Minority Bank Regulation (From the Viewpoints section of the American Banker Newspaper, 12/28/07)

On October 30, 2007, the Subcommittee on Oversight and Investigations of the House Committee on Financial Services held a hearing to review “the role of minority-owned financial institutions.” My organization has been researching women- and minority-owned banks and thrifts since 1989. We feel minority banks, specifically African-American banks, need one thing and one thing only: Capital.

That regulators do not recognize this is indicative of their decidedly lax approach to the sector. It also suggests that they may not be meeting their responsibilities under the Financial Institutions Reform, Recovery and Enforcement Act, which requires regulators to take steps to preserve minority banks.

Banking is a field that depends upon precise numerical data, but federal banking regulators do not have a valid estimate of the number of minority banks in the U.S. According to our data, by June, 2007, there were 225 minority owned banks and thrifts in the U.S., up from 190 at the end of 2005. The Federal Reserve Board counts 200 minority depositary institutions. The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Financial Management Service of the U.S. Treasury, all have differing estimates. If banking agencies cannot agree on the number of institutions, it is unlikely they will be very effective in preserving them.

Consider the case where the Department of the Interior Office of the Special Trustee for American Indians awarded the Alliance Capital Management a contract to manage $404 million in Federal Government trust funds. This firm had been fined $250 million by the U.S. Securities and Exchange Commission in 2003 for defrauding mutual fund investors.

An imaginative approach would have moved the trust funds to one or more of the 21 Native American banks in the U.S. instead, since placing Alliance in a position of trust is, given the SEC’s enforcement action, inconsistent with common sense, with the interests of justice and efficiency and with the interests of Indian beneficiaries. Giving federal banking regulators the power to take such an action is one legislative fix required.

Minority banks lead the industry with respect to asset growth. By June, 2007, annualized asset growth was 17.43% at minority institutions, compared to an industry growth rate of 6.38%. This reflects continued expansion at Hispanic institutions and remarkable growth at Asian institutions. Income has not followed suit…yet. From January, 2007 to June, 2007, minority bank and thrift net income totaled $616,416,000, almost twice what they earned in the full twelve months of 1998, $373,404,000.

Profitability is an issue. Minority bank return on assets averaged 0.09% by 6/30/07. For all FDIC-insured institutions, ROA was 1.21% by June, 2007.

Regulators underestimate the severity of the issues these institutions face, and do not give them sufficient credit when they perform well.

In light of the subprime problems impacting major financial institutions, we note that minority banks outperformed the industry with respect to loan performance. By June, 2007, net charge offs as a percentage of average loans totaled 0.21% at minority institutions and 0.47% at all FDIC-insured institutions. In 2006, charge offs as a percentage of average loans totaled 0.27% at minority institutions and 0.39% at all FDIC-insured institutions. In 2005, percentages were 0.20% and 0.50%, respectively.

Different ethnic groups have different financial needs. A “one size fits all” regulatory strategy may not make sense. Banks founded by newer Hispanic and Asian immigrants are more concerned with business financing. These groups are growing fast and do not require much assistance from banking regulators, other than training and technical assistance.

On the other hand, African American institutions face pressures other minority banks do not. They are the only group within this sector facing a significant decline in number. The only assistance offered by the banking regulators consists of training and technical assistance, important, to be sure, but insufficient to preserve the number of African-American institutions.

By lumping Asian, African American, Hispanic, Native American and Women-owned banks and thrifts into one large category, regulators do the sector and the country a disservice. Again, more precision is needed.

We believe regulators should focus on capital and capital related issues at minority banks, specifically African-American banks. A training and technical assistance program targeting minority banks announced by the Federal Reserve takes a step in the right direction: the first training module includes guidance for accessing capital. More help is needed.

In 1992, we developed the first CRA securitization, a Fannie Mae MBS security backed by home mortgage loans originated by minority banks and thrifts. This innovation spurred the development of over $100 billion in non-subprime, safe and sound CRA lending. Likewise, we believe the promotion and implementation of capital access tools will significantly increase the flow of capital to minority banks, and by extension, to all sectors in society. This increase will, in turn, result in significantly increased general economic activity in the communities served by minority banks.

We estimate that a $1 billion dollar minority bank capital facility will generate $10 billion dollars in economic impact over five years, assuming a capital access system operating without significant falsification and fraud.

We believe this is an investment worth making.

New Internet Tool With Instant Comparisons of Executive Pay

According to the SEC:

"Securities and Exchange Commission Chairman Christopher Cox today launched the first-ever online tool that enables investors to easily and instantly compare what 500 of the largest American companies are paying their top executives. The new database highlights the power of interactive data to transform financial disclosure.

The Executive Compensation Reader - available today on the SEC's Web site at http://www.sec.gov/xbrl - builds on the Commission's new requirements that went into effect earlier this year to dramatically enhance clarity and completeness of executive compensation disclosure."

"Framework" to Help Prevent Foreclosures

We have been attempting to review the Bush Administration's plan to help stop foreclosures. We have not been able to find coherent, consistent documentation, thus we believe there is no plan. There is, however, a public relations effort designed to feign concern.

According to the Jacksonville Business Journal,

"Nationwide, nearly 1.1 million homes entered the foreclosure process so far this year, up 93 percent from the 559,750 foreclosures filed during the same period last year. About 526,936, or more than six out of every 1,000 households in the United States, were repossessed by banks or lenders during the first 11 months of the year, up 41 percent from the same time last year."

HUD notes that the FHA Secure Plan " has helped 33,000 homeowners prevent foreclosure in three months; More than 50,000 to be helped by end of year. " Thus 33,0000/1,100,000 or three percent of homeowners in foreclosure have been helped. That is three out of one hundred. Even under the Administration's most optimistic scenario, only 240,000, or 21.8% of homeowners facing foreclosure are eligible for assistance, meaning that 78.2% are not.

On the basis of these numbers, we judge this effort to be ineffective and cynical, giving false hope to those facing one of the most stressful life events possible.

Recent news articles point to the fact that the "Fed Shrugged as Subprime Crisis Spread." The Fed's mantra in 2001, according to a Governor of the Federal Reserve, speaking at a Board meeting of a faith-based pension fund (a speaker, by the way, we suggested) was "subprime good, predatory bad." This was, in hindsight, wrong. This was, also, no accident.

As we noted on November 9th, in 2000 and 2001, most of the people losing their homes were low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

This, too, was no accident.

The SEC threads the needle

We note efforts by the SEC to "thread the needle" after approving what many had considered restrictive Proxy Access policies. (Our viewpoint is that things could have been worse, that Mr. Cox is still, by far, the most competent Bush appointee, and that there is still room for negotiation.) Consider the following:

• On December 5th, the "SEC's Office of Interactive Disclosure Urges Public Comment as Interactive Data Moves Closer to Reality for Investors" This is tied to efforts to create electronic shareholder forums. In the run up to the Proxy Access vote, many missed the fact that the SEC created, in October, an "Office of Interactive Disclosure..to lead the transformation to interactive financial reporting by public companies. A free taxonomy review tool is publicly available on the Internet at http://usgaap.xbrl.us along with other information."

• On December 6th, "The Securities and Exchange Commission announced a record $468 million settled enforcement action in an options backdating case against William W. McGuire, M.D., the former Chief Executive Officer and Chairman of the Board of UnitedHealth Group Inc. The settlement is the first with an individual under the 'clawback' provision (Section 304) of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors."

• On December 7, 2007, "The U.S. Securities and Exchange Commission announced that it filed civil actions alleging securities fraud in five separate kickback schemes uncovered by an FBI sting operation conducted pursuant to a recent cooperation agreement between the FBI and the Commission. The defendants are insiders or promoters of publicly traded companies who made stock sales to a hedge fund in exchange for illegal kickbacks to an individual whom they believed to be the hedge fund manager, but who was in reality an undercover FBI agent." This is one of the first times that the SEC has used an undercover vehicle of this type. Also notable is the cooperation of the FBI. It is important because it send a signal that the SEC has adopted this tactic to uncover fraud and malfeasance in the marketplace.

• On December 11th, "The Securities and Exchange Commission approved changes that will give smaller companies faster and easier access to capital when they need it or market conditions are favorable. Specifically, the Commission adopted amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to certain restrictions, including the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period." This may help small minority-owned firms.

• On December 11th, "The Securities and Exchange Commission asked for public comment on possible revisions to disclosure requirements for oil and gas reserves given the extent and nature of changes that have occurred in the oil and gas industry in the nearly three decades since the Commission first adopted its oil and gas disclosure rules." Social investors may be able to use this effort to call for other disclosure rules. In any event, this is a matter that social investors have been requesting for years.
  

All in all, these are signs that the SEC is not as hostile to shareholder interests as some, including this blogger, may have thought.