Bank executives who have signed on with the government's programs are expressing dismay that the original rules are changing, while new rules seem to emerge daily.
Alas, they are learning that a deal with the government is never done. Once invited in, the Feds are usually inclined to regard agreements as mutable, at best.
I witnessed this firsthand during the S&L crisis of the '80s. I was CEO of Empire of America, a Buffalo savings bank that had thrived for more than 100 years … until hyperinflation severely devalued our otherwise creditworthy portfolio. High rates were also enabling money market funds to kidnap our traditionally loyal deposit base.
It was a double whammy. The only feasible solution was to grow significantly by booking new, tightly underwritten loans at prevailing higher rates. To do this, we needed access to growing deposit and loan markets outside our New York domicile, preferably in a state whose laws would permit us to convert to a public company — thus allowing us to raise private capital to leverage the growth we needed.
So, in 1982, after passing a "viability test" (the "stress test" du jour), we agreed with our federal regulators to absorb a failing bank outside Detroit as the "price" to acquire three weak thrifts in Florida and Texas. To create a "good bank" and a "bad bank," we ponied up $50 million, while the government, which had no cash available to effect a true bailout, granted us long-term capital forbearances, capital income certificates, and the ability to write off the negative-$900 million gap between the assets and liabilities we were inheriting (i.e. goodwill) over a 40-year period. Before the deal was signed, we were also importuned to assume three more basket-case thrifts.
It wasn't the deal we originally discussed, but our board and principal advisors agreed that the de minimus risk of dealing with our government would surely be outweighed by the promised rewards, not the least of which was a reasonable, long-term investment opportunity for future shareholders.
For the next four years, our strategy unfolded successfully. Along the way, we picked up seven more failing thrifts, most at the government's behest.
Then, we began to learn that, signatures and seals notwithstanding, a deal with the Feds is never closed.
Late in the '80s, the markets began to roil because of major tax law changes, persistently high interest rates, the failure of a few big thrifts and the discovery of major malfeasance in some other S&Ls. Our regulatory pooh-bahs began to fear the worst. Consequently, they adopted a more aggressive strategy which, among other things, included more austere oversight of their previous, cash-skinny deals (like ours) that they feared could come back to call into question their judgment.
During a four-year period, 14 major regulatory changes were enacted, and they spawned hundreds of new rules, most of which contravened the intent of our original deal.
Limits were put on all thrift institutions' deposit growth. A moratorium was imposed on new branch construction. Selective interest rate ceilings were imposed. Brokered deposits were prohibited even among same-bank units. We were forced to re-merge our good and bad banks. Further, regulators put a cap on our lending to consumers and the relatively higher rates such loans afforded. "Mark-to-market" was a mantra, and riskless (and profitless) portfolio matching became de rigueur.
As time passed and market conditions deteriorated, our monthly meeting with regulators turned into daily conferences, and eventually our board meetings found regulators sitting at the table discussing everything from advertising to salaries.
Ultimately, our forbearances were vitiated and our goodwill writeoff period was reduced from forty years to 20 years… to 10 years… to today. As a consequence, our bank had to be sold piecemeal to other institutions, mostly commercial banks, and our shareholders were wiped out.
We won a Pyrrhic victory seven years later when the Supreme Court decided that the government acted improperly in reneging on deals like ours. The court's decision was too late for us and many other institutions.
Our experiences, I believe, harbor some important lessons for today's stressed bankers and their shareholders. To wit: Before signing on with Uncle Sam, make sure you contemplate all the alternative scenarios that might emerge down the line, craft appropriate contingency plans and be prepared for vastly different tomorrows.
Don't stumble. While the government's side of the deal will always be in flux, you will be expected to perform as per original agreement, no matter how your circumstances might change.
Your deal isn't the last one that will be made. New and different government "arrangements" with other institutions and investors could dramatically alter your prospects in both the consumer and capital markets.
Keep in mind that, while most of the individual, on-the-line regulators you consort with will, in all probability, be good, well-intentioned folk, they don't set, nor can they mitigate, the truly damaging policies that can afflict you.
