Banking Law

Former OCC attorney John Podvin, currently lodged in the Dallas office of Texas-based law firm Haynes & Boone, was interviewed last week by Metropolitan Corporate Counsel magazine. He had some ?hot? opinions about the expected course of federal bank regulation, and since this blog favors ?hot? over ?lukewarm,? we thought that some of John?s points were worth repeating, especially since we happen to agree with him (a testament to his brilliance, obviously).

His first observation that continued deterioration of commercial real estate is a ?red sky in the morning? harbinger of potential storms for commercial banks may not be controversial, but is worth emphasizing. Bank examiners have been focusing so heavily on community banks' CRE portfolios recently that in a number of cases, increased write-downs, loss reserves, and capital requirements by examiners have pushed some banks to ?offload? their most attractive, stable, and best-earning CRE loans, not their worst dogs. After all, if you have to downsize quickly, you need to sell the assets that are most easily moveable, and those are the good loans, not the bad ones. In addition, while you ought to be able to sell the good stuff at a premium, the bad stuff is most assuredly going to fetch such a low price (if you can even find a buyer) that your capital will be further impaired.

John makes another excellent point that programs other than TARP and P-PIP (which have absorbed most of the mainstream press ink) have been home runs in terms of inducing stability and avoiding runs on banks. The increased deposit insurance limit (which is going to be hard not to extend) and the Temporary Liquidity Guarantee Program have worked well.Proper kudos to the government for those. And you thought all we did was blast bureaucrats here.

His comment that the legacy loan portion P-PIP has not been a hit because of the unwillingness of most banks to take the capital hit necessary to sell assets to ?market? buyers is based upon reality, which is always the best place to stand when making an observation. Congress should try it sometime, just to change things up a little. That's one dog that not only won't hunt, but that at the sound of gunfire, runs and hides.

I share John?s concern that in its clanging shut of the barn door after the horses are long gone, Congress and the federal banking regulators may not only stuff the goose that lays the golden eggs (our commercial banking system), but outright wring its neck.

One of my fears is that the regulatory pendulum may swing too far, producing excessive regulation. We must be mindful of this as a country in our public policy decisions going forward.

While I repeat that there is no how-to book and everyone is trying to do the best he or she can, in my opinion government has gone too far in some cases. The Congressional reaction to the AIG bonuses with the proposed 90 percent tax on their proceeds, Senator Kerry's response to the bank sponsorship of sporting events and the accompanying publicity have set us back in my opinion. It is the fear of the unknown concerning what Congress will do next that is the potential stumbling block. Having some public policy discussion to encourage capital investment as opposed to frightening it away would be a good step forward. I also believe that the talk of nationalizing banks, or frankly any industry for that matter, is going the wrong direction. We want to be the land of the free and the home of the brave - we don't want companies to be owned by the state and run by the bureaucrats. I think we need to think long and hard before we go in that direction.

Do I hear an ?Amen,? brothers and sisters?