Thursday, August 27, 2009

FDIC revises rules on private equity investments

According to the New York Times, "The Federal Insurance Deposit Corporation imposed(new rules governing investments by) private equity firms seeking to buy failed institutions, although they eased more onerous proposals in hopes of luring them to the table." The new rules are designed to address concerns that "private equity buyers might engage in aggressive practices that could put its deposit insurance fund at risk."

"The rules..require private equity-controlled banks to pour enough capital into a failed bank so that it has a cushion of at least 10 percent of its assets for three years. The F.D.I.C. dropped a requirement that private equity firms supply additional capital in the event of a severe downturn, required private equity firms not sell an acquired bank for at least three years, imposed restrictions barring the acquired bank from lending to companies affiliated with the private equity buyer, and exempted private equity firms from complying with the higher capital standards if they joined forces with a traditional bank buyer."

The new rules apply "only to future deals, and (will be reviewed) in six months."

The article stated that "Private equity firms said the new rules would make them less likely to buy a failed institution on their own."

But another article in the same paper noted that:

"Billionaire investor Wilbur L. Ross..said he plans to invest further in banks under the new regulations.

'We will now be able to be a bidder,' Mr. Ross said. 'We’ll be in the game..' "

Thus, concern that these new federal rules would reduce the number of private equity firms buying banks can be seen as a private equity industry negotiating tactic used to minimize the application of common sense public interest risk controls.

For minority banks, this means that investors will be encouraged. We continue to believe that value in this sector is growing, and note new interest in our website http://www.mbflp.com/.

We also note several new black banking initiatives:
a. The Black Bank Initiative. www.blackownedbank.com
b. “National Community Reinvestment Day” on September 4, 2009. Urging individuals to open accounts at black owned banks.
c. Atlanta Black Banking Initiative. Sponsored by the Overground Railroad.

SEC issues investor warning

According to the Chicago Sun Times, "Exchange-traded funds that leverage their holdings could lead to outsized losses, the Securities and Exchange Commission said. It said brokers and financial advisers should warn people away from them unless they plan to hold them for just a day. The problem with leveraged ETFs comes down to the magic and mystery of compounded returns. If you leave your money in a leveraged ETF over time, your return can differ drastically from the fund's stated goal, especially in volatile markets. "

Sunday, August 9, 2009

Wells Fargo sued for racially biased lending, again..

As we noted in June, Wells Fargo has a real issue.

Now, they have been sued by the State of Illinois. According to recent news reports,

"Illinois filed a lawsuit on Friday against Wells Fargo & Co. accusing it of discriminating against black and Latino homeowners by employing racially biased lending practices.

San Francisco-based Wells Fargo & Co. allegedly sold high-cost subprime mortgage loans to minorities while white borrowers with similar incomes received lower-cost loans, according to the lawsuit, filed in Cook County Circuit Court by Illinois Attorney General Lisa Madigan.

'As a result of its discriminatory and illegal mortgage-lending practices, Wells Fargo transformed our cities' predominantly African-American and Latino neighborhoods into ground zero for subprime lending,' Madigan said."

Wednesday, August 5, 2009

Hearing on Examing Proposals to Enhance the Regulation of Credit Agnecies(Jui Kai Li)

On Aug 5th, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Proposals to enhance the Regulation of Credit Rating Agencies.

Testifying were Michael S. Barr-U.S. Department of the Treasury, Professor John C. Coffee, Jr.-Columbia University Law School, Dr. Lawrence J. White-New York University ,Mr. Stephen W. Joynt-Fitch Ratings, Mr. James Gellert-Rapid Ratings, Mr. Mark Froeba-PF2 Securities Evaluations, Inc.

The testimony is summarized below and copies of the written statements are available at;
http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=89e91cf4-71e2-406d-a416-0e391f4f52b0

Credit Rating Agency blamed for Financial Stress

In credit markets, borrowers often know more than lenders. While lenders may buy a portion of debt issued, borrowers often issue debt to many borrowers. Thus, rating agencies are traditionally assumed to address this information asymmetry. They help lenders evaluate the credit worthiness of borrowers. However, many researches show that investors’ over reliance on these rating agencies causes financial stress. These researchers believe that a severe conflict of interest and lack of transparency in the rating process led to overly optimistic ratings. A wave of sudden CDO downgrades in July 2007 not only led investors to lose confidence in rating agencies but also led to an increase in risk aversion and to low liquidity afterwards.

Conflicts of interest and a lack of transparency have led to increased Corporate Governance risk, a key factor socially responsible investors examine. Due diligence issues, accountability and liability factors aroused a lot of debate at the hearing. In highlights from the testimony, we will see how the administration proposes to regulate credit rating agency and gain different perspectives on the proposal.

Highlights from Testimony:
Senators’ Support for the Proposal

Most Senators think reform is necessary. “I strongly believe that the credit rating agencies played a pivotal role in the collapse of our financial markets. Any regulatory reform effort must take that into consideration,” said Senator Shelby.

The Senators agree to give SEC more authority to regulate disclosures and conflicts of interest, as well as unfair and abusive practices. However, the agreement between the Senators and the Administration is not a coincidence. Before the Administration’s proposal was submitted, the Banking Committee proposed and helped passed the Credit Rating Agency Reform Act of 2006. The act gives the SEC more authority to regulate credit rating agencies. According to the Assistant Secretary’s testimony, “This Committee, under the leadership of Senator Shelby, Senator Dodd and others, took strong steps to improve regulation of rating agencies in 2006. That legislation succeeded in increasing competition in the industry, in giving much more explicit authority to the SEC to require agencies to manage and disclose conflicts of interest, and helping ensure the existence and compliance with internal controls by the agencies.”

Industry’s Perspective on the Proposal
On the other hand, from an industry perspective, many disagree with key points in the proposal. They do not believe that due diligence and greater liability should be the responsibility of credit rating agencies.

“In that regard, we support the concept that issuers and underwriters ought to be required to conduct rigorous due diligence on the underlying assets that comprise asset backed and mortgage backed securities….. Congress ought not to hold rating agencies responsible for such due diligence or for requiring that others do it,” said Stephen W. Joynt, President and Chief Executive Officer, Fitch Ratings. “Unlike other gatekeepers, the credit rating agencies do not perform due diligence or make its performance a precondition of their ratings. In contrast, accountants are, quite literally, bean counters who do conduct audits,” said Professor John C. Coffee, Jr.
,Professor of Law Columbia University Law School.

Both industry and academic perspectives point out that rating agency should not be held to a standard that might lead to greater credit rating agency liability. “A credit rating is an opinion about future events – the likelihood that an issue or issuer will meet its credit obligations as they come due. Imposing a specific liability standard for failing to accurately predict the future in every case strikes us as an unwise approach,” said Mr. Joynt. “Also, Professor Coffee maintained that”We have to face the simple reality that the rating agencies have a built-in bias: they are a watchdog paid by the entities they are expected to watch. “

Monday, August 3, 2009

Dwelling House, a 119 year old Black bank, rallies

According to an article in the American Banker Newspaper,

"With public sentiment running so hard against the banking industry these days the story of Dwelling House Savings and Loan Association, a $13.4 million minority-controlled mutual in Pittsburgh, is nothing short of amazing.

Community leaders have rallied around the thrift for the past few months after cyber thieves took more than $3 million through fraudulent automated clearing house transactions, leaving the thrift with a $1 million capital hole.

Residents campaigned to boost the thrift's deposits, and it ultimately received pledges of cash injections from four local foundations and the $5.6 billion-asset Dollar Bank of Pittsburgh, just in time for a June 30 deadline that regulators imposed for getting the thrift adequately capitalized."

As was noted in the article, "Observers said the outpouring of support for the bank was primarily because of its age. 'It goes to show their importance to the community that can't be divorced from their age,' said William Michael Cunningham, social investing adviser with Creative Investment Research Inc., which invests in minority-owned banks. 'They have such a long history in the community that it doesn't surprise me they are rallying around the institution.' "