It took ten years for real estate markets to recover after the ’86 Act; it’ll probably take at least as long this time. Economic and financial dislocations like this are dream killers. They destroy people’s savings and investments, small businesses, and millions of jobs.”
“Based on your description of things, it sounds to me as though the federal government is the real dream killer.”
“You could say that,” Snowden agreed. “It’s the macro killer. But guys like Gerald Folsom, in a much smaller, but more personal, vicious way, murder people’s dreams as well.”
“You said two reasons.”
“Yeah. In February of this year, the Congressional Oversight Panel of TARP issued a report about commercial real estate. It wasn’t encouraging. Commercial real estate debt totals $3.4 trillion in the United States. Banks hold forty-five percent of that total, or about $1.5 trillion. According to the panel, smaller banks had commercial real estate portfolios equal to one point six times their total risk-based capital. By the third quarter of 2006, that had increased to three point two times. Because the typical commercial real estate loan has about a 20-year maturity and a 5-year call, there is real concern, especially in an environment like today’s, where real estate values have declined so much, that when the 5-year call period is up on many of these loans, the value of the real estate will be below the loan amount. The bank and the borrower will find themselves underwater. Just like they did with residential properties.”
“Fortunately, that’s not our situation,” Edward said, half-hoping Snowden might find a way to still finance the company’s debt.
“Yes, but what if you can’t find a bank to refinance your loans? What if every bank in the country has the same problem we do? If you can’t refinance your loan balance when your loan matures, what do you think is going to happen?”
“The bank will place us in default on our loan,” Edward said, feeling sick.
“So what do we do?”
“Try a couple other banks; maybe you’ll get lucky. But I wouldn’t count on it, because your financing needs are real estate-based. Commercial real estate loans have been branded by the regulators as toxic, regardless of the quality of the borrower or the current status of the loan. Your best bet is to work out a deal with Broad Street National.”
CHAPTER THIRTEEN
Katherine stopped at the post office on her way to the Winter Enterprises’ headquarters building. She opened her box, hoping there would be a letter from Carrie. She hadn’t heard from her daughter in over a month and had a difficult time not letting her imagination run away with itself with visions of her daughter lying in a pool of blood or in the hands of some Islamic terrorist group.
She rifled through the stack of mail and nearly shouted for joy when she saw an envelope with Carrie’s handwriting. She rushed out to her car, throwing the rest of the mail on the front passenger seat and slicing open the letter.
Dear Mom: I’m sorry I haven’t written more often, but it’s not really practical. Even if I wrote a letter, there would be no way to mail it.
Katherine felt a pain in her chest. My God, she thought, what sort of hellhole is my daughter in? She continued reading.
The good news is that my assignment is complete. I am being treated for some intestinal bug you can’t avoid where I was and I’ll be released in about a week from the Army hospital in Riyadh, Saudi Arabia. I’ll be on the first plane back to the real world. I should be home when Betsy’s baby arrives.
I’ve got a thirty-day leave scheduled, before I report for duty at the Pentagon. Believe it or not, I’m coming home for that leave, and then I’ll be at the Puzzle Palace for at least twenty-four months. Think about weekends in Cape May. I can already taste the linguini and clams at Cucina Rosa.
Anyway, that’s all for now. I feel rumbling going on in my nether regions, which means I’ll have to make a run to the john any moment now. No need to worry. A bit of antibiotic and lots of fluids and I’ll be as good as new in a couple days.
Please hug Eddie and Betsy for me and give them my love.
Love, Carrie
Katherine knew her daughter well enough to know she was downplaying her illness, but couldn’t help but feel relieved that Carrie was back in civilization, so to speak. She couldn’t wait to tell Edward his sister would be home soon. Then Katherine came down from her high, thinking about how Carrie’s homecoming would be in the midst of the crisis with the bank. It wouldn’t be much of a leave for her, with her mother and brother tied up with problems at the company. But at least she’d be safe.
CHAPTER FOURTEEN
Edward felt beat up as he and Nick walked out of Pennsylvania Industrial Bank’s main office on City Line Avenue at 5 p.m. The bank’s president, Victoria Watts, had been courteous and quite evidently embarrassed by the bank’s present circumstances. She was nowhere near as candid as Van Snowden, but Edward could fill in the blanks. She did mention they had been required to raise their core capital and risk-based capital ratios, and they were not considering any new commercial real estate loans for the foreseeable future. She also told them U.S. banks had posted their biggest drop in lending since 1942.
“You know, I’ve got a thought,” Edward said after he pulled out of the bank parking lot. “Let’s call Ernest Deakyne at Philadelphia Savings & Trust and ask him if he has an interest in financing our real estate. If not, we won’t waste his time or ours by keeping our appointment tomorrow.”
“Good idea,” Nick said. “I’m getting the impression these bankers would be thrilled to have our business, as long as we don’t ask for any credit.”
Edward laughed. “I shouldn’t see any humor in this, but I’m beginning to feel like Alice in the looking glass. Surreal.” He handed his Blackberry to Nick. “Pull up Deakyne’s number. Let’s call him right now.”
Nick found the banker’s name and scrolled down to his office number. He listened to the car’s Bluetooth system dial the number.
“Philadelphia Savings & Trust,” a woman said. “Mr. Deakyne’s office.”
“Hello, this is Edward Winter of Winter Enterprises. I have an appointment with Mr. Deakyne tomorrow and need to talk with him for a minute.”
“Yes, Mr. Winter. This is Jeanne, Mr. Deakyne’s assistant. I made the appointment for you. Can you hold a second?”
Edward and Nick listened to the canned music on the bank’s telephone system for about thirty seconds before Deakyne came on the line. “Ernest Deakyne.”
“Hello, Mr. Deakyne. Edward Winter calling.”
“Mr. Winter, good to hear from you. Are we still on for tomorrow?”
“That’s what I’m calling about. By the way, I have you on speaker in my car. Our CFO, Nick Scarfatti, is here with me.”
“Hi Mr. Scarfatti,” Deakyne said. “What can I do for you?”
“We’ve been reading and hearing a lot about banks not wanting to make commercial real estate loans because of pressure from banking regulators. Our financing needs are heavily real estate oriented. We wanted to make sure this wouldn’t be a problem for you. We didn’t want to waste your time.”
Deakyne paused, as though gathering his thoughts. Edward expected to hear that there was no point in visiting with them the next day. “I very much appreciate your courtesy in calling me, but, unlike most of the banks in our area, we don’t have a big exposure to commercial real estate. When other banks were participating in the real estate boom, we took the conservative route. As a result, we have money to lend and feel that real estate values have pretty much hit bottom. We would be pleased to consider your loan request.”
Edward and Nick looked at one another with expressions of ecstatic shock. “That’s good to hear, Mr. Deakyne. We’ll be there at 10 in the morning.”
“Looking forward to seeing you, gentlemen.”
Edward took his phone back from Nick, terminating the call and giving Nick a high five with his right hand. “Just when you think there’s no hope, opportunity raises its beautiful head.”
“I’m not deviating from my current negative mindset until you sign loan papers and I see the payoff confirmation from Broad Street Bank,” Nick said, although Edward could hear relief in his voice.
“Killjoy.”
“Realist. After what we heard today, I didn’t think there was a bank in America that could help us.”
Edward looked at the dashboard clock and said, “4 o’clock. Even though I’m tempted to stop at McNally’s Tavern and get one drink short of plastered, I’m going to the office. You want me to drop you off at your house first?”
“No, I’ve got a couple hours of work to do too. I’ll need a ride home later.”
“Just let me know when you’re ready to leave. By the way, we ought to process the checks and credit card receipts in the vault. We can’t hold onto them forever. Even if we find another bank, it will take weeks to get the legal work completed.”
“Already taken care of. We opened an account at Third Community Bank, that little bank down the street from the office. The branch manager nearly had a heart attack. A $600,000 deposit of checks and credit card payments is a lot of paper for a little bank.”
“They shouldn’t get too attached to that money. We’re going to move it as soon as we find a new lender.”
CHAPTER FIFTEEN
Gerald Folsom entered the board room at Broad Street National Bank and sat at the head of the table. This was the first meeting he’d attended at the bank since the Feds took it over at 5 p.m. the previous Friday. Now that his CFO, Sanford Cunningham, had wrapped his hands around the
high-level stuff – the computer systems, the loan and investment portfolios – he was ready to be briefed. Cunningham was already seated on Folsom’s right; Eli Black, the bank’s acting president, to Folsom’s left. Others in the room were Stanley Burns, Chief Credit Officer, seated next to Black; Sarah Long, Chief Operating Officer, seated next to Cunningham; Alexi Chenko, IT Department manager, seated next to Burns; and Frances Dougherty, the Chief Investment Officer, seated next to Long.
Folsom pounded the file in front of him and barked, “Let’s do this.” He looked at his watch. “It’s 3 o’clock. I want to be on the road by no later than 4.”
Used to Folsom’s management style, Cunningham looked around the room and wanted to laugh at the surprised looks on the others’ faces, but knew that wouldn’t be appropriate. Instead he jumped right into the agenda. “Ms. Dougherty, please brief us on your area.”
Frances Dougherty was a fifty-eight-year-old woman who started at the bank right out of high school, working her way up from teller to Senior Vice President of Investments. She managed the investment portfolio, which included the bank’s investments in Treasury bonds and bills, other securities, overnight funds invested with the Federal Reserve, among others. She also set interest rates on the bank’s certificates of deposit and money market and savings accounts.
“As of close of business yesterday,” she said, “we had $53.2 million in Treasuries, $36.0 million in mortgage-backed securities, and $112.0 million in municipal bonds in the bank’s portfolio. In addition—”
“What’s the average yield on the portfolio?” Folsom demanded.
Dougherty referred to a sheet of paper and answered, “three point one percent on the federal government bonds, five point eight percent on the MBS, and two point four percent on the Muni’s. The weighted average yield is almost three point two percent. And keep in mind the Muni’s are tax-exempt, so the actual after-tax yield is even greater.”