Banking Law

 It's telling that so many observers are reacting with increasingly unbridled cynicism to every word that comes out of the mouth of Pinochio Tim Geithner.  Last week's guffaw-inducer was the statement that the CPP investments that are paid back by big banks will be used to help smaller community banks. The little guys were shut out of the initial rounds of TARP CPP investments, and those smaller banks that took it aren't doing backflips over the changes Congress and the U.S. Treasury Department made to the program after the fact. Now, few of the banks that qualify for CPP want to touch it with a ten-foot pole.

As The American Banker discussed late last week (paid subscription required) discussed late last week, the community banks that really need the additional capital aren't strong enough to qualify for it under standards set by Treasury and the federal banking regulators. If you're a very large train wreck, you get the U.S. government falling all over itself to force-feed you additional capital, but if you're a community bank train wreck that might be important to your local community but not within the daisy chain of anointed big boys, you're out of luck. The e-mail I receive from community bankers and their attorneys lately is spewing a new level of venom toward the regulators, none of which I intend to share with anyone, other than to speculate that what they've requested Sheila Bair do to herself is, I believe, physically impossible, even for a contortionist.

Bankers and their counsel cite instances of the FDIC pressuring community banks to withdraw their TARP applications, demanding increased levels of loan loss reserves, forcing the mark-down of carrying values of mortgage-backed securities and loans (especially commercial real estate loans), and otherwise paralyzing already gun-shy local banks and rendering them unwilling or unable to extend credit to businesses, much less to consumers. FinCriAdvoisor recently profiled the additional problem of federal banking regulators imposing higher levels of capital on otherwise well-capitalized banks through the issuance of Individual Minimum Capital Letters. One senior federal bank regulator's attorney even slipped up and came clean about the reason for the use of this latest "tool" in the "whack-a-community-bank" game.

OTS attorney Deborah Dakin, senior deputy chief counsel for Regulations and Legislation, in a talk at Pepperdine University School of Law, said that regulators are "feeling a lot of pressure" from Congress to increase enforcement orders against banks. Dakin declined comment to FinCri Advisor, but OTS spokesman William Ruberry confirmed that she made the "off the cuff" remarks, which were first reported by the American Banker.

That's right, it's not because the regulators would independently come to the conclusion that a well-capitalized community bank would have to raise capital levels to unprecedentedly high levels, but because they need to play the game of appearance-over-reality to placate federal legislators whose combined intellectual firepower makes a gerbil on a wheel look like Albert Einstein in comparison. Playing to the lowest common denominator; that's called "leadership" these days.

Simultaneously, the regulators and Geithner are squawking publicly about how they're going to help the little brothers of the BofAs and Citigroups by making all this cheap capital available to them so the small banks, in turn, can make more loans and dig us out of this economic hole that seems to grow deeper despite all the "dirt" being slung into it from D.C. You'd be stunned by the depths of the hypocrisy if you weren't already inured to it.

Not that community bankers would be standing in line to snatch up the new capital, even if Treasury actually intended to offer it.

"The biggest problem I have is the fact they have changed the rules so many times that as a chief executive officer of a company I have a very difficult time having a business partner in the form of the United States Treasury," [Heritage Oaks Bank CEO Lawrence] Ward said.

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"I was shocked by it," said [Greater Southwest Bancshares Inc. CEO and past ICBA chairman Cindy Blankenship, who attended Geithner's speech. "Are there banks out there that still want the money?"

She reiterated ICBA's call for Treasury to bring in community banking advisors. "They don't understand community banking. They are from Wall Street. That's not a slam, but a fact. So when you have people inventing these programs, it would make a lot more sense if they asked for input," Blankenship said. "If they want to be helpful, they should ask what would help."

"This is not a slam, but a fact." It's a fact that is, in and of itself, a slam. Your federal government: once again, damned by the facts.

Of course, they don't "want to be helpful." They want to give speeches and issue press releases that give the appearance that they want to be helpful. After all, the average voter isn't reading the trade press. All that counts for the cynics in charge is to be able to fool most of the people, most of the time. At that task, they excel.