I received a letter this morning from a chief lending officer at a small mutual savings bank.
He asserts that they are levered at a moderate 10:1, and their ROE ranges from 4-6% depending on the economy. They are profitable - today.
Their bank makes loans held on their books - the way bankers of old before securitization operated, and the only way to guarantee that actual underwriting takes place. Their delinquencies for 1-4 family homes are elevated at 1.2%, but are resulting from job loss, illness and other similar life events - which happen in both good times and bad.
There are literally thousands of banks and credit unions just like this across the nation.
The FDIC on Friday mandated what amounts to a 20 basis point "levy" on deposits. From all banks. But their shortfall, both actual and predicted, comes from willful and direct violations of Title 12, Chap 16 Sec1831o.
Specifically, IndyMac bank (and one other), it has now been learned, was permitted to improperly treat capital by a member of the OTS, which is a federal regulatory agency run by Treasury. This is not conjecture it has been discovered to be fact and in addition, the person responsible did the same thing during the S&L crisis.
This is not an "accident" folks.
(a) Resolving problems to protect Deposit Insurance Fund
The purpose of this section is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund.
(2) Prompt corrective action required
Each appropriate Federal banking agency and the Corporation (acting in the Corporations capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.
Not requests, REQUIRES.
The word shall in statute is an important "term of art" in legislation; it is not subject to interpretation or desire. It means what it says - SHALL.
Among other violations there are institutions such as GMAC (and IndyMac and WaMu before them) that have been offering above market-rate CDs, which is one of the practices in 12/Ch16/Sec1831o that is subject to regulation and is required to be curtailed by any institution that is in trouble.
Further, the compounded cost of TARP money (under the old rules) is close to 9%, and you have to look at compounded cost just as you must look at compounded returns.
Now go look up above at "SoundBank's" ROE. 4-6%.
It is not possible for that bank to take TARP money and make a profit from it unless it was to engage in the very unsound practices that got us into this mess!
This leads to the following inescapable conclusions:
- The entirety of TARP is in violation of PCA as it is not possible through prudent lending to earn more than this capital costs. TARP IS AND WAS UNLAWFUL.
- The actions of "troubled institutions" such as GMAC, IndyMac and WaMu (some of which have failed, some of which have not - yet) is directly contrary to the requirements of the PCA law and yet regulators have willfully ignored these requirements.
- OTS in particular has been caught with people on their staff that improperly permitted reclassification of capital as a means of avoiding PCA; since these people acted in concert with one or more persons at the bank involved they conspired to commit this act. Is there a "bank fraud" prosecution in here? If so, where is it?
I wrote on the underlying "Bezzle" in our banking system yesterday.
Today is about remedies.
I strongly urge the sound banks in this nation to consider filing for "writs of mandamus" en-masse in the courts to compel the federal government to follow the law, and ask for injunctive relief to put a stop to these programs along with their underlying malfeasance and misfeasance now.
As these sound local and regional banks are the ones harmed, they clearly have standing in the courts to bring this action.
One of the challenges that I have had from the beginning of this mess is finding an angle under which legitimate, impossible-to-challenge standing can be established in order to urge that someone use the legal resources available in this country to stop it.
I think I may have just discovered that crucial link.
Now it is up to our sound community and regional banks to take action before their capital basis is eroded by these outrageous actions, directly contrary to statute, to the point that they fail as well.