Needless to say, we’re not going for a popularity contest on the cautionary flags we’ve thrown out on robo settling. But we are really interested in challenging the status quo of our handling for the longer range. The stakes are huge today for corporate and institutional leaders. I just heard about a case where a mortgage applicant sued a bank and an employee apparently lost their job over newly instituted mortgage pre approval procedures and processes that are behaviorally still in assimilation phases, organizationally, for the both the federal government and at banks. Show me an organization with people as sharp as a tack, doing something they’ve never had to do before, in mass, during a crisis and crisis response period, and I will show you the fountain of youth in enterprise risk. So what are we really trying to prove here?
Wednesday I listened in on the senate SBLF Program hearing, attended by Tim Geitner. I admire and respect him for his important work for America. He’s done an admirable job in this financial market mess and I’m a fan. But here’s a parallel take away from listening in…
What I concluded from the testimony yesterday on the Small Business Lending Fund (SBLF) hearing with Treasury Secretary Geitner is that this program basically failed for underwriting reasons to make advances in lending on the small business front. Poor credit quality. For small banks and small businesses. Apparently it took a day and age to get response out of this program. A few people and banks benefited. If they were talking about monetary policy yesterday though, maybe we’d call this a “recognition lag”. A lag between the time a problem arises and the time it is recognized. Others might call it blind spot. This to me is precedence for the trouble I’m also seeing with reams of principles based, prudential regulation in banking. It is great in theory, in practice, well…this is a litigator hedging moral competency in the name of justice living the American dream… I guess if there were full employment in the field of law, also absent the wage inflation people in the field are dealing with, maybe that would be the silver lining. But really, what is up with the recognition lag?
What was striking to me was Senator Snow’s obvious frustration with the Treasury Secretary’s response… that her testimony was kind of falling on deaf ears, while she slammed the failure of the SBLF program, taking it out on Mr. Geitner for the Obama administration to know. Funny to me for the theatrical element but she was serious on the content. In a way, Tim politely humored her while he justifiably rested his case on the underlying facts. What really is there to say about poor credit quality in the nation right now? It’s important to know where people stand and what they stand on.
So when I see this same kind dynamic in the parties to the arguments in the robo foreclosure debacle, recognizing the also powerful and seemingly arrogant leaning position of the large financial institutions, these double standards of conduct that Washington can give the appearance of applying, while resting the case on the critical underlying facts, is germane to the legal and financial questions surrounding robo settling. I don’t think it was Mr. Geitner’s intent to come across this way. He just did. I don’t think it was the banks’ intent either. They just did. That’s an impression. What’s naive about intent here? It’s circumstantial. We also know the problems are hardly criminal, but is it, under a reasonable standard of care, even negligence? The kind we should be paying for? The appearance of the conduct itself can be at the least, insensitive, unbecoming, unconscious, and in some cases absolutely deplorable. Is it under the precise crisis response conditions negligent? What are the preconditions that serve this dynamic up? You’d have to reconstruct this. It’s happening at a time for people when they are clearly predisposed to immense financial pressure and are incredibly frustrated in dealing with bureaucracy.
The issues here are really not unlike some of those that big banks were dealing with in this mass foreclosure debacle that ultimately may require them to pay big money. In other words, causation for the unfavorable outcome in both was technically rooted in failed credit, but the rage was triggered by administrative process that had nothing to do with the credit quality. Administratively each were unprepared in their particular crisis response to do a more timely, accurate or adequate job than the one they did. The chain of events preceding the ultimate outcome support wrongful handling allegations, but do they justify indemnity or making whole. For what? A lot of pain and suffering in America…
So, many of the customers to whom these situations pertained were either failed by some expectation, held back or mistreated by the institution. On the one hand disadvantaged underfunded small banks (SBLF) and the other disadvantaged underfunded households in foreclosure (Robo signing). The errors were about the wrongful handling and treatment of the customer in the administrative process. But not withstanding, the ultimate failure was really predicated on the underlying fact set that still warranted in the SBLF case, a loan declination to 50% of the small financial institutions who applied with only $4.0B of the $30B program going out the door to stimulate lending, $1.8B lent to small businesses and in the robo signing case, hundreds of foreclosure parties compensated on the subsequent fact pattern while not being true too, the underlying fact pattern of massed failed mortgage credit. One has no legal recourse, the other one does. Each believes, the net effect was the most reasonable standard of care they could render under their circumstances. Mr. Geitner had a legal basis for the hold up in the SBLF application process to protect confidentiality and in the case of the banks they had a legal basis to be concerned about protection of their financial interests in properties in an accelerated and unprecedented period of foreclosure. No one really wants to argue about this. So settle? Is not the protection of assets one of the highest fiduciary duties? The order and rank of priority for the duty of care in the handling of our various financial crisis responses are pretty dam tricky. It’s unfortunate that a disadvantaged small bank who could have used the lending capacity, to lend to a contracted field of small businesses with acceptable credit quality or hundreds of disadvantaged poor households who really can’t afford to stay in the house got nothing but grief from their experience, be it a loan application process or loan foreclosure process. Is there a reason for a monetary apology?
At the end of the day here, the theme of the SBLF testimony is captured in quotes like “bit of a shell game” “too many faulty assumptions and miscalculations” “tax reform and regulatory reform are needed.” “talk to the 44 states who made use of this initiative” “cheap money to repay TARP” “another bailout for banks”. If we can say some small businesses benefited to the tune of $1.8B because of their credit quality out of an authorized $4B of the $30B pie, technically we can say the program succeeded. And if a few thousand citizens stand to benefit from the financial crisis, among 300 million people in America because of foreclosure crisis servicing serendipity over the underlying conditions to foreclose, technically we can say, we succeeded for them too…It’s certainly the humane thing and a socially important one right about now but I still really don’t know if its the legal and economic thing we can afford to do.
Have a good day