Inner City Press Bank Beat
Archive # 4: Oct. - Dec. 31, 1999
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December 27, 1999
In this holiday-week edition of Bank Beat, Inner City Press reviews two pending merger applications (Telebank - E*TRADE and two North Fork Bank applications), then a broader M&A review.
Telebank Maintains Evasive CRA Position --
Will the OTS Accept It?
On December 23, 1999, a representative of Inner City Press participated in a conference call with the Office of Thrift Supervision and three officials of Telebank, including its CEO Mitch Caplan. During the hour-long call, Mr. Caplan reiterated Telebank’s position that it is only subject to the Community Reinvestment Act in Arlington, Virginia (where Telebank’s headquarters office is located), despite the bank’s solicitation of deposits nationwide. Mr. Caplan stated that Telebank “does not make loans,” explaining that making loans is expensive. Mr. Caplan emphasized Telebank’s November 20, 1999, commitment to increase the percentage of its assets that are “CRA loans” from the current 5% to 10%, stating that this is a significant commitment, since “CRA loans are less profitable.”
Inner City Press has submitted comments to the OTS opposing the proposed Telebank - E*TRADE merger, on CRA and other grounds. ICP timely requested an informal meeting on the application. The OTS representatives on the call, however, began by stating their position that the OTS’ informal meeting rules don’t apply to the E*TRADE - Telebank application, but that the OTS was nevertheless offering this conference call. ICP maintains that an informal meeting is required, but thanked the OTS for holding the conference call (which was set up on short notice -- the OTS left a message for ICP on Dec. 21 proposing such a call, and attempted to set the call for the next day, Dec. 22).
One might infer, from the timing, that the OTS is considering imminently approving the E*TRADE - Telebank application. In fact, Mr. Caplan during the call referred to other meetings he has had with OTS officials about the bank’s CRA program, without notice to, or the participation of, ICP. The implication was that the OTS has already agreed to Telebank’s plan of 10% of assets devoted to “CRA,” and a $1 million program with the Boys & Girls Club. ICP encouraged Telebank (and the OTS) to compare Telebank’s proposals to the announced programs of other large brick-and-mortar banks. For a bank with $4 billion in assets to make so much of a $1 million plan calls for such a comparison.
More fundamentally, ICP urged Telebank and the OTS to compute and disclose what percentage of Telebank’s current 100,000 depositors live in low or moderate income census tracts, and similar demographics for the people who apply for and obtain mortgage credit through Telebank. Mr. Caplan claimed to not have such data, and the OTS said nothing on the topic.
The conference call was civil, but raises the question of whether the OTS is now rushing to approve the E*TRADE - Telebank application, giving in to the banks’ self-imposed deadline for closing the deal. If the OTS had already agreed to Telebank’s CRA proposal, what was the purpose of the call? This is a mystery that, in all probability, will soon be clarified.
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North Fork Bank Has Stopped Government-Sponsored Mortgage Lending --
What Will the Fed (and FDIC) Do About It?
The Federal Reserve Board has asked North Fork Bank, as part of North Fork’s protested applications to acquire Reliance and JSB savings banks in New York, to explain any decisions since 1997 “to alter the focus of its lending activities or composition of its loan portfolio.” In a December 15 response, North Fork stated that it “decide[] in 1998 to discontinue originating government sponsored mortgage loans, and the number of such loans declined.”
The Fed on Dec. 20 asked two follow-up questions: “Please discuss whether North Fork has eliminated its participating in all state and federally sponsored affordable mortgage programs,” and “Please describe any affordable mortgage lending programs in place at Jamaica Savings Bank or Reliance Federal Savings Bank that will be retained or adopted for use by North Fork Bank.” To this last, North Fork responded that “neither Jamaica Savings Bank nor Reliance Federal Savings Bank offer affordable mortgage lending programs.”
On Dec. 16, JSB Financial announced it was moving back its shareholders’ meeting on North Fork’s bid from Jan. 13 to February 10, 2000. “JSB did not give a reason for the data change.” Reuters, Dec. 16.
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Dec. 27 Bank M&A Roundup
Merger of the week is far to the north and west: Wells Fargo’s $900 million bid to buy National Bank of Alaska. After the announcement on Dec. 22, the target’s stock fell 28 percent. There’s the possibility of fireworks on this application, given the systematic export of capital from many Alaskan communities...
Further west, in Japan, Fuji, IBJ and Dai-Ichi Kangyo Bank on Dec. 22 announced more details on their planned merger. The colossus would be called Mizuho Holdings (referring to fresh ears of rice -- very catchy), and will lay off 7,000 of its 35,000 workers. Happy holidays.
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December 20, 1999
The poster child of mergers gone wrong -- First Union -- is telling analysts to lower its projected 2000 earnings again. First Union, after a Dec. 14 board meeting, is telling analysts it will have to hire more tellers to try to lure back customers who’ve defected due to the decline in service after the last round of lay offs. FU also on Dec. 15 announced it is closing at least 32 offices of The Money Store, the subprime consumer finance company it bought at the same time as CoreStates.
FU’s stock has fallen 44 percent this year. The nation’s largest pension fund, the California Public Employees’ Retirement System (Calpers) is “targeting” First Union, having filed a shareholders’ proposal demanding that Fast Eddie Crutchfield step down as chairman, in favor of an independent (outside) chairman...
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December 13, 1999
What have been the results of the two years of bank mega-mergers that led up to the enactment of even greater deregulation last month? Lays offs, branch closings, higher prices. Even for investors, the results are weak. A recent study by Keefe, Bruyette & Woods finds that only two of fifteen banks that made acquisitions in 1997 and 1998 met their per-share earnings goal for 1999. Among the ugliest deals: Bank One-First USA in 1997, and First Union - CoreStates in 1998. Even Fleet (very happy it was the weakened Sovereign that “won” its branch divestiture package) has taken to making fun of these two. Fleet’s vice chairman of technology, Joe Smialowski, says “We’re very conscious of what’s happened to First Union and Bank One,” and says that Fleet is taking steps to mitigate those type of risks. Computerworld, Dec. 13, 1999, at 24.
Note: Fleet’s just lucky that the Fed and DOJ didn’t hold out for a larger purchaser of the divestiture package (rather than agreeing to junk-bond-Sovereign). First Union’s and Bank One’s problems (with their respective CoreStates and First USA acquisitions) helped ensure that neither bid on the divestiture package. And BankAmerica was precluded (or at least discouraged) by the current prohibition on any bank controlling 10% of nationwide deposits...
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December 7, 1999 -- Mid-week flash (full weekly report of 12/6, below)
On December 6, the Federal Reserve approved HSBC’s application to acquire Republic -- click here for analysis
December 6, 1999
On E*TRADE, ICP last week received a copy of E*TRADE’s November 20 submission to the OTS, responded to below:
December 6, 1999
Office of Thrift Supervision
Attn: Director Seidman, et al.
1700 G Street, N.W.
Washington, DC 20552
Dear Director Seidman, Mr. Albinson and others at OTS:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP”), this is a comment further opposing and requesting an informal meeting on the proposal by E*Trade Group Inc. (“E*Trade”) to acquire TeleBanc Financial Corp. (“Telebanc”) and its thrift (“Telebank”), and SOFTBANK’s purported Rebuttal of Control.
Under OTS cover letter dated December 1, 1999, ICP has been provided with a copy of E*TRADE’s November 20 submission (hereinbelow, the “Letter”), including (at 27-30) on Community Reinvestment Act (“CRA”) issues.
E*TRADE’s Letter recites the OTS’ request that Telebank “quantify recent historic and projected levels of community development lending, qualified investments and community development services in Arlington Country, Virginia, as well as the broader statewide or regional area that includes Arlington County” and “the levels of performance that it seeks to attain in Arlington County and nationwide during the term of it Business Plan with respect to those factors mentioned in the CRA Plan, including projected lending to low- and moderate-income borrowers.” Letter at 27.
ICP is to some degree heartened by the second of the above-quoted OTS requests (for “level of performance... nationwide”), but is troubled by the first request (implicitly applying only a community development test, and only in a “statewide or regional area that includes Arlington County”). ICP emphasizes that it is inappropriate to apply only the CRA “wholesale bank” test to an institution like Telebank that actively markets to retail customers, and openly offers mortgage loans (on <Telebank.com>). Morgan Guaranty and Bankers Trust (now Deutsche Bank) are wholesale banks: they hardly do business with retail customers, and offer such products as (jumbo) mortgages only as an accommodation to private banking customers. Telebank is a different (admittedly new style) kind of institution -- it pitches itself to retail customers, including through television advertisements, soliciting deposits and, on its website, pitching “click here for mortgages.” It would be a perversion and weakening of the CRA to apply only a wholesale bank / community development in a limited area CRA test to Telebank, particularly as it proposes to become part of the even more actively advertised E*TRADE, and would become legally affiliated (through SOFTBANK) with the entity that technically makes the mortgages that Telebank markets (E-Loan).
E*TRADE’s November 20 response to the OTS questions evades the OTS’s request that “Telebank explicitly state the levels of performance that it seeks to attain... nationwide.. with respect to... projected lending to low- and moderate-income borrowers.” See supra, and Letter at 27. E*TRADE’s response devotes three paragraphs to the community development test -- only one of the two OTS questions quoted above. E*TRADE’s only reference to a “nationwide” plan is not for what the OTS requested (levels of lending to LMI borrowers, see supra), but is rather to a “community development service project to educate LMI individuals about earning, savings and investing using the Internet.” Letter at 28. To this purportedly “nationwide” project, the Applicants propose to commit a total of $1 million dollars -- less than one tenth of one percent of Telebank’s deposits (and even less of assets).
E*TRADE and Telebank have still not answered the OTS’ question (regarding nationwide lending to LMI borrowers). On the current record, this Application should not be approved, including on CRA grounds.
E*TRADE’s Letter alludes to meetings with the OTS on August 18 and November 4 -- ICP has requested minutes of and other documents reflecting these meetings, but has yet to receive the documents. E*TRADE’s Letter’s response on the SOFTBANK / control question is entirely elusive, stating in one sentence that “SOFTBANK and E*TRADE have addressed these issues in materials previously submitted to the OTS.” Such material should be provided to ICP; it is difficult for ICP to even specify the “materials” being withheld, since E*TRADE does not provide the caption or dates of the referenced submissions.
Note also, since ICP’s last submission of November 29 that SOFTBANK and E*TRADE are moving forward with (another) joint venture, in South Korea (Bloomberg of Nov. 30); that E*TRADE has formed a joint venture with Bank Leumi (Bloomberg, Dec. 2); [etc.].
On the current record, the applications could not legitimately be approved. If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.
Very Truly Yours,
Matthew Lee, Esq.
Executive Director
cc: Messrs. Shepherd and Muller
Brobeck, Pheleger & Harrison, LLP
Counsel to E*TRADE
SOFTBANK, Inc., Mr. Fisher
Finally, the banking mystery / scandal story of the week (if not the year) is clearly the Dec. 3 murder in Monte Carlo of Edmond Safra, the founder and 29% owner of Republic New York Corporation. The Federal Reserve has scheduled to vote on, and approve, the HSBC - Republic deal on Dec. 6, as Mr. Safra is being buried in Geneva. (see the Dec. 6 HSBC - Republic Report). Banks have been getting Fed approvals while embroiled in scandals about money laundering; an approval before the investigation into a murder as mysterious and sinister as that of Mr. Safra, however, would surprise even the most jaded Fed watchers... We shall see...
Until next time, for or with more information, contact us.
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November 29, 1999
KeyCorp Fires; Nat City: Liars?; First USA: Buyers?
On the U.S. Beat Beat, it was not a pretty week for Ohio’s largest banks. On November 23, KeyCorp tried to boost its stock price by announcing that it will lay off 3,000 employees by the end of 2000. Its shares still fell that day, and closed the week at barely two-thirds of its 52-week high. On November 24, National City Corp. revealed in an SEC filing that the Internal Revenue Service is planning to disallow $200 million of National City’s past tax deductions in connection with the bank’s corporate-owned life insurance (COLI) programs. National City is also trading at two-thirds of its 52-week high. Doing even worse is Bank One, “previously of Ohio.” The acquisition of First USA has worked out badly; ONE has now sent its M&A chief William Boardman to take over the division. Or would that be, to sell it off? ONE is trading at 36, off a 52-week high of 66.56.
Sleaze story of the week was the Philadelphia Inquirer’s report that First Union has broken the commitment it made while acquiring CoreStates, to promote its free checking accounts to low-income residents in Philadelphia. The account is not being marketed in FU’s 58 Philadelphia branches, and FU has signed up less than 1,000 customers for the product. FU spokeswoman Marnie Labertson says the bank will start distributing brochures next month. But this is more than a year and a half after the merger was announced...
E*TRADE late on November 22 filed with the Securities and Exchange Commission its prospectus (S-4) for its proposed merger with the Internet-based Telebank.com -- and provided at least some detail about the CRA issues that have arisen. The prospectus states:
"As part of the review process under the Community Reinvestment Act, it is not unusual for the Office of Thrift Supervision to receive protests and other adverse comments from community groups and others...E*TRADE is aware of one community group that has filed comment letters with the Office of Thrift Supervision opposing E*TRADE's application to acquire Telebanc... The community group's comment letters challenge, among other things, Telebanc's designation as a "wholesale bank" under the Community Reinvestment Act and Telebanc's designation of Arlington County as its current service area for purposes of that Act. These comments could prolong the period during which the merger is subject to review by the Office of Thrift Supervision."
E*TRADE had earlier said that the merger would be consummated in October. The delay is not only attributable to public comments to OTS, but by Telebank’s refusal to provide information that the OTS has requested. Another public report states that “[a]ccording to the OTS, Telebanc has failed to respond to requests to project its plans over the course of the business plan. The regulator said the bank did not ‘explicitly state the levels of performance that it seek to attain in Arlington County [Virginia] and nationwide during the term of its business plan with respect to those factors mentioned in the CRA Plan, including projecting lending to low and moderate income borrowers.’ E*TRADE’s response to the OTS’ queries included a plan to ‘empower children through real-life education about earning, saving and investing’ on a national basis. In addition, Telebanc would increase its purchase of community development loans to a level of 10% of its aggregate increase in total assets by the fourth quarter of 2001. ‘It’s a sound plan,’ [E*TRADE outside counsel] Muller said with respect to the Telebanc CRA proposal... After meeting with OTS officials, Muller remains encouraged that E*TRADE will be able to... receive the necessary regulatory approvals by year-end.” SNL Compliance Watch, November 28, 1999.
Deal consummation by year-end would be surprising, including because neither E*TRADE nor the OTS have provided the protesting community group with copies of the bank’s new CRA plan (which apparent seeks to substitute vague digital divide / financial literacy proposals for a concrete plan to lend to low and moderate income consumers). We’ll see. ICP has submitted supplemental comments to the OTS on November 24 and November 29:
November 24, 1999
Office of Thrift Supervision
Attn: Director Seidman, et al.
1700 G Street, N.W.
Washington, DC 20552
Dear Director Seidman and others at OTS:
On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, "ICP”), this is a comment further opposing and requesting an informal meeting on the proposal by E*Trade Group Inc. (“E*Trade”) to acquire TeleBanc Financial Corp. (“Telebanc”) and its thrift (“Telebank”), and SOFTBANK’s purported Rebuttal of Control...
ICP has received E*TRADE’s page-and-a-half submission dated November 12, 1999 (the “Resp.”).... First, ICP strongly opposes E*TRADE’s statement that the lending performance of AFFILIATED parties wouldn’t impact Telebank’s status as a “wholesale” bank for CRA purposes. Telebank offers mortgage loans, on its transactional Web site. The Applicants have argued that this does not preclude Telebank from being a wholesale bank for CRA purposes, because, they say, the mortgage loans are actually made by E-Loan. But SOFTBANK has a 26% stake in E*TRADE, and a similar substantial stake in E-Loan. If this proposal were approved, E-Loan would become an affiliate of Telebank, undermining Telebank’s argument that it doesn’t offer retail loans to the public.
If E*TRADE’s argument were accepted, brick-and-mortar banks and thrifts like Chase, First Union, Bank One, Washington Mutual -- could simply do all their loans through affiliates (like Chase Manhattan Mortgage Co.), and claim that their banks are all “wholesale” banks, required only to serve their headquarters cities under CRA.
[Your speech, as] OTS Director this past summer at the CRA conference in Newport, Rhode Island, is directly applicable to this issue, as are the OTS’ prior decisions in such cases as Travelers Bank & Trust, FSB, Lehman Brothers FSB and State Farm FSB. E*TRADE’s continuing attempts to evade the meaningful application of CRA to the conglomerate savings and loan association it proposes, and refusal to address applicable OTS precedents and policy statements, strongly militate for the informal meeting that ICP timely requested on these Applications.
Second, ICP is attaching hereto (and entering into the record) a recent e-commerce press release reciting that “SOFTBANK Technology Ventures [is] one of the world’s largest... Internet technology venture investors with investments in over 85 Internet companies, including Yahoo!, E*TRADE, E-LOAN, USWeb, Buy.com, ZDNet, CriticalPath, WebVan, More.com, 800-Flowers, VeriSign, Concentric, Geocities, Net2Phone, Cybercash, Interliant, MessageMedia, TheStreet.com and Invesmart.”
ICP reiterates its position that SOFTBANK should have, and should now, file an application for prior approval to become a savings and loan holding company, and commends the OTS for taking the position recited in E*TRADE’s prospectus...
On the current record, the applications could not legitimately be approved. If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.
Very Truly Yours,
Matthew Lee, Esq.
Executive Director
cc: Messrs. Shepherd and Muller
Brobeck, Pheleger & Harrison, LLP
Counsel to E*TRADE
SOFTBANK, Inc., Mr. Fisher
* * *
November 29, 1999
Office of Thrift Supervision
Attn: Director Seidman, et al.
1700 G Street, N.W.
Washington, DC 20552
Dear Director Seidman and others at OTS:
On behalf of Inner City Press/Community on the Move and its members and affiliates (collectively, "ICP”), this is a comment further opposing and requesting an informal meeting on the proposal by E*Trade Group Inc. (“E*Trade”) to acquire TeleBanc Financial Corp. (“Telebanc”) and its thrift (“Telebank”), and SOFTBANK’s purported Rebuttal of Control.
While ICP commends the OTS for some of the positions it is apparently taking on the Applications, ICP was flabbergasted to see (and hereby formally raises to the OTS) the SNL Compliance Weekly of November 29, 1999, reporting on documents related to the Applications and CRA that ICP has not been provided with, despite ICP’s repeated requests for these documents, in comments to the OTS that ICP cc-ed to E*TRADE’s counsel. The SNL report (copy attached hereto) inter alia states:
“According to the OTS, Telebanc has failed to respond to requests to project its plans over the course of the business plan. The regulator said the bank did not ‘explicitly state the levels of performance that it seek to attain in Arlington County [Virginia] and nationwide during the term of its business plan with respect to those factors mentioned in the CRA Plan, including projecting lending to low and moderate income borrowers.’ E*TRADE’s response to the OTS’ queries included a plan to ‘empower children through real-life education about earning, saving and investing’ on a national basis. In addition, Telebanc would increase its purchase of community development loans to a level of 10% of its aggregate increase in total assets by the fourth quarter of 2001. ‘It’s a sound plan,’ Muller said with respect to the Telebanc CRA proposal... After meeting with OTS officials, Muller remains encouraged that E*TRADE will be able to... receive the necessary regulatory approvals by year-end.”
Despite ICP’s FOIA request(s), despite ICP’s reiterated requests for information in its supplemental comments to the OTS (all cc-ed to E*TRADE via its above-quoted counsel), despite ICP’s still-outstanding request for an informal meeting on the Applications and protest, ICP has not been provided with ANY of the documents referred to and quoted from in the report above... ICP was not allowed to attend (including in light of the general prohibition on ex parte contacts), or even informed over, the above-reported meeting(s) between E*TRADE’s counsel and the OTS, including on CRA issues.
ICP should be provided with (and has today formally requested under FOIA) (1) all of E*TRADE’s and/or Telebanc’s post-application submissions, including those referred to in the public report quoted from above; and (2) all records reflecting meeting(s) between the Applicants’ counsel(s) and OTS staff.... On the current record, the applications could not legitimately be approved. If you have any questions, please immediately telephone the undersigned at (718) 716-3540. Thank you for your attention.
Very Truly Yours,
Matthew Lee, Esq.
Executive Director
cc: Messrs. Shepherd and Muller
Brobeck, Pheleger & Harrison, LLP
Counsel to E*TRADE
SOFTBANK, Inc., Mr. Fisher
November 22, 1999
Banks in the news (and not lookin’ pretty): BankAmerica, Wells Fargo and the Office of the Comptroller of the Currency last week won a court order enjoining two local ordinances that sought to outlaw the banks’ double-surcharges on automatic teller use. The legal defense (that federal law preempts local law, at least as to national banks like Wells Fargo and B of A) will probably prevail. But, beyond a few free-market demagogues (see below), there’s very little public support for the banks’ arguments. New York City, though its politically ambitious Council Speaker Peter Vallone, is moving toward such an ordinance; the cities of San Francisco and Santa Monica are receiving calls from cities and towns all over the country, eager to follow suit.
In New York City, the counter-spin has also begun. The supposedly small business focused weekly, Crain’s New York Business, predicts that a surcharge ban would “slow or halt the expansion of ATMs in New York.” That’s the banks’ main defense: let us surcharge, because we’re providing convenience. While that might be true for an ATM at a gas station in the middle of a desert, it does not apply to the ATMs that banks already have, installed in the vestibules of their branches. One can imagine a federal bill that makes this distinction -- but not in the current Senate Banking Committee.
Meanwhile, in the lull before the bank-insurance merger frenzy that Gramm-Leach-Bliley will touch off, the micro chess game proceeds. Chase Manhattan continues to sell off branches, most recently ditching six Connecticut branches, from Waterbury to Watertown, to Webster Financial. This follows Chase’s branch sales in upstate New York (to M&T) and on the Virgin Islands (to the minuscule operation of a phone-sex titan, see below). Wells Fargo, on the other hand, in keeping with the old incremental approach of Norwest, is making micro acquisitions, most recently the privately held Napa National and its four branches. Bank of New York, too, is on the prowl, even as the investigation into its Russian money laundering proceeds. On Nov. 16, BNY let it be known it’s buying Institutional Securities Trading “for an undisclosed amount.” On November 20, Vladimir Minayev of the Russian Prosecutor General’s office told the Interfax news agency that “We reassured our U.S. colleagues that we will provide them all possible assistance in investigating the case involving the Bank of New York.”
November 15, 1999
Now that President Clinton has signed the financial deregulation bill into law, this Bank Beat column will soon have to expand into the insurance industry. The federal regulators won’t even require an application when banks buy insurance companies (beyond the mere check that the acquirer’s banks have “Satisfactory” CRA ratings, which it is virtually impossible for them not to get (98% of banks are awarded “Satisfactory” or higher CRA ratings by the regulators). So bombs away -- American General, Allstate, Lincoln National, Jefferson-Pilot, ReliaStar, et al....
It’s ironic that in the same week that the largest banks got the bill they wanted, so many of them suffered other setbacks (which should have given Congress and the President pause before so blithely repealing Glass Steagall). at the Citibank money laundering hearings in the Senate on November 9, John Reed acknowledged “that in the mid-1990s, the control environment in the private bank was not satisfactory.” Investigation subcommittee chairwoman Susan Collins (R-ME) said, “Too often, Citibank’s private bank essentially paid lip service to its own procedures.”
The problem with this Congress, however, is that it too often essentially pays lip service to its own purported concerns, thundering on about money laundering a week after voting for further deregulation of the banking industry...
November 8, 1999
While the financial deregulation bill awaits the President’s signature, we’ll continue our focus on Citigroup, which threw its weight around in Washington during the debate, and in eleventh-hour calls to the White House.
In interesting timing, Citigroup co-CEO John Reed is being summoned to the Senate Governmental Affairs subcommittee on investigations on November 9, to explain his role in Citibank’s involvement in money laundering throughout the 90s. “The Senate investigation found that Reed, as the head of Citibank, failed to take significant action... despite internal warnings that the bank was failing to follow its own policies to prevent money laundering, said a subcommittee investigator, speaking on condition of anonymity.” AP, November 7. The Senate subcommittee is particularly looking at business Citibank has done for former Pakistani prime minister Benazir Bhutto, Gabon’s Omar Bongo, and Nigeria’s General Sani Abacha. The General Accounting Office (GAO) in December 1998 found that Citibank had transferred up to $100 million in suspected drug proceeds for Raul Salinas. Citibank, however, points to a January 1999 Federal Reserve Board report praising Citibank for making “significant progress.”
The friendly regulation of Citigroup does not stop with the Federal Reserve Board, however. In a November 1, 1999 letter, the Office of the Comptroller of the Currency purported to address issued raised in April concerning the high interest rate (“subprime”) lending activities of Citibank, N.A. and Source One Mortgage. The OCC states that “[t]he Bank has represented... that the unit offers its most creditworthy customers products that are relatively competitively priced when compared to prime rates.” What “relatively competitively priced” means -- is not defined. The OCC explicitly “did not address... comments directed toward subsidiaries of Citigroup or the former Travelers Group that the OCC does not regulate, e.g., Citibank, FSB.” Nor is their any indication that the OCC referred such comments to the appropriate regulator (as the GAO recently admonished the Federal Reserve Board to begin doing; see summary of GAO’s November 4, 1999 Report, in this week’s ICP Federal Reserve Reporter).
In a little-noticed (and rare) regulatory denial, the Office of Thrift Supervision on October 26 rejected the application of New York’s Abacus Federal Savings Bank to open an agency office in Beijing. Among other things, an “activity that the applicant had indicated the agency office would engage in... appears to be prohibited by the Chinese government.” So that’s what it takes -- outright illegality.
Get ready for the Citigroup fireworks in the Senate investigations subcommittee on November 9. In terms of the power Citigroup was allowed to have over the financial deregulation bill, however, it’s too little, too late...
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November 1, 1999
The last weeks of negotiations in Washington around the financial deregulation bill demonstrated the domination of the democratic process by large banks, particularly Citigroup. Citi has the most to lose, if the bill is now signed into law: the Fed bent (or broke) current law to allow the Travelers - Citibank merger, and gave the company from two to five years to sell off Travelers’ insurance underwriting business. Citigroup indicated it felt sure deregulation legislation would pass.
Citigroup is a major campaign contributor to both parties, and to the members of the House and Senate banking committees. Sandy Weill, who’d spoken with Clinton and Fed Chairman Greenspan before announcing the merger last April, put in calls to the White House again on October 21, after Senate Banking Committee chairman Phil Gramm (R-TX) told Citigroup’s lobbyist, Roger Levy, to have Weill call Clinton. After the compromise was reached, the Reverend Jesse Jackson, who calls Weill a “friend,” announced his support for the bill. And four days later, Weill announced that ex-Clinton Treasury Secretary Robert Rubin was joining him and John Reed, as the directing troika of this citi-state unto itself. From Jerusalem on October 31, Weill prognosticated: “We think inflation will stay contained between two and 2.9 percent.” Reuters, Oct. 31. “You oughta know...”.
While elected officials in Washington caved in to Citigroup, the never-sleeping Citi also provided the Administration with ground cover for its retreat. In the face of mounting questions about the CRA “compromise” it agreed to, the Administration claimed that “the community” supported the compromise. In support of that proposition, the Administration could cite only two main organizations: Reverend Jesse Jackson’s Rainbow / PUSH Coalition (see, for purposes of this analysis, P.R. Newswire of May 8, 1998: Rainbow / PUSH and its founder “endorsing” the Citigroup merger; Citigroup co-CEO Sandy Weill has supported Rainbow / PUSH’ Wall Street Project) and the Local Initiatives Support Corporation (LISC).
Citibank has been represented for some time on LISC’s board of directors. One cannot help noticing LISC was listed in the Federal Reserve Board’s Citicorp - Travelers approval order as being in support of the merger. See Federal Reserve Bulletin of November 1998, at footnote 2. See also, e.g., P.R. Newswire of February 5, 1999: Citigroup announcing a number of grants, including to LISC. On September 16, 1999, LISC announced that ex-Treasury Secretary Robert Rubin, then “just” a private citizen, was named the chairman of its board of directors. On October 22, LISC endorsed the previous night’s compromise, which had been announced by Rubin’s successor, Larry Summers. On October 26, Citigroup named Rubin to its office of the chairman, along with Sandy Weill and John Reed.
Rubin told the New York Times that he had been active in brokering the compromise on S. 900, specifically on CRA. “Rubin acknowledged that even while he was negotiating his own jobs with Citigroup, he had helped broker the compromise agreement repealing Glass-Steagall... Federal law requires retired Government officials to refrain from interceding with their former agency on behalf of a new employers for at least one year after leaving public service. The Clinton Administration requires its top officials to pledge that they will not lobby their agency for at least give years... ‘I don’t think there should be any political sensitivity here,” Rubin said...”. NYT, Oct. 27, 1999.
Would that be because the financial deregulation compromise, which Rubin acknowledges he helped broker, was announced two business days BEFORE Citigroup formally became Rubin’s employer?
Leaving aside Citigroup’s cat-and-mouse game with the law -- from Mexican money laundering, to questionable practices at its high-interest rate finance company, Commercial Credit-now-Citifinancial -- Citi’s been at the forefront of avoiding and lobbying against consumer privacy protections. After the merger, Citi said proudly that “the only addition the merged company made was a clause -- specific to Travelers’ life insurance records -- saying Citigroup would not share medical information about its customers.” American Banker, July 12, 1999. That’s it.
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October 25, 1999
Since the “compromise” on financial deregulation legislation announced early on October 22 resulted in huge run-ups in banks’ and insurance companies’ stocks, we’ll focus this week on some of the bank lobbying behind the bill, S. 900 or the “Gramm-Leach Act.”
Central, by all accounts, in the finalization of the bill (which weakens Community Reinvestment Act enforcement, as detailed in Inner City Press’ CRA Reporter) was Sandy Weill of Citigroup. Senate Banking Committee Chairman Phil Gramm (R-TX), immediately after losing a vote on his anti-CRA provisions, directed Citigroup lobbyist Roger Levy to have Sandy Weill call President Clinton. Weill did speak to senior administration officials, including Gene Sperling. Within hours, the “compromise” was reached, and hours later, banks’ including Citigroup’s stock values skyrocketed. Later Friday afternoon, Rainbow/PUSH Coalition founder Jesse Jackson said the said the revised bill “can heal the breach between surplus and deficit cultures and begin to ‘green line’ red lined America.” Rainbow / PUSH press release of October 22. It should be noted that in a press conference with Gene Sperling on October 15, Reverend Jackson specifically praised two bankers, as champions of the CRA: Bank of America’s Hugh McColl, and Citigroup’s Sandy Weill. While McColl, despite BankAmerica’s continued ownership of high interest rate mortgage lenders NationsCredit and EquiCredit, has at times spoken publicly in favor of CRA, Sandy Weill has made no such public pro-CRA statements (although Travelers, even pre-Citibank merger, supported Rainbow’s Wall Street Project).
Let’s take a look at Citigroup’s community lending record in New York City -- by race, most tellingly. For conventional home purchase mortgage loans in the NYS Metropolitan Statistical Area in 1998, Citigroup (combining Citibank, N.A. and Citicorp Mortgage) denied the applications of African Americans 2.97 times more frequently than the applications of whites. This compares unfavorably to the industry aggregate in the NYC MSA: a 2.15 denial rate disparity in 1998. Citigroup’s defense cannot be that it does more outreach to communities of color than other lenders. Whereas, for the industry as a whole in this MSA in 1998, 12.2 percent of conventional home purchase loans went to African Americans, for Citigroup, the figure was only 6.6 percent. Citigroup’s disparities for Latinos are also glaring: a denial rate disparity of 2.3 (compared to the industry’s figure of 1.75); 5.9 percent of conventional home purchase loans to Latinos, versus the industry’s 9.0 percent. How exactly do Mr. Weill and Citigroup “support” the CRA?
Here's two examples of the break-down of regulation: on October 21, Bank of New York announced it will acquire “the issuer, agency and depository business of Barclays Bank Plc.” While Congress is further deregulating bank regulation, an institution deeply embroiled in the Russian money laundering scandal can apparently simply go ahead and expand more deeply into the securities industry. Maybe we’re missing something here -- but it’s the Federal Reserve which withholds boxes and boxes of information from the public. Inner City Press on September 6 submitted a Freedom of Information Act request for the banks’ submissions “related to Japan’s Financial Supervisory Agency’s (and other agencies’) inquiry into the activities of Republic New York Securities Corporation.”
According to the Fed’s October 15 letter to ICP, “by letter dated October 5, 1999, the time period for our response to your FOIA request was extended... The staff’s search of Board records has revealed many documents that are responsive to your request. Several of these documents will be provided to you in their entirety. We have determined, however, that the remaining documents contain... information compiled for law enforcement purposes, the release of which could reasonably be expected to interfere with enforcement proceedings... In addition to the redactions indicated in the documents being provided to you, we are withholding in full approximately 234 pages of application-related materials pursuant to exemption 4, and approximately 25 boxes of investigatory and examination information under exemptions 7(A) and 8... The Board’s Freedom of Information Office will provide you with a copy of the documents being made available to you pursuant to this authorization under separate cover... you may appeal this determination.”
One problem -- ten days after the date of the Federal Reserve’s determination letter, the Fed has still not provided any of the documents to Inner City Press. (Meanwhile, the Fed has been deeply involved in the minutiae of the U.S. financial deregulation bill, clear here for a summary). Upon receipt, the documents (and appeal) will be reviewed in this space. Twenty-five boxes sure is a lot of information to withhold, on a matter of public interest that is not related to national security...
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October 18, 1999
The main action on the Bank Beat this week was in Washington, where a surreal mark-up took place on the financial deregulation bill, S. 900. On October 14, Fed Chairman Alan Greenspan and Treasury Secretary Larry Summers announced they’d reached a “mutual satisfactory agreement” on their turf war. Remaining issues include the Community Reinvestment Act, consumers’ privacy, from, from the thrift industry, the proposed closing of the unitary thrift loophole.
The lemming-like rush into Internet banking (or at least, announcements of Internet banks meant to boost shagging stock prices) continued. Sovereign, in the midst of having its credit rating lowered by Moody due to its ill-conceived plan to swallow over 200 Fleet branches, let out more details about its planned Internet bank, to be called FirstWebBankDirect.com (we guess all the shorter names were taken). The plans of Jefferson Bank’s CEO’s husband and son to start a Web bank (with the “platform” of Jeff Banks, if and when Hudson United buys it) continued, although crucial documents continue to be withheld. E*TRADE, still bragging that its application to acquire Telebank is “proceeding smoothly” (Cotsakos bragging most recently on CNBC’s Power Lunch program), announced widening losses in the third quarter of 1999. Meanwhile, E*TRADE’s allegedly non-controlling controller (with an over 25% stake in E*TRADE), Softbank, is rumored to be bidding on the failed Nippon Credit Bank Ltd. (Financial Times, Oct. 14).
On the New York scene, ever-eager thrift-seeker BRT Realty Trust and ITS controller, Gould, had another deal fall through, this time the proposed acquisition of Reliance Bank of White Plains, New York. Last year, its plan to acquire Peekskill Financial Corp. fell through. It’s hard to imagine the OTS approving Gould’s and BRT’s pending application for their own thrift charter.
In the malapropism of the week, North Fork’s CEO went public on October 15 to deny he’s in talks to acquire Astoria FS&LA. He attributed the speculation to the fact the North Fork has bought a “sizable position in Astoria stock,” adding that “We frequently traffic in bank stocks.” Traffic-ing, as a verb, usually applies to contraband... But as S. 900 (and the Fed’s twisting of the current Banking Holding Company Act) prove, the concept of legality is one that changes over time... North Fork traffics in savings banks, too -- its two most recent takeovers are pending -- more on that in coming weeks.
Finally, on the D.C.-scandal beat, Bill and Hillary Clinton replaced their controversial New York mortgage with Deutsche Bank / Bankers Trust with a mortgage from Pennsylvania-based PNC. One noted that PNC on September 29 settled Labor Department charges of employment discrimination for $375,000. But it’s hard to find an unblemished bank...
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October 11, 1999
It’s time for a little comic relief on the Bank Beat this week. While telecom and media mergers proceed apace (MCI WorldCom - Sprint, Clear Channel - AMFM, Viacom - CBS), the Bank Beat’s been relatively quiet. The currently-contested bank mergers are mostly deal announced months ago, but slowed by wrong-doing. Chief example: HSBC - Republic (reviewed below). A little more obscure, but both indicative and comical: Zions - First Security, otherwise known as the monopolization of Utah. Opponents of the deal on October 5 filed a lawsuit against First Security’s “intimidation” of prospective commenters. An attorney who works for First Security (and who’s member of a firm employing First Security’s CEO Eccles’ daughter) allegedly advised an applicant for membership in The Church of Jesus Christ of the Latter-Day Saint to steer clear of commenting. The plaintiffs have now raised this to the Board of Governors of the Fed (housed in their Eccles Building). The Fed’s faced allegations of retaliation in the past -- we’ll see how they deal with this Salt Lake City brouhaha.
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October 4, 1999
Lot of action, this past week, on the Bank Beat. We’ll start with M&A, touch on developments in subprime / predatory lending (including arguably predatory investing in debt-strapped Ecuador), and conclude with an analysis of how complex e-conglomerates like E*TRADE / Telebank are being allowed to undermine the Community Reinvestment Act.
The “deal of the week,” by size at least, was Chase’s September 28 announcement it will seek to buy San Francisco investment bank Hambrecht & Quist for $1.35 billion. To many observers, it seems a rather small (and perhaps risky) acquisition -- remember how Montgomery Securities’ hot shots fled in droves from NationsBank? And the exodus from Bankers Trust, once Deutsche Bank acquired it? Wednesday’s WSJ “Heard of the Street” noted that traders expect Chase to go after a big investment bank, say, Lehman Brothers or PaineWebber. Seems clear that Chase is leaving retail banking behind -- note its recent sale of branches in upstate New York to M&T, and the sale of its whole Virgin Islands franchise to a much smaller USVI-based bank. Bloomberg on September 30 profiled Chase’s head of investment banking, quoting him from a recent conference call with investors: “I wasn’t hiring the top known names. I wasn’t going out and hiring the Jimmy Lees, if you will” -- said Jimmy Lee. This goes beyond the “Royal ‘We’” -- if you will.
The bank M&A rumor of the week was Wednesday’s speculation that U.S. Bancorp may seek to acquire Union Bank in California from Bank of Tokyo - Mitsubishi. “An unidentified Union Bank executive said that U.S. Bancorp Chief Executive John Grundhofer flew to Tokyo... to discuss a potential buyout.” Bloomberg, Sept. 30.
Ol’ U.S. Bancorp’s sale of customers’ private information to telemarketers has given rise to a task force of state attorneys general, now probing other large U.S. banks, including Bank One, Wells Fargo and Citigroup. WSJ, Sept. 27. If the U.S. Congress doesn’t act some on privacy -- for example, in connection with financial modernization legislation -- this could turn into another tobacco-like state-driven litigation frenzy. The Senate Banking Committee, however, says it’ll “deal” with privacy at some later date -- conducting a witch hunt of community groups who question large bank mergers is simply too important to allow time for this consumer privacy issue.
On fair lending, the Fed on August 30 approved the AmSouth - First American/Deposit Guaranty merger, saying there were no fair lending problems. Then, on September 29, the Department of Justice announced that it had filed and settled a fair lending suit with Deposit Guaranty and First American. Earlier in the week, the GAO issued a report calling on the Fed to be more “transparent” in its decision-making on merger applications, and Chairman Greenspan had said he agrees. But where’s the transparency?
In the subprime lending industry, another boot has fallen on Mercury Finance, the Illinois-based high-rate auto lender. The SEC has sued Mercury to false reporting its earnings. ContiFinancial, the subprime mortgage lender, has put itself up for sale again. Subprimer Ocwen sold its U.K. business to Royal Bank of Scotland (which is also scoping out NatWest, thinking of topping Bank of Scotland’s bid). At the Fed’s upcoming (Oct. 21) Consumer Advisory Council meeting, on the agenda is “subprime lending.” One wonders what sort of generic “backgrounder” is planned, while the Fed continues to refuse to take action on its largest banks buying mortgage-backed securities issues by the worst of the subprime / predatory lenders (such as Delta Funding, whose securities Republic National Bank has continued buying, even after Delta was charged with discrimination by the NYS Attorney General). Bloomberg on September 30 reported the Fannie Mae is getting (more) into subprime, partnering with 22 lenders who make such loans. It’s unclear what fair lending protections will be in place at Fannie Mae -- or whether Fannie Mae will count these loans toward its $1 trillion low- and-moderate income borrower pledge.
On October 1, it was confirmed that Ecuador was defaulted on its Brady bonds. Numerous U.S. banks and investment funds are involved, as trustee (Chase), investors and pundits. On Wednesday, September 29, Lehman Brothers’ director of global sovereign market strategy Jose Barrionuevo said Lehman was advising its clients to vote to demand full and immediate payment of the bonds.
On Thursday, September 30, Gramercy Capital managing director Marc Helie announced that his firm, and others representing over 25% of the bond holders, had voted to accelerate all payments from Ecuador on the bonds. Chase Manhattan, acting as “fiscal agent” between Ecuador and the bond holders, said it was still counting votes. “It’s not like the old days when the banks made the loans,” Chase’s Mark Tuck said. “We live in a different world.”
Yes, we DO live in a different world. Below is a summary of ICP’s most recent comment to the Office of Thrift Supervision, on E*TRADE’s application to acquire Telebank, which, despite its nationwide television advertisements soliciting deposits, seeks to limit its Community Reinvestment Act assessment area to Arlington County, Virginia. E*TRADE is also arguing that Japan’s SOFTBANK, which owns 26.9% of E*TRADE, should not be found to “control” Telebank. As set forth below, the two argument (absurdly limited CRA assessment area, and “non-control”) are related:
October 4, 1999
Office of Thrift Supervision
Attn: Director Seidman
1700 G Street, N.W.
Washington, DC 20552
RE: Comment further opposing and supplementing ICP’s previous formal request for an informal meeting on the proposal by E*Trade Group Inc. to acquire TeleBanc Financial Corp. and its thrift, anD SOFTBANK’s purported Rebuttal of Control
Dear Director Seidman and others at OTS:
On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP”), this is a comment further opposing on the current record and requesting a hearing on the proposal by E*Trade Group Inc. (“E*Trade”) to acquire TeleBanc Financial Corp. (“Telebanc”) and its thrift (“Telebank”), and SOFTBANK’s purported Rebuttal of Control.
On September 7, ICP submitted a supplemental comment, which inter alia requested a copy of SOFTBANK’s purported Rebuttal of Control, and of the Proxy/Prospectus, both of which were referred to in E*TRADE First Response. To date, the Applicant has provided neither document to ICP. On October 1, ICP obtained from another source a copy of SOFTBANK’s purported Rebuttal of Control, which, as set forth below, ICP opposes. ICP also hereinbelow first replies to E*TRADE’s purported response of September 17, 1999 (the “Response” or the “Resp.”)
E*TRADE’s September 17 Response defends the Applicants’ Community Reinvestment Act (“CRA”) assessment area, limited to Arlington County, Virginia, and the proposed continuing (mis-) designation as a “wholesale” bank for purposes of CRA, by emphasizing that it is only “[t]hrough co-marketing arrangements [that] customers of Telebank have convenient access to mortgage products from unaffiliated third party organizations.” Resp. at 1, emphasis added. That argument can be dispensed with in a straight-forward manner. Currently, Telebank offers the mortgage products of E-Loan (on a Telebank.com web page). Note that under this proposal, SOFTBANK, which already owns 26.9% of E*TRADE and which also “has [an] important stake[] in... E-Loan Inc” (New York Times, July 27, 1999) -- would have a significant stake in Telebank and its new savings and loan holding company. If these applications were approved, it would be incorrect to describe E-Loan, in which SOFTBANK has an important stake, as an “unaffiliated thirty-party” with respect to Telebank. This proposal eviscerates Telebank’s (already questionable) “wholesale bank” designation -- which is why the Applicants should have submitted a much more substantive prospective CRA plan than they have submitted. On the current record, it would be illegitimate, and contrary to the CRA, to approve this Application.
E*TRADE’s September 17 Response also seeks to explain Telebank CEO Caplan’s previously quoted comments by now stating that “Telebank has plans to enter into additional co-marketing arrangements to provide convenient methods for customers to access other loan products, such as auto, student and other consumer loans. Telebank does not extend these type of loans directly to customers.” ICP contends that other of Telebank/E*TRADE’s arrangements will be with companies that cannot legitimately be portrayed as “unaffiliated third parties.” In Telebank CEO’s previously quoted statements (reported on Reuters of August 6, 1999), he said “‘We’ll look at a whole host of lending products from auto loans to student loans to consumer loans... We may partner, we may make strategic investments, we may do an acquisition.’” Emphasis added. If the loans are offered by a company in which Telebank or E*TRADE has made a “strategic investment,” the company is NOT an “unaffiliated third party,” and cannot be allowed to use this characterization to evade the CRA. Note also Telebank’s September 21, 1999, announcement that it will begin offering insurance, through a “strategic partnership” (also described as an “exclusive partnership” with Answer Financial Inc. and Insurance Answer Center. Business Wire, Sept. 21, 1999. See, for further example, E*TRADE’s August 23, 1999, announcement that it acquired a significant stake in Internet mortgage broker LoanCity.com, and E*TRADE’s CEO Cotsakos’ statements on September 9, reported on Bloomberg Business News, that “he expects to form an alliance with a ‘bricks-and-mortar’ financial company in the next few months.”
This is a cutting edge proposal with much portent for the future -- an online brokerage, 27% owned by SOFTBANK, applying to buy a savings and loan and use it to solicit insured deposits, while evading CRA by only technically “offering” loans by companies with other names -- to which E*TRADE and Telebank are / would be, nevertheless, affiliated. If allowed, this would undermine the CRA, particularly with respect to the important and emerging field of online banking, in which companies and prospective competitors often own stock stakes in each other. The proposal, in fact, also raises competitive issues that have yet to be addressed in this proceeding.
...SOFTBANK’s August 5, 1999, purported Rebuttal of Control acknowledges that SOFTBANK “as of June 30, 1999... held... approximately 26.9% of E*TRADE’s outstanding stock.” This is a major stake; it is simply not credible to claim that a company which owns 27% of another company, and is represented on its Board of Directors, does not exercise some control over the target, for purposes of HOLA (and, significantly, of the Foreign Bank Supervision Enhancement Act [“FBSEA”]). FBSEA was passed to ensure appropriate monitoring of foreign entities which own material stakes in U.S. insured depository institutions. It would contrary to the Congressional intent of FBSEA, and contrary to public policy, to accept the Applicants’ arguments that a foreign company owning 27% of a prospective savings and loan holding company would not exercise some control over the savings and loan association -- particularly when the argument also has the effect of eviscerating the application of CRA to the thrift, by implying that companies that offer loans through the thrift are “unaffiliated third parties,” even though the foreign company also owns important stakes in these lending companies (see above).
...ICP has, in its timely submissions, described the nature of the issues and facts to be discussed, and E*TRADE’s August 2 and September 17 purported responses show that that the issues and facts have not been adequately addressed. ICP asks the OTS to compare the record in this case to the record before the OTS on Conseco’s and Green Tree’s applications, on which the OTS’ Dallas office granted ICP’s request for an informal, and then a formal, meeting. The OTS’ regional offices should apply the same standard, and, the timely requested informal meeting should be scheduled and held forthwith.
On the current record, these Applications could not legitimately be approved.
Very Truly Yours,
Matthew Lee, Esq.
Executive Director
cc: SOFTBANK, Inc.
[and] Messrs. Shepherd and Muller
Brobeck, Pheleger & Harrison, LLP
Counsel to E*TRADE
Until next time, for or with more information, contact us.
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Click here to view ICP's Bank Beat Archive #1 (April - June, 1999).
Click here to view ICP's Bank Beat Archives # 2(July, 1999)
Click here to view ICP's Bank Beat Archive #3 (Aug.-Sept., 1999)
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Copyright 1999 - 2003 Inner City Press/Community on the Move, Inc.. All rights reserved. As should be clear, but in an excess of caution: under no circumstances does the information in this column (or web site) represent a recommendation to buy or sell securities. For further information, or to request reprint or other permission, contact: Permissions Coordinator, Legal Administration, Inner City Press, P.O. Box 580188, Mount Carmel Station, Bronx, NY 10458. Phone: (718) 716-3540. Fax: (718) 716-3161. E-mail: BankBeat [at] innercitypress.org