Shell Game (Stand Alone 2) (8 page)

Curtis Bank & Trust’s headquarters occupied the first six floors of an eighteen-story concrete and glass structure on Walnut Street, a couple blocks west of Broad Street. Like most downtown Philadelphia banks, it presented a solid, conservative image. Van Snowden’s office was on the first floor. Edward and Nick arrived ten minutes early, were shown to a conference room and offered coffee and water by Snowden’s assistant. They accepted bottles of water and took two of three seats on one side of a rectangular, dark mahogany table. Snowden entered the room a couple minutes later, with a man and woman in tow. Snowden was a six-foot-two, fair-skinned blond with an erect posture that spoke to his military background. He wore a tan suit, light-blue shirt, and yellow tie. Edward knew he had graduated from Penn and gone on to Yale for an MBA. He looked the part of a Philadelphia banker.

Snowden introduced Chief Lending Officer, Daniel Blake, and Chief Operating Officer, Veronica Stangler. Blake was a bantam rooster type, with a confident air and a sour look to go along with his blue suit, red power tie, and starched white shirt. He seemed to like being the senior credit guy in a bank, where successful business people came in, hat in hand, to ask him for money. Edward thought he’d have to set the guy straight — after they negotiated a deal with the bank. Stangler was a dark-haired, olive-complected woman of medium height, who appeared to be warm and competent in her light-gray suit, off-white blouse, and wire glasses. Edward liked her right off.

The bankers took seats across the table from Edward and Nick.

“What can Curtis Bank & Trust do for Winter Enterprises?” Snowden asked.

“Thanks for seeing us,” Edward responded. “Van, you and I have had several conversations over the past few years about your interest in moving Winter Enterprises’ business to your bank. As you know, we’ve been with Broad Street National for a while now. They’ve taken good care of us, so we had no reason to move our business. Obviously, with the FDIC taking over Broad Street and selling it to Folsom Financial, the situation there is up in the air.”

Snowden laughed, “That’s an understatement.” Stangler laughed along with Snowden; Blake’s sour look didn’t change. Edward smiled politely.

“Anyway, we feel that now would be a good time to seriously discuss your interest in Winter Enterprises’ business.”

Snowden grinned. “We’re pleased you’ve elected to give us this opportunity. I see you have a presentation with you,” he said, pointing at the stack of packages on the table in front of Nick. “Why don’t you go ahead and start?”

It took Edward and Nick a little over an hour to complete their presentation, during which the bankers interrupted them a half-dozen times to clarify points. They then segued into what they needed Curtis Bank to do for them.

“We have a $20 million master note at Broad Street National, secured by $50 million in real estate, all of which are our restaurant properties. We want to roll the balance of that note into a $30 million master loan facility that will allow us to finance another seven locations over the next twenty-four months or so. We’ll pay down the loan over five years, and will finance future expansion with internal cash flow. We’ll secure the loan, regardless of the balance, with all of our real estate properties. I think—”

Snowden suddenly stood and looked at Edward. “I’m going to suggest Nick finish the presentation for Dan and Veronica. Edward, I think you and I ought to continue this discussion in my office.”

Nick looked confused. Edward shot him a calming smile and rose from his chair. He didn’t know what was happening, but he figured Snowden wouldn’t have interrupted him unless there was a good reason. He and Snowden had a friendly relationship that spanned a dozen years, so he wasn’t particularly upset by the interruption. He followed the bank president out of the conference room into an office at the far end of the floor.

Snowden’s office was large: Twenty by thirty feet, Edward guessed. A red and blue Persian carpet lay on the wood floor. A large desk sat at the end of the room, beneath a bank of windows overlooking Walnut Street. Snowden pointed to a plush leather chair on one side of a coffee table and took the opposite chair himself.

“I apologize for breaking up the meeting that way, but I decided wasting any more of your time would be unfair to you.”

Edward took a deep breath and let it out slowly. “Wasting my time?”

“What I’m about to tell you can’t leave this room; I’m not quite ready to quit banking and I’d be out on my ear if the regulators learned I’d talked to you. But you need to understand the current banking environment. Okay?”

“Okay.”

Snowden exhaled loudly. “I was just a young banker in the early ‘90s, but I remember what the regulators and the Resolution Trust Corporation did to the banks and to their business clients. As bad as things were back then, it is even worse today. Bear with me; this is going to take a little time. But what I’m telling you is a roundabout way of turning you down for your loan.”

Edward’s face turned hot. “No disrespect, Van, but making me suffer through a long-winded story, where I already know the ending, is the height of patronization. I—”

Snowden stopped Edward. “I understand, but this is for your own good. If you don’t understand the present banking environment, you’ll be going into battle unarmed.”

Edward met Snowden’s gaze and, after a second, nodded and said, “I apologize. Please go ahead.”

“First of all, the regulators have issued cease & desist orders and regulatory letters to us, and to banks all across the country, ordering us to not make any more commercial real estate loans. That’s why we can’t even consider your loan request. The regulators believe that commercial real estate values are going to deteriorate and that any exposure to commercial real estate is too much. Earlier this year, Elizabeth Warren, the chairperson of the TARP Congressional Oversight Panel, said, and I’m paraphrasing, ‘We now have 2,988 banks with dangerous concentrations in commercial real estate lending.’ She also said that by the end of this year, about half of all commercial real estate mortgages will be underwater. What effect do you think comments like her’s have had and will continue to have on the way the regulators treat banks?”

Without waiting for a reply, he continued, “We have a loan delinquency rate of less than two percent, but the examiners don’t seem to care. To make matters worse, they ordered us to raise our core capital ratio.

“To put things in perspective, the current written guidelines for a well-capitalized bank are set at a six percent core capital ratio and a ten percent risk-based capital ratio. Before the market meltdown, the ratios used to be five percent and eight percent. The standards are relative to the relationship between the bank’s capital and its assets. This sounds complicated, and I’ll admit, is a bit convoluted. Loans are treated differently than securities, for example.

“But anyway, the changing standards are creating a vicious cycle. As community banks reduce their investments in commercial real estate loans, as the regulators demand, the less income the banks generate, meaning lower earnings and thus more difficulty in building additional capital.

“Our ratios are eight percent and twelve percent, significantly above the guidelines. But the regulators have now ordered us to raise our ratios to ten percent and thirteen percent. Why? I don’t have a clue. Our examiner, when I asked her about this, in effect, told me it was none of my business how she made the decision.”

“Couldn’t you appeal?” Edward interjected.

“To whom?”

“Her boss?”

“Been there, done that. The guy was frothing at the mouth over me questioning one of his examiners.”

“Then how about our Congressional delegation?”

“Those gutless wonders are less than worthless. Ever since the Keating Five back in 1987 got into trouble, not one of those guys would stick his neck out to intervene on behalf of a banker in a pissing match with a regulator. Besides, they’re demonizing bankers. Haven’t you heard? The Great Recession is our fault.”

“What was the Keating Five?”

Snowden smiled at Edward. “Sorry. You were probably still in elementary school in 1987. The Keating Five was named for Charles Keating, Chairman of Lincoln Savings & Loan Association. Five U.S. Senators were accused of intervening in 1987 on behalf of Keating’s bank, the target of a regulatory investigation by the Federal Home Loan Bank Board. I don’t think the Senators ever thought they were doing anything wrong; they were just trying to get the regulators to back off a constituent they thought was being unfairly attacked.

“But politicians have a long memory when it comes to political liability and no one wants to be accused of interfering in the regulator’s witch hunt against the big, bad bankers. The press, the President, Congress—they’re all demonizing the bankers.”

“It sounds like things have gone too far the other way,” Edward said.

“It doesn’t seem to matter. When it comes to the regulators, this isn’t a democracy. As Sol Levin told me, ‘I went to bed in America and woke up in the USSR.’ ”

“What happened at Broad Street National is unconscionable. It’s a crime. The federal government stole that bank from its rightful owners, which included thousands of individual shareholders in Pennsylvania. Sure, the bank had some real estate loan problems, but nothing warranting the Feds going in and taking it over. I’ve talked with some of their people; I won’t tell you who, but I have absolute confidence in the people I’ve talked to.

“One told me he discovered a major error in the calculations the OCC examiners used to determine the bank’s loan loss reserve. When he brought it to the examiner’s attention, the guy told him that it didn’t make any difference. That they’d just change one of the other parameters so they’d come up with the same result. In other words, these Gestapo agents came into a bank with a predetermined mindset and then forced the numbers to fit that predetermination.

“Community banks like Broad Street and our bank here didn’t get us into this economic mess. It was the politicians, Fannie Mae and Freddie Mac, and the largest financial institutions that undermined the system. The FDIC, the Office of the Comptroller of the Currency, the Office of Thrift Supervision didn’t enforce regulations on the big banks; now, they’re taking it out on the community banks while the bastards at the big institutions get bailed out.”

“So there’s nothing you can do?” Edward asked.

“I am ashamed to tell you I can’t stand up to these people. They are in absolute control and I don’t know why. But I do have an opinion. I think the politicians screwed things up so badly with the pressure they put on banks and on Fannie and Freddie to make subprime loans, and the regulators were so unaware that they are now all in the same bed covering one another’s asses. They’ve made the bankers the fall guys, which is the same thing the politicians did during the Great Depression and again after the 1986 Tax Reform Act.”

“And the customer is screwed,” Edward said.

Snowden nodded. “We can’t win this game, Eddie. Just look at what New York Attorney General, Andrew Cuomo, did to Bank of America. He’s just another politician to claim bankers are the villains who created the capital markets meltdown and the recession. Sure, the big banks contributed to the problem, but in 1999, who was it, as HUD Secretary, that established new affordable housing targets requiring Freddie and Fannie to buy $2.4 trillion in ‘affordable’ mortgages? Andrew Cuomo! Fannie and Freddie invested in subprime loans that will weigh on all of us for years. Huge losses there. And the tax payer has to cover those.”

“My attorney told me about some of this a few days ago,” Edward said. “But how can lending to good companies just stop? Didn’t I read a little while back that the regulators are working to ensure the availability of credit to sound small business borrowers?”

“You did. It’s bullshit. The politicians caused the problem, demonized the banks, and now they’re very softly questioning the regulators for going too far in the other direction. And as long as there’s money to be made by friends of the politicians and of the regulators, nothing’s going to change. Sol Levin gets gored and Gerald Folsom gets the bank handed to him on a silver platter. That bastard Folsom must be sleeping with someone at one of the regulatory agencies. It seems like he turns up every time there’s a sweet deal available.”

“What’s in all of this for people like Folsom?”

“A damn fortune. The regulators wipe out a bank’s ownership, hand over the bank to one of their buddies who injects capital into the bank in return for a discounted purchase price of the bank’s assets and a loss-share arrangement with the FDIC. The Feds share in any loan losses the new owner might incur. So Folsom is brought in to take over Broad Street at a sweetheart price, starts selling off bank assets at a premium to the discounted price he paid, gets indemnified by the Feds against a substantial share of any losses, and ends up with a bank franchise that has residual value when all is said and done.”

“Unbelievable!” Edward exclaimed. “And who covers the cost of these bailouts? The taxpayers?”

“Indirectly, but yes. The Feds require banks to replenish the deposit insurance fund through higher premiums. In 2008, our annual premium was $300,000. In 2009, the agency forced us to pay $9 million in premiums for two years in advance. That means $9 million less in capital, and then we get criticized for not having enough capital. It also means $90 million less in lending capacity, assuming we can leverage capital 10 to 1. So, our earnings are impacted. How do we compensate? We raise our fees and interest rates on loans and lower our interest rates on savings and CD accounts. Who pays? It’s always the consumer.”