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Monday, February 08, 2010
Bank tale exposes seamy side of regulation
Winthrop Quigley
Of the Journal
Nothing that I have written in my 10 years on the Journal's business desk has provoked as much reaction among readers as our coverage of the seizure of Charter Bank by the Office of Thrift Supervision.
If the reaction has a common thread, I think it's a combination of shock at the power regulators have (power we appreciate when we agree with them, power we fear when we don't) and regret that another little guy is gone. Main Street has another shuttered store front. The parking lots around the big box stores on the edge of town are more crowded.
Many of the several dozen electronic mail messages, phone calls and letters I received mourned the loss of what had been a good local business and regret that its owners, the Wertheim family, would no longer be in charge. I received many tributes to the character of the Wertheims and notes of gratitude from people who bought their homes with Charter mortgages. One prominent businesswoman wrote to say she could not have put together her company without Charter's faith and help.
Current and former employees wrote to say their time at Charter had been some of the best in their working lives.
A bunch of bankers wrote to say federal regulators are ignoring the quality of the loans banks actually have on their books and are instead ordering them to write down the value of their loan portfolios by some arbitrary amount in case real estate conditions deteriorate. Bankers say that it doesn't matter if a borrower is paying. The feds want the books to reflect a world where the borrowers have stopped paying, just in case.
A few readers have asked where New Mexico's congressional delegation was while this was going on. I haven't heard from any of the delegation.
I got a couple of comments that described Charter as unfair in its appraisals of commercial real estate and as a bank that bullied some borrowers. I received a thoughtful analysis of Charter's books from a retired banker who said that it is management's job to anticipate problems like an overreliance on real estate lending and a rapidly inflating global real estate asset bubble. Clearly, this reader said, Charter management hadn't done its job.
The Office of Thrift Supervision wrote to say the bank's condition justified its seizure in order to protect the public. OTS declined the Journal's invitation to write an article for us explaining its actions or to provide an official involved in the decision to interview.
Beal Financial Corp., the Plano, Texas, company that owns Charter now and kept the Charter name, hasn't said what it intends to do with the bank. It sent a letter to old Charter customers assuring them that banking with new Charter would be business as usual. However, interest rates Charter paid to some depositors were immediately and significantly reduced, a normal and legal practice when banks take over failed banks.
Stories about Beal in the national business press suggest the company's strategy is to buy distressed financial assets at a significant discount. Charter's major asset is the loans that OTS required the bank's old management to write down to reflect what OTS saw as deteriorating real estate conditions in New Mexico. Beal could make money by keeping the loans on its books and collecting interest, or it could sell them at a profit to another financial institution.
I've asked Beal what its plans are for the 250 Charter employees it inherited. I've received no answer, though employees and former employees tell me layoffs have begun.
None of New Mexico's congressional delegates have made community bank regulation a cause, but Treasury Secretary Tim Geithner told a Senate committee last week that he is aware of the impact regulation has had on the ability of small banks to survive and to lend. He said that regulators who were caught off guard by the explosion of the real estate bubble are now trying to appear to be tough and on top of things. Senators from Kentucky, Washington and Florida called for action.
This is one of those times when we need to be careful what we wish for. However miffed we might be about Charter, I seriously doubt we want Congress dictating how OTS does its examinations and intervening when the examination doesn't please some constituent or donor.
Most of Congress's attention is on the really big banks anyway. Former Federal Reserve Chairman Paul Volker, with President Barack Obama's support, is advocating that commercial banks that accept customers' deposits and make loans and enjoy federal protection and deposit insurance not be allowed to engage in the casino-like trading that put Citigroup on life support.
It's a worthy idea, but Charter and its ilk were never in the casino business. They weren't in the sub-prime mortgage business either. Their borrowers passed all the usual tests for creditworthiness. Charter's crime was making loans on the eve of the worst economic contraction in decades. Charter should have seen it coming, I suppose, though I sure didn't, and neither did the OTS.
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