CSBS Examiner
A weekly report of events affecting the state banking system from the Conference of State Bank Supervisors
October 3, 2008
“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” - Mark Twain
What is it about October? Leaves start to fall, or is it the sky? Americans are usually optimistic, but when the stock market goes up and down like a yo-yo, we start to feel glum. Monday’s 777-point loss in the Dow Jones average took us back to Black Monday, October 19, 1987, when stock markets around the world started tumbling like dominoes, and our valued Dow Jones average lost 508 points in one fell swoop. The current market volatility frazzles our nerves. But we should keep in mind that the DJIA was under 2000 on Black Monday, compared to its 10,366 close this past Monday. But as we know, while Wall Street may affect Main Street, the community and regional banks that comprise the state banking system are Main Street. And that is where our focus will stay.
Monday arrived, accompanied by mix of desperation and optimism that Congress would find a way to pass an economic rescue measure to bolster confidence in the nation’s financial system and stem the worsening credit crunch. Treasury Secretary Henry Paulson had announced a plan three weeks ago, hearings were held last week, and version 1 of the bill headed to the Congress for quick action. The legislation provided up to $700 billion to stabilize the financial system by authorizing the Treasury Department to buy mortgages and other problem assets. The House of Representatives took the first stab at the 109-page Emergency Economic Stabilization Act, but it faltered along the way, and by mid-afternoon Monday, the House had defeated the bill by a vote of 228 to 205.
The bill’s defeat sent the Senate into action, and by Wednesday, senators had crafted an “enhanced” version of the bill and moved it to the floor for debate. Around 10 p.m., a vote was taken, and the Senate had approved the revised and expanded Emergency Economic Stabilization bill by a vote of 74 to 25. Wednesday ended on a high note. Like the House-rejected bill, the legislation provided up to $700 billion for Treasury to purchase mortgages and other problem assets on financial institutions’ balance sheets. In addition, the 450-page Senate bill included provisions that would:
- temporarily increase the cap on deposit insurance coverage to $250,000 from the current $100,000 until Dec. 31, 2009
- allow for a temporary increase in the borrowing limits at the Treasury for FDIC and the credit union insurance fund
- extend the current law providing tax forgiveness on the cancellation of mortgage debt
- allow for the Federal Reserve to pay interest on reserves
- authorize the SEC to suspend the application of mark-to-market accounting under Financial Accounting Standards No. 157 if determined it would in the public interest and protect investors.
This morning, the amended bill (H.R. 1424) moved back to the House. After several hours of debate, the bill was finally approved on a handily on a vote, 263 to 171. The bill was quickly signed into law by President George W. Bush. More Information
Foreclosure Prevention Efforts Disappointing, State Officials Say
Industry measures to keep homeowners out of foreclosure have slipped, according to the State Foreclosure Prevention Working Group -- a group of state attorneys general and state banking regulators working to prevent home foreclosures. “Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer,” the report concluded, “a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases.” The Working Group issued its third “Analysis of Subprime Mortgage Servicing Performance,” based on data collected from subprime mortgage servicers for the period of February through May 2008. The report found nearly eight out of 10 seriously delinquent homeowners were not on track for any loan work-out or loss mitigation assistance to enable them to avoid foreclosure, a higher percentage than the group found in its April report. While the number of loan modifications closed increased by 51 percent between January and May of 2008, the number of modification in process declined by 28 percent. The report concluded that instead of expanding loan modification options to reach a broader set of homeowners, more loss mitigation was directed to selling homes short of foreclosure. In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one. The report also found that one out of five loan modifications made in the past year were currently delinquent.
Treasury Backs Money Market Funds
The Treasury Department on Monday opened its temporary guarantee program for money market funds. Treasury will guarantee the share price of any publicly offered eligible money market mutual fund – both retail and institutional – that applies for and pays a fee to participate in the program. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, maintain a stable share price of $1, and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. The temporary guarantee program provides coverage to shareholders for amounts that they held in participating money market funds as of the close of business on Sept. 19, 2008. The guarantee will be triggered if a participating fund's net asset value falls below $0.995, commonly referred to as breaking the buck. The program is designed to address temporary dislocations in credit markets. The Treasury Secretary will review the need to extend the program after the initial three-month term. The deadline for applying for the program is Oct. 8. More Information
Mark-to-Market Rules Under Attack
The Emergency Economic Stabilization bill passed by the Senate this week would affirm the Securities and Exchange Commission’s ability to suspend Statement 157 on fair value accounting. On Thursday, A bipartisan group of more than 60 House and Senate members added further support to a suspension of the use of mark-to-market accounting in a letter to the SEC calling for a new mark-to-value mechanism that the group says better reflects an asset's value.
In response, the Financial Accounting Foundation issued a letter to lawmakers on Thursday objecting to political interference for Financial Accounting Standards Board’s Statement 157 on fair value measures. “We believe that once Congress starts setting accounting standards through its political process, the integrity of U.S. accounting standards setting and the credibility of U.S. financial reporting will be dangerously compromised,” said FAF Chairman Robert E. Denham in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.) and copied to other leaders in the House and Senate.
Denham said the best interests of the participants in the capital market would not be served if “Congress sends the message that special interests are able, through legislation, to overturn expert accounting judgment arrived at through an open and thorough due process.” He urged lawmakers to allow changes to be made to Statement 157 through FASB’s open due process without political interference. More Information
Alabama: Alabama Superintendent of Banks John D. Harrison recently wrote an op-ed article reassuring the public that Alabama banks are safe and strong. Harrison said no bank chartered by the Alabama State Banking Department has failed in more than 21 years. “I do not expect that record to be broken during these tough economic times. As one of the regulators of Alabama state-chartered banks, I am proud of the conservative approach that the CEOs of our banks have taken.” The department regulates129 banks with a total of $257 billion in assets and $175 billion in deposits. Harrison said ensuring safe and sound banking operations is the department’s No. 1 priority. More Information
New York: In light of the extraordinary conditions in the financial markets, the New York State Banking Department used its wild card authority to allow state-chartered banks to enter into loans in emergency situations and for limited periods of time that exceed regular lending limits. National banks have comparable authority. Superintendent of Banks Richard H. Neiman said the state program has standards and conditions that are substantially similar to those imposed by the Office of the Comptroller of the Currency for national banks. “These are serious times and we have a responsibility to be responsive to changing market conditions and to ensure that we have the ability to enable New York state-chartered banks to help ease the credit and liquidity crunch that the financial markets are experiencing,” Neiman said. The program provides special lending limits for temporary funding arrangements in emergency situations. It is open for a 30-day comment period. More Information
Texas: The Texas economy and the Texas banking system continue to show strength and resiliency in the wake of economic stresses nationwide, Interim Banking Commissioner Bob Bacon said on Oct. 1. As of June 30, Texas’ state-chartered institutions reflected a healthy core capital ratio of 9.02 percent as compared to a 7.58 percent position for all commercial banks nationwide, and the loan loss reserve for state-chartered banks was good at 1.17 percent of total loans. Bacon attributed the resiliency of the Texas banking system to the refusal of state-chartered institutions to participate to any great extent in subprime lending. As a result, Texas banks are not beset with the avalanche of past due and foreclosed home loans occurring in other parts of the country. More Information
FHA: The Department of Housing and Urban Development introduced the Hope for Homeowners program to refinance mortgages for borrowers who are having difficulty making their payments but can afford a new loan insured by the Federal Housing Administration. The program is a part of the Economic and Housing Recovery Act of 2008. Some of the features of the program include: a maximum loan amount of $550,440; waiver of prepayment penalties and late payment fees; a loan amount that is 90 percent or less of the new appraised value; and an upfront mortgage insurance premium of 3 percent and annual premium of 1.5 percent. The borrowers must agree to share with FHA both the equity created at the beginning of the new mortgages and any future appreciation in the value of the homes. Junior liens against the properties will be excluded for the first five years except for those directly related to property maintenance. More Information
NCUA: The National Credit Union Administration announced on Monday that Alliant Credit Union of Chicago purchased the assets and assumed all member shares of the recently liquidated Kaiperm Federal Credit Union of Oakland, Calif. Alliant Credit Union is a state-chartered, federally insured institution with $5.7 billion in assets and more than 216,000 members located throughout the United States. Alliant Credit Union was chartered in 1935 to serve employees of United Airlines. NCUA made the decision to liquidate Kaiperm Federal Credit Union after determining the credit union was insolvent and has no prospects for restoring viable operations. At the time of liquidation, Kaiperm Federal had approximately $91 million in assets and served 18,000 members. NCUA chartered Kaiperm Federal in 1957 to serve employees of Kaiser Foundation medical facilities in the East Bay area of Northern California. Over time, the credit union’s field of membership expanded to include other employee groups. NCUA has closed 11 credit unions in 2008. More Information
SEC/FASB: The Security and Exchange Commission and Financial Accounting Standards Board issued interpretative guidance on Sept. 30 to help preparers, auditors and users of financial information with fair value determinations in the current market environment. The clarifications are based on the fair value measurement guidance in FASB Statement No. 157 -- Fair Value Measurements. The guidance answers the most urgent questions, while FASB and its international counterpart work on providing additional guidance. The questions addressed were: whether management's internal assumptions could be used to measure fair value when relevant market evidence does not exist; how market quotes should be considered when assessing the mix of information available to measure fair value; whether disorderly sales should be used in calculating fair value; whether an inactive market can affect fair value measurements; and what factors should be considered in determining whether an investment is other-than-temporarily impaired. More Information
SEC: The Securities and Exchange Commission ended its Consolidated Supervised Entities program and announced plans to enhance its oversight of the broker-dealer subsidiaries of banking holding companies regulated by the Federal Reserve. SEC created the program in 2004 as a way for global investment bank conglomerates that lacked a supervisor under law to voluntarily submit to regulation. “The last six months have made it abundantly clear that voluntary regulation does not work,” said SEC Chairman Christopher Cox. He also noted that each of the major investment banks that had been part of the program have now been reconstituted within a banking holding company and are subject to robust supervision by the Federal Reserve. Cox said SEC will work closely with the Fed as it focuses on the regulatory oversight of the broker-dealer subsidiaries of the banking conglomerates. Cox also urged Congress to fill a major gap in the regulatory framework – the oversight of the $60 trillion credit default swap market that is not regulated by any government agency. More Information
October 6 - The House Oversight & Government Reform Committee holds an oversight hearing to discuss the Lehman Brothers bankruptcy. – Time TBA, 2154 Rayburn House Office Building.
October 7 - The House Oversight & Government Reform Committee holds an oversight hearing to discuss the takeover of American International Group. – Time TBA, 2154 Rayburn House Office Building.
October 7 – The FDIC Board of Directors will meet. Up for discussion will be a proposed rule on risk-based assessments and designated reserve ratio for 2009. – 10 a.m., FDIC Sixth Floor Board Room.
“It’s like making Colonel Sanders give Popeye’s their chicken recipe.” Richard Baker, president and chief executive of the Managed Funds Association in Washington, commenting on a new requirement that hedge funds file their respective short positions with the Securities and Exchange Commission.Mary White, Editor
Teresa Dean, Contributing Writer
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