March 30, 2010

Health Care Bureaucracy May Be Like FDIC

Posted in Banking, Big Banks, Bonds, Capital, community banks, crises, derivatives, Finance, Forward thinking, government, investment advisor, investment banking, investments, local banks, municipal bonds, San Francisco, Stocks, Uncategorized tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , at 8:18 PM by Robert Barone

The folks in Washington D.C. say one thing – the bureaucrats in the field do another.  This is happening today on Main Street to America’s community financial institutions.  Because I suspect the health care bureaucracy will be similar, this writing will point out the abuses by the FDIC and relate them to what might happen in health care.

There are now 702 institutions on the FDIC’s Medusa list.  This number is likely to rise in the second quarter despite the closure of 41 banks year to date through March 26, 2010.  Almost all of these are community based or regional institutions, and they are victims of current economic conditions.  The balance sheets of these institutions were never meant to be “marked to market” or “marked to fire sale prices”.  As the economy heals, so would these balance sheets.  In the interim, nearly all of these institutions have enough liquidity to survive even if their “capital” base is low.  Yet, the FDIC’s approach has been that the managements and boards of directors of these institutions are lacking or even incompetent despite the fact that 3 years ago the FDIC itself rated most of these managements and boards in the top two rating categories.  It almost appears that the FDIC is on a mission, directed by the “Too Big To Fail” (TBTF) institutions, to eliminate a large chunk of community institutions so that the TBTF can get even larger.

The institutions on the Medusa list cannot raise capital precisely because they are on the Medusa list.  The FDIC is supposed to “resolve” a failing institution in a “least cost” way.  The least cost way would be to provide some seed money (like TARP which went mainly to TBTF) or change some regulatory accounting rules to allow write-downs to amortize over a longer time period, like 10 years.  In either case, once the public perceives that the Medusa banks can survive, private capital would become available.  But, under current FDIC policy, why should private capital come into a Medusa institution when all the investors have to do is wait for the FDIC to “resolve” the institution?  The deals the FDIC makes when it closes an institution are once in a lifetime deals for investors, and something they would never see in a free market transaction.  How could it cost the FDIC more if private capital comes to the aid of the institution without an FDIC “intervention”?  Even if it is later closed, the FDIC would be better off by the amount of the private capital raised.  Clearly, the FDIC closure policy is illogical in and of itself.

Let’s dig a little deeper.  Each of the Medusa institutions is under a “Cease and Desist” order which requires a blizzard of paperwork and reports which takes up most of management’s time and effort, often reporting on a weekly basis, to fulfill a whole lot of irrelevant requirements.  This takes time away from the important things management should be doing, e.g., dealing with the asset problems and trying to find additional capital.  At examinations, examiners are often arbitrary, especially when it comes to capital, often requiring uncalled for asset write-downs, which directly depletes capital.  It actually appears as if the examiners are under orders from their superiors to do so.

Having given away taxpayer money to save TBTF Wall Street institutions (the very ones that caused the financial crisis), the FDIC seems to have reacted to taxpayer outrage.  So, in an effort to appear “tough”, they aren’t about to help any other institution, even if it’s what the public wants or is the “least cost” resolution method.

More important, the way government bureaucracy is set up leads to wrongheaded decisions.  Today, the FDIC case managers are overwhelmed with the number of cases to manage.  The Medusa institutions send paperwork to the case managers who have so many cases to manage that they don’t have time to read the reports they themselves have required.  Most of these Medusa institutions regularly get messages from the case managers asking for reports that often have already been sent multiple times.  In the end, the easiest way for the case managers to cope is to reduce the number of cases.  This is shorthand for “closing” the institution, because keeping it open would only increase the case manager’s workload.  From their point of view, it isn’t their money and the money pot is unlimited.  So, case managers instruct field examiners to do what they have to do to justify an FDIC “intervention”, even if they have to be arbitrary in their judgments.  (Often, when the “intervention” occurs, it is Gestapo like.  For example, the FDIC sent 65 field agents to close a one branch, nine employee bank in Carson City, NV in February!)

This is what happens when a bureaucracy is given unlimited power.  The managements, boards of directors and shareholders have no recourse, and any lawsuits filed are met by an army of government lawyers with unlimited resources.

Think of what this means for the health care system.  First, for any particular illness, the bureaucrats will establish rules and guidelines which they will apply whether it makes sense or not.  That is, the bureaucrat, not the doctor and/or patient makes the medical decision.  Second, because cost will always be an issue in health care, the case managers will always be overwhelmed.  They will not have time to collect and read all of the relevant information.  Even if they do, if the rules and guidelines do not permit a treatment, it is safest for the bureaucrat to say “no”, even if he/she thinks a different treatment is appropriate.  No criticism can be leveled against a bureaucrat who follows all the rules.  Finally, like at the FDIC, the best way to control your workload is to get rid of case files.  Saying “no” may lead to a patient’s death – saying “yes” may prolong the life and keep the case file on the bureaucrat’s desk.

Like the TBTF Wall Street banks, if you are lucky enough to be a celebrity or a big political contributor, no doubt you will receive “special treatment” in the new health care world.  But, if you, like most, live on Main Street, no matter what is said in Washington, D.C., if you become ill, you can expect the same treatment that the 702 Medusa institutions are now receiving at the hands of the FDIC.

Robert Barone, Ph.D.

March 29, 2010

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778

March 4, 2010

FDIC Policies Are Devastating Main Street America

Posted in Banking, Big Banks, Capital, community banks, crises, Finance, investments, local banks, Uncategorized tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , at 9:19 PM by Robert Barone

There are now 702 banks on the FDIC’s endangered list.  That’s about 10% of all community financial institutions.  Unless something changes, very few of these will survive.  As I’ve recently blogged (The Creation of Jobs – A Systemic Failure, February 23, 2010, ), these are institutions that make loans to small business, and it is widely recognized that small business is the job creating engine in America.  So, imagine, 10% of this vitally important industry is being devastated.  Our politicians praise FDIC Chairwoman Shelia Bair.  But I submit that she and her organization, the FDIC, is single-handedly destroying the basic fabric of American business.

It need not be that way.  What we have is government run amok.   First, two decades of excessively easy monetary policy which has led to a devastating debt bubble.  Then, when the crisis hits, the government responds by using taxpayer dollars to save the “Too Big To Fail” (TBTF) institutions that played a key role in fostering the debt bubble.  Finally, seeing that the public is up in arms about such policies and government behavior, the government reacts by refusing to aid those institutions that are now victims of the government’s own and the TBTF institutions’ policies, but are vital to economic recovery.

In trying to make it look like it is protecting the taxpayer, the FDIC has taken heavy handed and aggressive tactics with community financial institutions.  The problem here is political.  They want to appear tough to satisfy what they perceive the public wants, especially after the government’s TARP, AIG, and TBTF “bonus” fiascos.  The result is a depleted FDIC insurance fund, a certain need for a taxpayer bailout sometime this year, and devastation for America’s small banks and small business.

Each of the 702 endangered institutions has a Cease and Desist Order (C&D), the last step before closure.  Each C&D Order and all of the correspondence from the FDIC accuses Boards and Management of “incompetence” and “mismanagement” despite the fact that in ’05 and ’06, most of these same Boards and Managements received high scores in examinations.  I simply can’t swallow the assertion that most of the 702 institutions suffer from “incompetent” management.  We are in the midst of an economic crisis, not a crisis of management.  Yet, the FDIC is addressing the issue as if only the latter is the cause.

Each of the 702 problem institutions has a capital raising mandate as part of the C&D order.  The fact is, once on this list, capital is impossible to raise.  Those with capital to inject simply only have to wait for the FDIC to close the institution to get a once in a lifetime sweetheart deal from the FDIC.  On the other hand, the TBTF easily raised capital last November and December to repay TARP in order to ensure that big bonuses could be paid.  They could raise capital because the public knows that the government won’t let these behemoths fail.

Worse, when an institution is closed, in come the Wall Street wealthy who appear to get the deal of a lifetime, at taxpayer expense.  [The FDIC will argue that the insurance funds are not taxpayer dollars, but insurance premiums paid by insured institutions.  Two points: 1) the FDIC fund is now -$20 billion, so soon taxpayers will be on the hook; 2) bank fees would be lower without insurance premiums, so, like every other tax, eventually the consumer pays.]  By the way, one must be an “approved” purchaser to purchase the failed banks, an exclusive club composed mainly of Wall Street sharks.

Capital devastation for these small banks comes mainly from souring loans (although the opening salvo was the losses many took on FNMA and FHLMC preferred stock in September, 2008, another government failure).  In many instances accounting rules require loan write-downs upon renewal of loans if appraisals come in lower than at loan inception, virtually a 100% probability.  Bank balance sheets are illiquid by design (they turn illiquid collateral assets into cash via the loan process).  Rules that force “mark to market” on such illiquid assets only erodes capital, make survival problematic, and prohibit new loans to small business, thereby prolonging the economic crisis and joblessness.  Instead of blaming management and employing Gestapo like tactics, an approach to capital that allows “healing” time for bank balance sheets appears to be a better and cheaper approach, especially in light of the FDIC’s mandate to resolve institutions using a “least cost” approach.  Most of the assets on those balance sheets will regain value as economic conditions improve.  Time is all the institutions need.

One way to provide time would be to have a special category of capital where the “write-downs” of loans due to economic circumstances could be amortized over a long period, say 10 or 20 years.  This would give the vast majority of the 702 doomed institutions new life.  If it is publicly perceived that they will survive, most will have the ability to raise capital, and the time to heal.

I believe the devastation and havoc being wreaked upon Main Street America’s financial institutions by Ms. Bair and the FDIC’s current policies will continue to cripple America’s economic engine and prolong the economic malaise.  Funny thing about America, oftentimes media heroes turn out to be real villains: Elliot Spitzer, Bernard Madoff, Alan Greenspan, Tiger Woods, to name a few.  If the FDIC’s current policies continue, we’ll soon add Shelia Bair to this list.

Robert Barone, Ph.D.

March 1, 2010

Ancora West Advisors LLC is a registered investment adviser with the Securities and Exchange Commission of the United States.  A more detailed description of the company, its management and practices are contained in its registration document, Form ADV, Part II.  A copy of this form may be received by contacting the company at: 8630 Technology Way, Suite A, Reno, NV 89511, Phone (775) 284-7778