Banking Law

Late Friday, the Office of Thrift Supervision shut down, and placed into FDIC receivership, the first bank to fail in New Mexico since 1999. Charter Bank was owned by a company controlled by the Wertheim family, admired philanthropists and supporters of investments in low-income housing in New Mexico. Casual readers who follow such closing through the caustic #bankfailfriday hashtag on Twitter might chalk this up to just another poorly run bank that ran out of gas. However, there's more here than meets the eye.

Charter Bank management and Office of Thrift Supervision examiners argued for months over the quality of Charter's loans.
        The argument ended about 4:30 p.m. Friday when OTS officials arrived at the bank's headquarters in a small shopping mall at Eubank and Spain NE to declare Charter "unsafe and unsound" and appoint the Federal Deposit Insurance Corp. as the bank's receiver.
        The FDIC in turn handed Charter over to a Texas company, Beal Financial Corp., which will keep the Charter name and open for business as usual Monday.
        Charter's management, led since 2001 by bank President Glenn Wertheim, insisted that loans, mostly commercial real estate loans ? which OTS said were troubled ? were, in fact, being paid on time. OTS disagreed and ordered tens of millions of dollars of those loans to be classified as toxic.
        That classification, recorded as an entry on the bank's balance sheet, on paper lowered Charter's capital (money regulators require banks to make sure their deposits are safe) to levels well below those regulators regard as sound, even though virtually all of Charter's commercial real estate borrowers continued to pay their bills on time.
        "They had one judgment; we had another," Wertheim said in a Journal interview Saturday.

Glenn alleges that the OTS is being overly conservative on loan evaluations, collateral writedowns, and capital requirements because it's fighting for its life. He's not the first to make that allegation, and I think that there's truth in it.

The bone that stuck in my throat was the fact that the OTS ordered massive writedowns on commercial real estate loans that were fully performing. As a reader of Ed Morrissey's blog who calls himself "The Banking Guy" observed, just because a loan's paying now doesn't mean that it's not subject to classification as "troubled." That's a true statement as far as it goes, and without having knowledge of each individual loan, it's difficult to make a definitive judgment. However, another report said 95% of the loan portfolio was fully performing, yet the OTS declared the thrift insolvent and shut it down. That sends a chill through the hearts of community bankers throughout the country.

Those of us who were in the saddle in Texas in December 2005 saw the Federal Home Loan Bank Board ride into Texas and start marking-to-depressed-market the collateral values of commercial real estate, construction, and acquisition and development loans of savings and loans throughout Texas. As a result, Cease and Desist Orders were flying faster than the Roadrunner on crank. It was a tactic used by a regulator responding to political pressure to seize control of a situation. What they did was help accelerate a death spiral that might have been eased had less draconian measures been employed. They proved that they were tough guys, though. They were tough right up until Congress turned on them and put them out of business less than four years later.

If the OTS, the FDIC and the FRB want to do that to every community bank in the country today, they can wreak even more carnage than they did in the late 1980s. That's something to look forward to, isn't it?

There's another thing about this closing that is seldom, if ever, reported upon in the mainstream media. The people who owned this bank weren't a bunch of wheeler-dealers out to make loot a bank or take outsized risks in hope of an outsized payday. Instead, they are, by all public reports, good guys. Certainly, the New Mexico Mortgage Finance Authority thought so.

Ed Morrissey, who's a big dog on the right side of the blogging spectrum, thinks that there's something "fishy" with this takeover by the OTS.

...[T]he fact is that the only reason the bank became insolvent is because OTS made the risk look worse on paper last fall.  Their loans were being paid back at a high rate, probably better than most that OTS allows to continue operations.  OTS appears to have set up Charter to fail with its new risk declarations.

Welcome to our world, Ed. It's a trip through the looking glass. The trouble with it is that real human beings, not fictional characters, suffer.