BankThink

Don't think of this business as residential lending. It's really a low-risk form of asset-based lending.

Receiving Wide Coverage ...Devil Advocates? The Journal reports this morning that the SEC is turning its sights on companies’ in-house and outside lawyers for obstructing investigations and for green-lighting questionable mortgage bond deals. The stonewalling includes tactics like “witnesses ‘forgetting’ what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook.” Usually the agency only pursues lawyers for active involvement in fraud or misconduct, the paper says, but the SEC is getting fed up with what enforcement director Robert Khuzami calls “less-than-candid testimony.” Khuzami tells the Journal that SEC staff members have been reporting more lawyers to the agency’s general counsel, which can take action against them for misconduct on the job. The article briefly acknowledges the possibility that the SEC may be stepping on a slippery slope, and a Journal reader articulates this concern in the comment thread: “Whenever an unpopular defendant winds up in the dock … you will find unprincipled fanatics and opportunists going after his lawyers, including prosecuting attorneys and the news media. …In the United States defendants are entitled to legal representation to defend themselves against criminal and civil charges. This is the American way of life and it distinguishes us from dictatorships and authoritarian regimes. … Attacking a defendant's attorney is a backhanded way of attacking his rights under the constitution.” Separately, the Times reports on the growth of the “litigation finance” business, in which third-party investors pay plaintiffs’ legal expenses in exchange for a piece of the potential winnings from the case. These investments are apparently quite profitable, but some warn the activity could encourage frivolous suits and inappropriately influence cases. Responds one successful litigation financier: “This really is just corporate finance. … It just happens that the underlying asset is a litigation claim instead of an airplane or a photocopier.” Except you can know with certainty before you write a check whether the plane flies or the machine makes copies, but not whether the claim will prevail in court. Speaking of ethereal assets, we guess we ought to mention the Dewey & LeBoeuf situation here; the latest story in the Times says partners are now being encouraged to leave the wobbling global law firm. A rash of prior partner departures caused Dewey to breach its loan covenants, and bankruptcy is now a possibility.

While having dinner with a couple of old banker friends recently, our conversation turned to a consistent challenge many management teams face. It started when one friend shared that he was recently in a meeting in which his bank's "revised" incentive plan for branch managers and frontline employees was being explained.

Dodd-Frank went a long way toward ending too-big-to-fail. Since large, diversified financial institutions provide significant economic value to clients, the likely effect of arbitrary and preemptive break-ups would be to concede global financial leadership to other jurisdictions.

The CFPB's mission is to protect consumers from financial harm.

Receiving Wide Coverage ...Too Big to Tolerate: This morning’s Journal includes an op-ed by Warren A. Stephens, the head of the investment bank Stephens Inc. For decades his firm and family long supported the establishment of interstate and national banks (and invested in merger-bait institutions), but now he appears to regret having helped created a monster. Despite what Stephens and others once thought, “banks that are national in scope are no more immune to financial and capital problems than regional banks,” he writes. And unlike regionals, national banks that get into trouble can threaten the whole U.S. economy. Stephens calls for the maximum share of nationwide deposits any one bank can hold to be lowered to 5% from the current 10%, with no grandfathering; any bank above that cap would have to be broken up. He also wants commercial banks out of his business, complaining that “the large integrated banks have exercised undue influence over corporate executives by pressing them to use their investment banking services to retain access to the bank's commercial lending services.” Meanwhile, in her Sunday Times column Gretchen Morgenson interviews former Fed Governor Kevin Warsh, another big-bank critic. He stops short of advocating break-ups, but calls for stronger disclosure requirements for the megabanks. Most interestingly, Warsh questions whether the U.S. ought to be working on capital standards with all of the Basel committee countries, since a number of them explicitly stand behind their largest banks and thus have less motivation to demand thick capital buffers. Rather, maybe we should work exclusively with countries that don’t (at least officially) consider financial institutions too important to be allowed to fail, and thus a greater impetus to insist on “market discipline and real capital levels.” Wall Street Journal, New York Times

The last few weeks have seen good news (with a potential to become Revised News), bad news, and news that depends on your perspective-as news most often does.

Are Multi-Million-Dollar Salaries Sign Of Lost Way?

While today's volatile financial environment offers opportunity for credit unions to build their memberships, the challenges are twofold.

Making more bad loans is the tuition price for learning how to build and train new underwriting algorithms.