“Find a need and fill it.” - Ruth Stafford Peale

It’s spring, and potholes are sprouting up everywhere. We had a doozy in our neighborhood after a water main break and had to call our city council representative to get it fixed. Fortunately, she’s running for re-election, so the pothole (actually a sinkhole) was smoothed the next day. So when we heard that Kentucky Fried Chicken is offering to “sponsor” pothole fixes in exchange for using temporary chalk to write “Refreshed by KFC” on the asphalt, we had to smile. Retailer John Wanamaker once said, “I know half the money I spend on advertising is wasted, but I can never find out which half." KFC’s new marketing plan really hits the spot.

The Conference of State Bank Supervisors held its annual Washington fly-in this week, meeting with members of Congress, federal regulators and policymakers to voice support for the state banking system.

Delegates from 20 states kept to a full schedule of policy briefings and visits with members of Congress on Monday and Tuesday. CSBS Legislative Committee Chairman Sarah Bloom Raskin, Maryland Commissioner of Financial Regulation, chaired the program, designed as a way for CSBS to communicate its position on current legislative issues on Capitol Hill, as well as for commissioners to receive first-hand information from key members of Congress who deal with banking issues on a day-to-day basis.

Monday opened with a roundtable dialogue over breakfast with key officials from FDIC. The Troubled Asset Relief Program and FDIC’s plan to replenish the deposit insurance fund were major topics of discussion. Following breakfast, the group reconvened for reports from New York Superintendent of Banks Richard Neiman, who serves on the TARP Congressional Oversight Panel; top officials from the Department of Housing and Urban Development, FDIC Chairman Sheila Bair; and former Federal Reserve Chairman Paul Volcker, who chairs President Obama’s Economic Advisory Council.  The day concluded with a meeting at the Federal Reserve, with Vice Chairman Donald Kohn leading the discussion. He was joined by Governors Kevin Warsh, Elizabeth Duke and Donald Tarullo, along with a number of key supervisory staff members.

Tuesday morning, House Financial Services Committee Chairman Barney Frank (D-Mass.) and Committee Ranking Member Spencer Bachus (R-Ala.) briefed the CSBS delegates on legislation now pending in the House. Delegates then met on the Senate side of Capitol Hill for a Senate Legislative Overview from key Senate Banking Committee staff. State commissioners held individual face-to-face meetings with their respective Congressional representatives to discuss CSBS positions on issues of importance to the dual banking system.

“It’s a fact that all politics is local, which is why our Washington fly-in is so important,” said CSBS President and CEO Neil Milner. “Members of Congress want and need to know how decisions made in Washington play out in their home states, which is why we must continue to bring our commissioners to Washington each year.”

Treasury Secretary Timothy Geithner made multiple visits before Congress this week and began to unveil vital pieces of the Obama Administration’s plan to overhaul the financial regulatory system. He said the overall plan would address systemic risk, protect consumers and investors, eliminate gaps in the regulatory structure and foster international coordination. In his testimony this week, the Treasury Secretary focused on systemic risk and providing for federal oversight of nonbank players who play critical roles in the economy. “As we have seen with AIG, distress at large, interconnected, nondepository financial institutions can pose systemic risks just as distress at banks can," Geithner said. The Treasury Secretary said the plan would cover bank and thrift holding companies and holding companies that control broker-dealers, insurance companies and futures commission merchants.

Treasury’s plan has six major components: creating a single entity with responsibility for systemic stability over the major institutions and critical payment and settlement systems and activities; establishing and enforcing substantially more conservative capital requirements for institutions that pose potential risk to the stability of the financial system to dampen financial cycles; requiring leveraged investment funds with assets under management over a certain threshold to register with the Securities and Exchange Commission to protect investors and promote market integrity; establishing a comprehensive framework of oversight, protections and disclosure for the over-the-counter derivatives market, moving the standardized parts of those markets to a central clearinghouse, and encouraging further use of exchange-traded instruments; strengthening SEC’s oversight of the money market mutual funds;  and establishing a stronger resolution mechanism that gives the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions.

When it comes to intervening in a systemically important institution, Geithner said the plan would be modeled after FDIC's exercise of emergency resolution and other authority for banks. Before emergency measures could be taken, the plan would require agreement by Treasury, the Federal Reserve, the appropriate federal regulatory agency and consultation with the president. The government would be able to provide financial assistance to the institution or to put it into conservatorship or receivership. The trustee of the conservatorship or receivership would have broad powers, including the ability to sell or transfer the assets or liabilities of the institution, to renegotiate or repudiate the institution's contracts, and to deal with a derivatives book. More Information

The Treasury Department and FDIC announced the Legacy Loan Program this week to cleanse bank balance sheets of distressed loans and other assets. Treasury said it currently anticipates that approximately half of the TARP resources would be used for legacy assets. FDIC will provide oversight for the formation, funding and operation of new public-private investment funds that will purchase loans and other assets from depository institutions. The Legacy Loans Program will attract private capital through an FDIC debt guarantee and Treasury equity co-investment. Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to rigorous oversight from FDIC.

Under the scheme, private investors would bid for the opportunity to contribute up to 50 percent of the equity for the PPIF, with the winning bid setting the implied value of the equity share held by the Treasury Department and the overall price offered to the selling bank. FDIC would provide a debt guarantee for a fee. Investors would be pre-qualified by FDIC to participate in auctions, and the agency is encouraging the participation of individuals, mutual funds, pension plans, insurance companies and other long-term investors.

The Treasury Department and Federal Reserve on March 23 announced plans to create a program to address the broken markets for securities tied to residential and commercial real estate and consumer credit as the second half of the Administration’s Legacy Loan Program. The intention is to incorporate this program into the Term Asset-Backed Securities Facility. Under the new program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage backed securities that were originally rated AAA and outstanding commercial mortgage-backed securities and asset-backed securities that are rated AAA.  The program will require borrowers to meet eligibility requirements, and haircuts will be determined to reflect the risk of the assets provided as collateral. Lending rates, minimum loan sizes, and loan durations have not been determined. Treasury will make co-investment/leverage available to partner with private capital. The agency will approve up to five asset managers with a demonstrated track record of purchasing legacy assets, and the agency may consider adding more depending on the quality of applications received.  More Information

CSBS President & CEO Neil Milner expressed support for the program but cautioned that it must be available to all banks.  “Community and regional banks, which fuel economic development and provide local market stability, must be guaranteed access to this program.  Through our network of local officials, we will work with the Federal Government and the industry to ensure that happens.”

Richard Madison, director of Mortgage and Education Programs, joined the Mortgage team this week.  His  background includes serving as a project management officer with UnitedHealth Group, and as a vice president and CIO with the American Public University System, an accredited online university system which offers undergraduate and graduate degrees to some 30,000 students around the world.  Additionally, he was the director of e-commerce with AOL from 1995 to 2000.  Prior to joining AOL, Madison served in the Navy for 10 years as an intelligence analyst.  He holds a B.A. in Interdisciplinary Studies from American Military University and is working to complete his M.A. in Management with a concentration in organizational leadership. 

U.S. Bank announced an agreement with Western Union Co. on Tuesday to offer the Western Union® money-transfer service in 2,791 U.S. Bank branch offices in 24 states. The agreement will connect consumers to more than 334,000 Western Union agent locations worldwide. The money-transfer service will be available at U.S. Bank locations as soon as May 2009 and will enable customers to send domestic or international money transfers for payout in 200 countries and territories. The plan also calls for the expanding the service to U.S. Bank’s online customers. In 2008, Western Union completed more than 188 million consumer-to-consumer transactions worldwide. U.S. Bancorp, with $266 billion in assets, is the parent company of U.S. Bank, the sixth largest U.S. commercial bank.

President Barack Obama nominated David Stevens to be the assistant secretary for housing and commissioner of the Federal Housing Administration this week. The president also nominated three people for positions in the Treasury Department -- Neal Wolin to be deputy secretary, Lael Brainard to be undersecretary for international affairs and Stuart Levey to continue as undersecretary for terrorism and financial intelligence. Stevens currently serves as the president and chief operating officer of the Long & Foster Companies, which includes Long & Foster Real Estate and its affiliated businesses, including mortgage, title, insurance and home service connections. Stevens’ previous experience included serving as an executive vice president at Wells Fargo; vice president of the single-family business at Freddie Mac; and working at the World Savings Bank for 16 years. Wolin was general counsel at Treasury from 1999- 2001, and was deputy general counsel from 1995-1999.  He served briefly in the Obama White House as deputy counsel to the president for economic policy and deputy assistant to the president before being asked to rejoin Treasury. He formerly served as president and chief operating officer for property and casualty operations at The Hartford Financial Services Group.  Brainard is vice president and founder of the global economy and development program at the Brookings Institution. Brainard served as deputy national economic adviser and deputy assistant to the president for international economics during the Clinton Administration. The Senate must confirm all the nominations except Levey, who was confirmed in July 21, 2004.

Colorado, Georgia, Kansas: FDIC last week was named the receiver for three banks -- FirstCity Bank, Stockbridge, Ga.; Colorado National Bank, Colorado Springs, Col.; and Teambank, National Association, Paola, Kan.  For FirstCity, FDIC arranged the payout of the insured deposits. The agency said direct deposits from the federal government, such as Social Security and Veterans' payments, will be transferred to SunTrust Bank. FirstCity had total assets of $297 million and total deposits of $278 million. At the time of closing, the bank had about $778,000 in deposits that exceeded the insurance limits. FDIC estimated the cost of the failure to its Deposit Insurance Fund would be $100 million. For Colorado National Bank, FDIC entered into a purchase and assumption agreement with Herring Bank, Amarillo, Texas, to assume all of the deposits of Colorado National and approximately $117.3 million in assets at a discount of $4.2 million, and paid a discount of 1.27 percent on the deposits. FDIC and Herring Bank entered into a loss-share transaction where the agency will share 80/20 percent in the losses on approximately $62 million in assets. Colorado National had total assets of $123.5 million and total deposits of $82.7 million. FDIC estimated that the cost to the Deposit Insurance Fund would be $9 million. For Teambank, FDIC arranged a purchase and assumption agreement with Great Southern Bank, Springfield, Mo., to assume all of the deposits and approximately $656.5 million in assets at a discount of $100 million, and pay a 1 percent premium on deposits. FDIC and Great Southern Bank entered into a loss-share transaction with the agency sharing 80/20 percent in the losses on approximately $450 million in assets. Teambank had total assets of $669.8 million and total deposits of $492.8 million.  FDIC estimated that the cost to the Deposit Insurance Fund would be $98 million. Twenty banks have closed so far in 2009.

Massachusetts: Massachusetts Commissioner of Banks Steven L. Antonakes was one of four lead-off witnesses at a House Financial Services Committee field hearing Monday on credit availability for small and mid-size businesses in Massachusetts. He cited an analysis of FDIC call report data showing that Massachusetts state-chartered community banks balances for commercial real estate loans and commercial loans to businesses increased 12.5 percent from 2007 to 2008. He added that community banks continued to serve as sources of strength, providing credit to consumer and business customers and positively impacting the local communities where they are based. Antonakes noted that recent events beyond the control of community banks (i.e. the conservatorship of Fannie Mae and Freddie Mac and the prospect of significant deposit insurance assessment increases) will impact banks’ operating costs, which could result in reduced credit availability. Antonakes summarized a number of state initiatives designed to support the financing of small business, including the Massachusetts Small Business Capital Access Program and the Massachusetts Banking Partners program. More Information

Missouri: The Missouri Development Finance Board recently took the first step to establish a direct loan program for small businesses. Missouri Governor Jay Nixon praised the action saying, “Missouri small business owners must be able to access capital to expand their operations and create the jobs of the future.” The program will create a pool of funds designated for low-interest and no-interest direct loans to small businesses. The pool of about $2 million would be enough to provide 80 loans of $25,000 each to small business owners across the state. The next step will be for MDFB staff and the Finance Committee to review the proposal and develop recommendations concerning the possible structure and funding for the loan pool. 

OTS: Treasury Secretary Tim Geithner appointed John E. Bowan to be the Acting Director of the Office of Thrift Supervision effective March 26. Bowman is deputy director and chief counsel for the agency and takes over the position from Scott M. Polakoff.

FASB, IASB: The Financial Accounting Standards Board and the International Accounting Standards Board agreed to work jointly and expeditiously toward common standards that deal with off-balance-sheet activity and the accounting for financial instruments. The boards agreed to issue proposals to replace their respective financial instruments’ standards with a common standard in a matter of months, not years. As part of this project, the boards will examine loan loss accounting, including the incurred and expected loss models. At a meeting in London this week, the two boards discussed the projects on financial statement presentation, fair value measurement, financial instruments with the characteristics of equity and the conceptual framework. The boards said they will continue to draw on expertise provided by the Financial Crisis Advisory Group, which is made up of current and former investors, regulators, central bankers, finance ministers and others from industry and the public sector. The group has met on three occasions and will summarize their recommendations in a report, which is expected to be published in the second quarter of 2009.

NCUA: On March 20, the National Credit Union Administration Board placed U.S. Central Federal Credit Union, Lenexa, Kan., and Western Corporate Federal Credit Union, San Dimas, Calif., into conservatorship to stabilize the corporate credit union system and resolve balance sheet issues. NCUA explained that corporate credit unions do not serve consumers, but are chartered to provide products and services to the credit union system. U.S. Central had approximately $34 billion in assets and 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members. NCUA said a staff analysis and stress test of the mortgage and asset backed securities held by all corporate credit unions found that US Central and WesCorp. have an unacceptably high concentration of risk. NCUA also noted loss of confidence by member credit unions and other stakeholders in the two corporate credit unions.  On March 26, NCUA approved a legislative proposal that would enable credit unions to spread the cost of the National Credit Union Share Insurance Fund replenishment over as much as a seven-year period. The agency said the plan would create a mechanism, the Corporate Credit Union Stabilization Fund, to absorb losses associated with the corporate credit union stabilization actions. Congress would have to approve the plan.

March 28 - The House Financial Services' Subcommittee on Housing and Community Opportunity will hold a field hearing titled: "The Housing Crisis in Los Angeles and Responses to Preventing Foreclosures and Foreclosure Rescue Fraud.” - 10 a.m., Thomas Lakin Gymnasium, Los Angeles Southwest College, 1600 W. Imperial Highway, Los Angeles.

March 31 - The Senate Finance Committee will hold a hearing on "TARP (Troubled Asset Relief Program) Oversight: A Six Month Update." - 10 a.m., 215 Dirksen Senate Office Building.

March 31 - The House Ways and Means' Select Revenue Measures Subcommittee has scheduled a hearing on "Banking Secrecy Practices and Wealthy American Taxpayers." - 10 a.m., 1100 Longworth House Office Building.

March 31 - The Senate Banking Committee will hold an economic policy hearing titled "Lessons from the New Deal." - 2:30 p.m., 538 Dirksen Senate Office Building.

"Between the dry, measured testimony before various Congressional panels and the poker-faced responses to queries from outraged lawmakers, how do Timothy Geithner and Ben Bernanke find time for their day jobs?" -- Opening sentence in the March 24 Business Week's 'Around the Street' column, alluding to the frequency of Congressional hearings requiring the two to appear as witnesses.