At the height of the financial crisis, the founders of the now troubled CertusBank managed to outmaneuver dozens of other groups and obtain a federal charter to buy failed banks. It turns out that Certus' backers received support in their successful bid from Reps. Barney Frank, Maxine Waters and nine other Democratic members of the U.S. House of Representatives.
The politicians made their pitch for Certus via a July 30, 2010 letter obtained by American Banker under a Freedom of Information Act request. Addressed to Federal Reserve Chairman Ben Bernanke, Comptroller of the Currency John Dugan and Federal Deposit Insurance Corp. Chairman Sheila Bair, the letter sought "prompt review and action" in response to the Certus group's application. (The group applied for a charter as Blue Ridge Holdings and later changed its name to CertusHoldings.)
At the time the letter was written, Certus was one of dozens of groups seeking permission to buy failed banks with the government's assistance. The Congressional letter supporting Certus was signed by eleven Democratic members of the U.S. House of Representatives Committee on Financial Services. All three recipients were Republicans. It emphasized the extensive banking experience and personal integrity of Certus' four founders and stated that approval of their application would promote diversity in the banking industry.
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The Certus founders "are of unquestioned character and reputation, each with long and wide-ranging experience in various aspects of banking and other financial services," the House members said.
The Certus group "would become the highest capitalized minority-owned bank in the country" if its application were approved, they state. "We, therefore, encourage you to act expeditiously on this application which, we believe, would represent an historic and important step to further diversify" the financial services industry.
Banking regulators have a longstanding policy of encouraging minority ownership of financial institutions. However, Certus was never designated as a minority financial institution by the FDIC or OCC. Federal regulators have no policy of fostering the creation of banks that, like Certus, are managed by minorities.
Bernanke responded individually to each of the lawmakers in letters dated Aug. 12, 2010, which were acquired through the FOIA. In them, he stated that the Federal Reserve Board was "working closely" with the OCC and FDIC to "resolve outstanding issues" related to the group's application. (A copy of Bernanke's letter to Barney Frank, the contents of which were identical those sent to the 10 other lawmakers, is here. The FDIC and OCC have not responded to FOIA requests similar to the one sent to the Federal Reserve. All three regulators declined to comment on matters relating to Certus, citing legal restrictions on discussing specific open and operating banks.
Limited Shelf Space
It is not clear that the legislators' letter had any influence on regulators' decision to allow Certus to form a bank. It does, however, raise the prospect that political intervention did influence the process.
What is known is that the OCC granted Certus preliminary approval to form a bank less than three months after its Congressional backers made their request. Certus was one of just five national banks created through the shelf-charter system in the years after the crisis, the OCC says.
The shelf-charter system was created during the financial crisis to allow private investors to bid for failing banks at a time when there was a shortage of potential buyers within the banking industry. Investors, including prominent private equity and hedge funds, were drawn to the deals by the FDIC's practice of insuring against many losses at acquired institutions.
Demand for a piece of the failed-bank pie was further stoked by the FDIC's sales of IndyMac and BankUnited to investor-led groups in early 2009 on terms that proved highly lucrative for the buyers.
Certus' lead investors are four hedge funds which each took 9.9% stakes. They include Paulson Management II, namesake of the billionaire John Paulson, and BlueMountain Capital Management, which was co-founded by the former JPMorgan Chase (JPM) executive Andrew Feldstein. All told, Certus obtained $500 million in commitments from about 25 investors in May 2010, which it would draw on as it made acquisitions.
Four years later, investors have begun to revolt. The bank has recorded pretax losses of $115 million the last two years and recently has faced allegations of gross mismanagement, and possibly worse, as detailed in an American Banker article last month.
Among concerns outlined by one investor in a March letter to fellow shareholders are the nearly $10 million Certus has paid to a consulting company owned by the bank's top officers a relationship that was disclosed to investors and approved by the bank's regulators. Another concern involves Certus' use of millions of dollars for executive apartments, charter jet trips, an art collection, sporting events and sponsorships; much of it came at a time when the company was hemorrhaging cash.
The company's infrastructure investments have also drawn scrutiny. Certus opened a Greenville, S.C., headquarters late last year featuring the tallest touch-screen "media wall" in the United States, a 200-seat theater, a steam room and a ceiling decorated with hundreds of thousands of pennies.
Charles Williams, Certus' co-chief executive and one of the four founders, left the company on March 31. Williams' resignation came three days after American Banker reported that he had purchased an SUV from Certus for nearly $13,000 less than its market value, and that the bank paid nearly $146,000 to cover three months' of work by Williams' son Bryan, a recent college graduate.
Certus characterized Williams' departure as voluntary and said "he had been considering such a move for several months for personal reasons."
Certus three remaining founders are executive chairman Milton Jones, a longtime Bank of America executive, plus CEO Walter Davis and President Angela Webb, who each spent several years at Wachovia.
More than two dozen senior Certus staffers have left since December 2012, including two chief financial officers, the latter of whom resigned in late February. That post remains vacant.
Experience and Connections
The four founders' extensive large-bank experience was undoubtedly key to the success of their capital raise, although none had recently been involved in operating a small institution faced with the challenges of turning around troubled franchises. Another draw emphasized by their FBR Capital Markets advisors during presentations to potential investors were the backers' political ties in Washington, according to people present at the meetings.
Those ties have been nurtured by political donations. Certus' four founding executives made $45,000 in political contributions between 2010 and 2013. Some went to the Congressional representatives who wrote to regulators in support of the group's bid.
That includes $10,000 for Waters' 2012 re-election campaign, according to Federal Election Commission data. Waters, now the lead Democrat on the House Financial Services Committee, did not immediately respond to a request for comment.
The bank's founders gave to the campaigns of two other lawmakers who signed the letter: $2,000 in 2010 for Rep. Mel Watt, now head of the Federal Housing Finance Agency, and a total of $2,750 to Rep. David Scott in 2010, 2011 and 2012. Watt declined to comment through a spokeswoman. Scott did not immediately respond to a request for comment.
The other members of the financial services committee who signed the letter are Reps. Barney Frank (formerly D.-Mass., now retired); Gregory Meeks (D-N.Y.); William Lacy Clay (D-Mo.); Al Green (D-Texas); Emanuel Cleaver (D-Mo.); Gwen Moore (D-Wis.); Keith Ellison (D-Minn.); and Andre Carson (D-Ind.).
Congressman Carson "signed this letter of support in 2010 because he, along with other members of the Financial Services Committee, wanted to ensure that a diverse pool of applicants was being considered for this program," according to an emailed statement from his spokeswoman received after the original version of this article was published. The other members of Congress who signed the letter did not respond to requests for comment.
All the signatories are Democrats and all but Frank were members of the Congressional Black Caucus at the time the letter as written. Certus paid nearly $119,000 to fund the nonprofit Congressional Black Caucus Political Education and Leadership Institute's 2012 convention, according to internal bank documents previously cited by American Banker.
One puzzling feature of the lawmakers' letter to top regulators is its reference to the future CertusBank as a "minority-owned institution." Throughout its formation, Certus' business plan called for its four founders to make modest investments and hold only a small fraction of the shares; as planned, hedge funds and other investors have held majority control of the institution throughout its history.