Inner City Press Bank Beat Archive #1 2001 (Jan. 1-March 31, 2001)
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March 26, 2001
Regulatory reviews: The Federal Reserve Board, in a March 21 letter, has asked Citigroup a series of 19 questions, including about subprime lending and the FTC's March 6 lawsuit against Citigroup's Associates -- click here; for quotes from the Fed letter, and here for an update, and portions of ICP's third comment opposing Citigroup's applications.
In London, Sunday Business reports that Lloyds TSB Group Plc CEO Peter Ellwood won't attend a Competition Commission public hearing Friday on Lloyds TSB's proposed takeover of Abbey National Plc. Sent instead will be Mike Fairey, deputy chief executive with responsibility for human resources, group planning and budgetary process. Ian Harley, chief executive of Abbey National, which is trying to fend off the takeover bid, will be there. The public hearing is the first of its kind organized by the commission for a corporate monopoly investigation...
On Tyco's proposal to buy a controlling stake in the CIT Group, among other things a subprime lender, a source reminded us last week that CIT's bank, in Utah, will trigger an application to the FDIC, and that Tyco will also have to apply to the New York Banking Department.
Finally, for this week, while the Fed accepted Fleet's answer, earlier this year, that it "didn't know" which branches it would close if the Fed allowed it to acquire Summit, on March 23, Fleet proudly announced that it will be closing 80 branches: 33 from the old Summit, and 47 from Fleet itself. "And they said they didn't know...". We'll see if the Fed allows Citigroup to play this "now I don't know, now I do" game, in connection with the Citigroup - EAB proposal....
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March 19, 2001
American General, on which ICP has previously reported, is not just an insurance company: it is a major player in high interest rate, "subprime" lending in the United States. It also has a savings bank charter, which should trigger an application by Prudential plc to the U.S. Office of Thrift Supervision. There will also be applications to a number of state insurance regulators. The World Jewish Congress has called for the deal to be reviewed on Holocaust grounds; the Texas insurance commissioner (who did nothing when Citigroup acquire Associates First Capital Corp.'s insurers based in that state last Fall) has indicated he will be reviewing the Holocaust issues. Should be interesting...
Less scrutiny is expected of Tyco-CIT: while Japan's Mizuho Group has a large stake in CIT (which is also a subprime lender), it's unclear where Tyco will be required to apply for regulatory approval. We'll be following this one.
As foreshadowed last week, the Fed on March 12 hauled off and approved Fifth Third's application to acquire Old Kent Financial Corporation. The Fed's order, at 33-35 and n.51, acknowledges that "categories of Fifth Third's housing-related lending to minority individuals and in predominantly minority communities were below the average lending levels of the HMDA-reporting lenders in the aggregate (the 'aggregate') in some of Fifth Third's CRA assessment areas... For example, the 1998 and 1999 HMDA data indicate that Fifth Third's housing-related loan originations to African-American applicants as a percentage of its total housing-related loan originations ('percentage of originations') generally were below those of the aggregates in the states and MSAs reviewed... The HMDA data for those years also indicate that Fifth Third's percentage of originations to Hispanics generally was below that of the aggregate... The 1998 and 1999 HMDA data also indicate that Old Kent's percentage of housing-related loan originations to African-Americans [and Hispanics] in its assessment areas generally was lower than that of the aggregate... The Board has forwarded copies of the comments on Old Kent Mortgage Co.'s lending activities to the Department of Housing and Urban Development, the Department of Justice, and the Federal Trade Commission, which have responsibility for fair lending law compliance by nondepository companies like OKMC."
As widely reported, the FTC sued Citigroup and Associates on March 6, 2001. Click here to view ICP's second comment on Citigroup's applications to acquire European American Bank from ABN Amro...
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March 12, 2001
Before this week's round-up, we direct readers to a global titan with feet of clay: Citigroup. On March 6, the U.S. Federal Trade Commission sued Citigroup, and the subprime lender it acquired last Fall, Associates First Capital Corporation, for predatory lending. Citigroup knew, when it bought Associates, that the FTC was investigating the company; Sandy Weill and Robert Rubin apparently believed that their reputations and political connection (and contributions) would discourage the FTC from filing suit. The FTC filed its suit early in the comment periods on Citigroup's applications to acquire European American Bank began -- click here to view ICP's just-filed comments.
Going global: last week, last week, U.S.-based insurer Liberty Mutual's Venezuelan unit, Seguros Caracas, acquired Seguros Panamerican for $56 million, and now controls the largest insurance company in Venezuela. And in Argentina, MetLife announced it has gotten regulatory approval for a new pension fund management company, to target that country's now-privatized social security system.
A final update, for this week: on March 8, Fifth Third reached an agreement with the U.S. Justice Department to divest six branches, in connection with its proposal to acquire Old Kent. Fifth Third finally finished responding to the Federal Reserve Board's January 29, 2001, questions about the deal -- but is seeking to withhold parts of its answers from the public, including regarding its fair lending policies. Since Fifth Third has begged the Fed to be able to consummate the deal by April 2, and since the Fed is usually quite accomodative to such requests, a rubber-stamp appears imminent...
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March 5, 2001
There's been a development, in the battle in the U.K. for Abbey National -- Bank of Scotland dropped out; Lloyds has reaffirmed its interest, even as the its bid has been referred to the Competition Commission, which now has until June 12, 2001, to issue a ruling. Meanwhile, Bank of Scotland is now viewed as a target, of insurer Prudential Plc, or for a merger with one of the Irish banks: Allied Irish Banks Plc or Bank of Ireland Plc (Bloomberg, 3/2).
Meanwhile, the Financial Times (2/28) speculates that talks between Deutsche Bank and Allianz AG are reaching a decisive stage. The idea? Sort of like a German Citigroup...
The conflicts raised by these combinations are exemplified by the quiet bidding war for ANB Amro's European American Bank, "won" by Citibank, N.A. on February 12. Citigroup's Salomon Smith Barney had been advising North Fork Bank on NFB's bid for EAB, and only withdrew, citing the (obvious) conflict, late in the process. Citigroup claims that Citibank used "in-house" M&A analysts, and not SSB. Is that credible? What's the purposes of a conglomerate merger, if you don't even use your investment bank affiliate?
In a March 2 SEC filing, Citigroup disclosed its 2000 compensation to CEO Sandy Weill: $127.8 million. Bob Rubin, still playing the statesman (but now for Citigroup) got $45.3 million...
Bloomberg's Vernon Silver filed a detailed story on Citigroup's cross-selling woes last week. As with his previous work, about Citi's Boca Raton love-fest last November, it's full of telling details: Travelers' Kate Preston bragging about Citigroup's "Sikorsky S-76 helicopter -- outfitted like a corporate jet, with leather seats and a coffee dispenser -- that shuttles executives back and forth from Manhattan to Hartford three times a day;" the deadpan report that "[i]n some countries, politicians and customers see Citi as a flag bearer for the U.S. ``We make the State Department blush,'' says Sujit Banerji, who oversees Citi's corporate banking on the Indian subcontinent." Walter Wriston, even at 81, still maintains his office in 399 Park Avenue; down on Greenwich Street, Salomon's conference rooms are adorned with "Proof of the Pairing posters that advertise transactions for which Citibank loaned money and Salomon underwrote bonds or provided merger advice." One example given is Sovereign Bancorp Inc.'s purchase of the 285 Fleet - BankBoston divestiture branches (a great deal from Fleet; less so, for Sovereign, which just took another charge). Silver concludes with a summary of the many money laundering charges against Citigroup; what's missing in the analysis -- and that of most Wall Street analysts and reporters -- is an awareness of consumer compliance problems in the Citigroup "family," both pre- and post-Associates. On that front, we'll conclude this week with this description of Citi's practices, from the mail bag:
Subj: Citigroup
Date: 2/26/01 3:57:31 PM Eastern Standard Time
From: [ ] (deleted at correspondent's request)
To: info [at] innercitypress.org
Dear Inner City Press
...We recently refinanced using someone in our church body who passed themselves off as a "personal financial analyst," but was really a salesman for Primerica / Travelers. The interest rate offered was higher than the one we already had and we have a spotless credit record. When we questioned this, the rep told us that "interest rates don't matter," "it's all smoke and mirrors," and "this bank calculates the interest differently." To make a long story short, we have come to realize that this bank does nothing differently but scam people, and if we want to get refinanced yet again, we are subject to a stiff prepayment penalty...
How to reconcile this with Citigroup's claims -- for example, to the Cincinnati Enquirer of February 21, 2001: "We have gone across the country, talking with community groups to help develop the best policy. We disagree that we should not be in the communities, because we have been the one to pave the way to give loans to people who don't qualify for prime rates" -- Leah Johnson, director of public affairs for Citigroup. Those "go[ing] across the country talking with community groups" have included Citigroup "Chief Administrative Officer" Charles Prince, and Citifinancial general counsel Martin Wong (who most recently has declined the settle the case of a Texas woman who hung herself, after being subjected to Associates First Capital's harassing collection practices -- more on this in coming weeks). Noticeably absent from the road show / outreach has been ex-Treasury Secretary Robert Rubin. He's earning that $45 million (see above) somewhere else...
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February 26, 2001
A quick review of the week's deals -- then a focus on the largest U.S. deal currently pending before the Federal Reserve Board: Fifth Third - Old Kent.
On February 22, Wheeling, W. Va.-based WesBanco Inc. it is buying cross-town rival American Bancorporation, for $73.2 million. The main action, however, was overseas:
On February 20, Citigroup announced it has agreed to acquire Argentine pension fund Generar AFJP, for about $220 million. Citigroup already controls local fund Siembra AFJP...
On February 22, HSBC's French subsidiary, CCF, was declared the winner of the bidding-war for Banque Hervet, being re-privatized by the French government. HSBC's bid of $480 million beat out Parisbas, Credit du Nord - Dexia, and insurer Groupama. (In the U.S., HSBC has applied to close its branch in a low-income section of New Rochelle, New York).
According to Japan's Yomiuri newspaper, GE Capital Corp. is in final negotiations to take over Tokyo Mutual Life Insurance Co., aiming to complete the deal by the end of February...
J.P. Morgan Chase announced on Feb. 22 that it acquired privately held financial record keeper and loan servicing company Colson Services Corp.; the terms of the deal were not disclosed. Colson services about 85,000 secondary-market loans with an outstanding value of more than $30 billion. "We have no plans for staff reductions, but never say never," J.P. Morgan Chase SVP Conrad Kozak said.
Never say never, indeed. In the United States, the contested case of the moment is Cincinnati-based Fifth Third's applications to acquire Old Kent, based in Grand Rapids, Michigan. Fifth Third initially submitted applications at both the holding company and bank merger level. Issues have been raised (see Reports of previous weeks, below); the Fed has asked questions, to which the banks have yet to fully respond, despite the expiration of the comment period. But -- a new front has opened, in opposition to the deal. Several city commissioner in Grand Rapids are calling for the withdrawal of all municipal funds and business from Old Kent. This local opposition became more vehement after Old Kent announced its plan to cut 1,400 people, or 17.5 percent of its work force, in the next nine months. Local reports put Old Kent CEO David Wagner's golden parachute at $100 million dollars. One city commissioner said: "Old Kent directors allowed families and hard-working people who built that company to get cast aside while they made their millions. We don't have to do business with Fifth Third if their attitude is to come in and abuse the people of West Michigan."
Also, Kent County Commissioner (for the 17th District), Paul Mayhue, has filed comments opposing the deal. As reported in the Grand Rapids Press, Mayhue "says both banks are less likely to give loan to blacks than to whites. He also says Old Kent already has cut back on some services, and he describes the Old Kent branch at 1300 Madison Avenue SE as nothing more than a shell offering only check cashing and deposit. 'This is an opportunity to at least have some input in this giant, gargantuan deal... If you don't file a formal letter, you don't have that much input. I'm finding out, in talking to people about these things.'... Mayhue's opposition came a few weeks are New York-based consumer group Inner City Press / Community on the Move asked the government to block the merger, saying the companies more often deny home loans to minorities than to whites."
On branch closures, Old Kent spokeswoman Peggy Janei said: "That's something we are still working through."
On February 21, Fifth Third's outside counsel wrote to the Fed, regarding the Bank Merger Act application: "The Bank has determined not to proceed with the merger transaction described in the Application and, accordingly, desires to withdraw the Application. This action does not in any way affect the [Bank Holding Company Act] application." No further explanation is offered...
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February 20, 2001
Our focus this week is on the rapidly-consolidating New York banking market. On February 12, Citigroup announced its intention to buy European American Bank, and its 97 branches, for $1.95 billion. Then, on February 13, North Fork, one of the spurned bidders for EAB, announced that it's buying Commercial Bank of New York, and its 14 branches, for $170 million. Click here for more.
On Fifth Third - Old Kent, as of last week's deadline, we had not received any of these Applicants' responses to the Federal Reserve's questions of January 31, 2001. Late on February 12, we received a copy of a partial response -- the cover letter stated that "we... will provide the remainder in the near future...". This first response disclosed, among other things, that "the division of Old Kent Mortgage Company responsible for subprime lending is a 'd/b/a' of the mortgage company using the names 'Old Kent Financial Services' and 'Novelle Financial.'" The response shows that Old Kent's subprime lending volume was, in 1998, $153 million; in 1999, $608 million; and, in 2000, $782 million. Surprisingly, to the Fed's Jan. 31 questions about "compliance with the fair lending laws" and which institution's "procedures and policies would be retained at the depository institutions and other lending affiliates to be controlled by Fifth Third" as a result of the proposal, the banks' response, more than a week after the questions, and months after the deal was announced, stated that "[t]his information will be provided supplementally as soon as it is available."
Then, in a February 15 submission, the banks stated that "As to Fifth Third Bancorp, this information will be provided supplementally as soon as it is available. As to Old Kent Financial Corporation, please see the attached Confidential Supplement for the response to this item." But there's no basis for withholding this... The banks' counsel's letters, however, continue to state "We very much appreciate your efforts to ensure that the closing of this transaction may occur by April 2, 2001."
An aside: Fifth Third's CEO George Schaefer recently commented to the Federal Reserve, opposing proposed amendments to the Home Mortgage Disclosure Act regulations, stating that regulations attempt to react to "current needs" but end up becoming "contradictory, redundant, or outmoded in the modern environment of the financial services sector." Mr. Schaefer's view of this "modern environment" apparently includes fast rubber-stamp approval of mergers, without even answering the regulatory agencies' questions... We'll see...
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February 12, 2001
Overseas, in Hungary, General Electric on Feb. 8 made a formal takeover offer for Budapest Bank, of which it already owns 28.4%. Scandal has dogged Budapest Bank since it was privatized in 1995. The state audit office afterwards found fault with some conditions of the sale which contained sell-back clauses requiring the state to repurchase loss-making affiliates of Budapest Bank from GE.... Also last week, in the U.K., GE ended its bid to buy Equitable Life Assurance Society after Equitable rejected a 1.5 billion-pound ($2.2 billion) proposal. GE made the offer in an attempt to break-up Halifax Group Plc's 1 billion-pound purchase of Equitable.
Also on Feb. 8, in Kuala Lumpur, Belgian-Dutch Fortis agreed to buy a 30 percent stake in the insurance unit of Malayan Banking Bhd.
Don’t believe that globalization is on the agenda of all the big U.S. banks? On Feb. 8, the Indonesian government approved a plan to merge two companies affiliated to the Texmaco Group: PT Polysindo Eka Perkasa Tbk and PT Texmaco Jaya Tbk. Bloomberg quoted Tim Sandell, a spokesman for U.S. Bancorp that "investors would also receive an equity stake in the new Polysindo," noting that U.S. Bancorp acts as trustee for the debt...
Meanwhile, Fifth Third Bancorp announced last week that it gave CEO George Schaefer a 16 percent raise in 2000 -- $2.8 million, on top of a stock option grant potentially worth $19.2 million over 10 years if Fifth Third shares rise 10 percent annually, according to a proxy statement filed Feb. 6 with the SEC. Fifth Third is telling the Fed that it "very much wants to consummate" its proposed acquisition of Old Kent by April 2, 2001 -- apparently, without Old Kent Mortgage Corporation. In a Feb. 7 SEC filing on Form 8-K, Old Kent announced it is "consider[ing] strategic alternatives for certain components of its mortgage banking business." This, while the banks' response to the Federal Reserve's questions about their mortgage lending was due on February 9. ICP has not yet received its copy; ICP has requested an extension of the Fed's comment period. Developing...
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February 5, 2001
On January 31, 2001, Schwab announced that, along with Toronto Dominion, it is now seeking to acquire Scotland's Aitken Campbell & Co., for $87 million...In Zurich, Credit Suisse announced that Axa SA of France has sold its 8.5 percent stake in CSFB, which has cut about 2,000 jobs since its merger with DLJ. In Greece, HSBC agreed to buy Barclays Bank Plc's branches and fund management unit: 13 sites and 220 staff, with net assets of about $1.2 million, increasing HSBC's network in Greece to 23 branches. Prudential Insurance Co will take over Japan's Kyoei Life Insurance Co. for 430.5 million.
In the U.K., Lloyds TSB Group PLC on January 31announced a "conditional offer" worth $29 billion for mortgage lender Abbey National PLC. Bank of Scotland, Office of Fair Trading, where are you? Also in the U.K., Sunday Business has reported that GE Capital has bid more than Halifax Group Plc for Equitable Life Assurance Society. GE offered more than 1.2 billion pounds ($1.8 billion) Friday and will soon meet with Equitable's adviser, Citigroup Inc.'s Schroder Salomon Smith Barney Inc., the U.K. paper said.
Fifth Third / Old Kent update: On January 31, 2001, the Boston-based law firm of Goodwin Procter LLP submitted to the Federal Reserve a 15-page purported response to ICP's comments on Fifth Third's applications to acquire Old Kent. The Response (the "Resp.") begins with antitrust, stating that "[c]urrently, the parties are actively engaged in discussions with the agencies regarding proposed divestitures, but no final decision has been reached." The Resp. directs the Fed to this Web site, complaining that ICP's first comment (Jan. 22, 2001, below) stated that Fifth Third was not proposing any divestitures. Well, Fifth Third has asked for "confidential treatment" for the substantive portions of its Memorandum on Competitive Effects, so what Fifth Third is proposing is not at all clear. ICP's second comment, of Jan. 26 (contained in the Report of Jan. 29, below) noted that Fifth Third is proposing some unspecified amount of divestitures in two of the five markets in which the merger would presumptively be anticompetitive. One may assume that the "discussions" now alluded to go beyond the two markets; ICP's FOIA request and appeal remain pending.
Regarding Old Kent's involvement in subprime lending, the Response states that
"As of September 30, 2000, Old Kent serviced subprime loans have an aggregate principal balance of $662,317,000... Old Kent's subprime loan production for the year ending December 31, 1999, totaled $609,001,000... Old Kent's subprime lending production for the year ending December 31, 2000, totaled $793,056,000."
Note: not only has Old Kent's subprime production volume increased from 1999 to 2000 -- the percentage of its overall mortgage lending that is subprime has increased as well. The Resp. clarifies that "Old Kent's subprime lending is conducted through Old Kent Financial Services, a division of OKMC."
The Resp. then states that "in August 2000 Old Kent's board of directors adopted a loan suitability component to its lending policies... Old Kent's loan suitability policy was reviewed with the bank's examiners from the Federal Reserve Bank of Chicago, who were complimentary of its adoption." But no documentation to this effect is provided; nor is the referenced "policy" provided. And while the Resp. says various things about the reported "predatory lending" lawsuit against Old Kent's National Pacific Mortgage that ICP's comment cited to, no documentation is provided. The Resp. states that "National Pacific Mortgage has moved for a protective order barring any discovery by plaintiff, and will shortly be filing a demurrer (essentially a dismissal motion)...". The Resp. concludes that "[t]he ICP assertions are completely rebutted" -- but where is the rebuttal? Can it consist of a statement, for example, that an Old Kent subsidiary formally charged with predatory lending will, at some date in the future, file a motion to dismiss?
As to Fifth Third's mortgage lending disparities, the Resp. provided a table, comparing Fifth Third's raw "declination rate" for African Americans to the aggregates', in eight markets. Even by this measure (ICP finds it more relevant to compare a bank's denial rate disparity to the aggregates'), Fifth Third is more likely that the aggregate to deny African Americans' applications in Louisville, Kentucky and Cleveland, Ohio (into which the Resp. "consolidates" Akron, from which issues have also been raised); Fifth Third reports its denial rate for "Hispanics" in Arizona, but does not compare it to the aggregate, claiming that "Arizona data is not available due to license limitations." But HMDA data is publicly available, on <ffiec.gov> and elsewhere...
On January 31, the Federal Reserve wrote to the banks' counsel at Goodwin Procter, asking eight (multi-part) questions, including:
"For Fifth Third and Old Kent, please provide an update of each subsidiary depository institution's CRA initiatives and programs since its last examination (and that of its predecessors). Please include the following information for each subsidiary depository institution separately by calendar year 1999 and 2000:" [community development loans, CRA investments and] for non-HMDA reportable consumer lending for 1999 and 2000, please provide the total number and total dollar amount of loans made by borrower income and by borrower geography;
"please provide information regarding any anticipate branch closures or relocations in connection with this proposal;
"please provide a copy of the policies and procedures in place at each Fifth Third and Old Kent affiliate to ensure compliance with fair lending laws and regulations;
"please list all organizations engaged in subprime lending ('subprime lenders') in which either Fifth Third or Old Kent has a direct or indirect ownership interest of five percent or more... Describe each subprime loan product offered by each subprime lender, and provide the annual volume of such products, including number and dollar amount for 1998, 1999, and 2000... Indicate whether Fifth Third or Old Kent has any policies or procedures in place for subprime lending affiliates to refer applicants that appear to be qualified for traditional or 'prime' home mortgage or consumer loans to the prime lending subsidiaries of Fifth Third or Old Kent."
The banks' response is due on or before February 9; the comment period now extends until February 11, 2001. There is so little substance in these banks' January 31 "Response," ICP will await their response to the Fed's questions. Developing...
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January 29, 2001
Deals, deals, deals. The holiday slow-down seems to have ended. In the past week, Royal Bank of Canada announced it's buying Centura Banks, for $2.3 billion; Charter One announced it's buying Chicago's Alliance Bancorp, for $245 million; Vermont's Chittenden said it's buying closely-held Maine Bank & Trust for $49.25 million; and BB&T announced two deals in one day: purchasing Virginia Capital Bancshares Inc. in a $180.5 million stock swap and F&M National Corp. for $1.17 billion in stock, "expanding its presence in the Washington and Richmond, Va., banking markets." Yowdza! We'll be looking at these deals as progress (or don't progress, as the case may be). We want to update U.S. Bancorp - Firstar, and last week's main story, on Fifth Third - Old Kent (at the bottom of this Report):
There's been a new development in the U.S. Bancorp - Firstar proceeding. In its December 4, 2000, protest, ICP contended, among other things, that U.S. Bancorp controls the subprime mortgage lender New Century. U.S. Bancorp denied this, to the press, and then to the Federal Reserve. (These denials are quoted from, below). Well, in a "Memo to File -- Firstar/U.S. Bancorp," dated January 17, 2001 (ICP believes that "January 12" is meant), Federal Reserve staff memorializes that:
"Staff of the Board and the Federal Reserve Bank of Minneapolis (collectively, 'Staff') today spoke with representatives from Firstar Corporation and U.S. Bancorp (collectively, the 'Representatives') regarding U.S. Bancorp's interest in New Century Financial Corporation ('New Century'). Staff informed the Representatives that, based on information provided in Firstar's letter dated January 9, 2001... Staff deemed U.S. Bancorp to control New Century for purposes of the Bank Holding Company Act ('BHC Act'). The Representatives stated that they had not considered New Century to be a U.S. Bancorp subsidiary, either as a practical matter or for purposes of the BHC Act. The Representatives indicated that they would discuss options to restructure U.S. Bancorp's interest in New Century so that Staff would not deem U.S. Bancorp to control New Century for purposes of the BHC Act. This call lasted approximately 30 minutes.
Approximately one hour later, Representatives phoned Staff to state that U.S. Bancorp was taking steps to: (1) cancel the New Century warrants held by a bank subsidiary of U.S. Bancorp, and (2) terminate a voting agreement between U.S. Bancorp and officials of New Century. Staff confirmed that, once these actions were taken, U.S. Bancorp would not be deemed to control New Century for purposes of the BHC Act. This call lasted approximately 5 minutes.
U.S. Bancorp then faxed documents to Staff concerning U.S. Bancorp's cancellation of the warrants and termination of the voting agreement."
These documents including a letter from U.S. Bancorp Senior Corporate Counsel Karen J. Canon, to the Fed, stating that "effective today, U.S. Bancorp is terminating its Shareholder Agreements with individual executive officers of New Century Financial Corporation and forfeiting all of its rights under the warrants to purchase 650,000 shares of Common Stock of New Century Financial Corporation dated April 28, 2000 and the warrant to purchase 37,500 shares of Common Stock of New Century Financial Corporation dated April 28, 2000." Behind that, is a letter from U.S. Bancorp executive vice president Lee R. Mitau, to New Century, stating that
"U.S. Bancorp has made every effort to structure its equity investment in New Century Financial Corporation in such a manner as to ensure that New Century would not be deemed to be an 'affiliate' of U.S. Bancorp for purposes of Section 23A of the Federal Reserve Act. U.S. Bancorp has determined that it would be advisable to forfeit all of its rights under the Shareholder Agreements, each dated November 24, 1998, with Robert K. Cole, Edward F. Gotschall, Steve Holder and Brad A. Morrice (the 'Shareholder Agreements') in order to clarify that New Century is not such an affiliate. U.S. Bank National Association has also determined that it would be advisable for this reason to forfeit all of its rights under the warrant to purchase 650,000 shares of the Common Stock of New Century Financial Corporation dated April 28, 2000 and the warrant to purchase 37,5000 shares of the Common Stock of New Century Financial Corporation dated April 28, 2000 (collectively, the 'Warrants'). Effectively immediately, U.S. Bancorp and U.S. Bank National Association hereby forfeit all rights under and interests in the Shareholder Agreements and the Warrants, respectively. Please execute, or have executed, the acceptances below...".
The document is signed by all of the above-named executives of New Century, except Mr. Steve Holder.
ICP anticipates, after this sleight-of-hand, the Fed's final order in this matter evading the question of U.S. Bancorp's responsibility for New Century's lending practices. But it appears clear that U.S. Bancorp controlled New Century, at least between November 1998 and January 2001. U.S. Bancorp apparently never sought a ruling from the Fed, about whether its unique "arrangement" with the subprime lender New Century constituted "control" -- U.S. Bancorp simply went on its own (self-serving) "understanding" that it did not control New Century. If the issue had not been raised in comments opposing U.S. Bancorp - Firstar, it is doubtful that U.S. Bancorp would have made these changes. As noted in ICP's first, December 4, 2000, comment on the U.S. Bancorp - Firstar application, the applicants should have disclosed the New Century matter, in the application, but didn't. The ramifications for this? Developing...
At Wells Fargo, the complete corporate take-over by Norwest is confirmed. The company has announced that ex-WFC chairman Paul Hazen is leaving after the April 24, 2001 board meeting.. The ex-Norwest chieftain, Richard Kovacevich, "will add the title to his position." Hazen's only 59; he's moving on to venture capital firm with 10 employees, started last year by leveraged buy-out firm buyout shop Kohlberg Kravis Roberts & Co....
Predictably, spokespeople for Fifth Third and Old Kent read from the same script, in responding to journalists about ICP's January 22 challenge. Fifth Third spokeswoman Stacie Yee told the Associated Press, "We stand by our record." Old Kent spokesman Larry Magnesen told the Grand Rapids (Mich.) Press that "Old Kent and Fifth Third stand behind their lending records," and that the banks "are working closely with regulators with regard to the [antitrust issues], and we will arrive at a solution that will be beneficial to all involved."
Meanwhile, the Federal Reserve has confirmed to ICP that the comment period on the merger will extend until February 11, and not the "January 26" date specified on the Fed's Web site. The Kent County Commissioner for the 17th District has written to the Fed, commenting among other things on "the poor customer service that Blacks received at some of the Branches... There are 2 Old Kent Bank Branches in the 17th County Commission District, one at 754 Franklin Street SE, Grand Rapids Michigan, the other at 1300 Madison SE Grand Rapids Michigan; most of the customers/depositors are Black... The Old Kent Branch at 1300 Madison, for 5 years or more has been just a shell. No business transactions take place in this branch. Customers cash the check or make a deposit.... We request that the two organizations hold a public meeting in the city of Grand Rapids to discuss these issues." Similar issues are emerging in other markets, including Fort Wayne, Indiana. Here's ICP's second comment, of January 26, 2001:
January 26, 2001
Board of Governors of the Federal Reserve System
Attn: Jennifer J. Johnson, Secretary and Ms. Pat Robinson, Esq.
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Re: Timely comment opposing the applications and notices of Fifth Third Bancorp to acquire Old Kent Financial Corp. and its affiliates -- including the application to merge Fifth Third Bank, Indiana with and into Old Kent Bank (and request to consolidate comment periods)
Dear Secretary Johnson, Ms. Robinson, Mr. Terlop, others:
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 timely comment opposing, on the current record, the Applications and notices of Fifth Third Bancorp to acquire Old Kent Financial Corp. and its affiliates, including the application to merge Fifth Third Bank, Indiana with and into Old Kent Bank, and, as set forth below, a request to consolidate comment periods.
On January 22, 2001, ICP submitted, to the Board and Reserve Bank, a timely comment opposing Fifth Third Bancorp's applications and notices to acquire Old Kent Financial Corp. (the "Holding Company Application"). On January 23, ICP received from the Reserve Bank a copy of the related Bank Merger Act ("BMA") application (the "BMA Application"), to merge Fifth Third Bank, Indiana with and into Old Kent Bank. The BMA Application states, at 5, that "Fifth Third Indiana and Old Kent Bank desire Board action on this Application as soon as practical and in no event later than the date of the Board's approval of the related FR Y-3 Application and FR Y-4 Application with respect to the Proposed Acquisition... The parties understand that it is likely that they will not receive approval to consummate the Subsidiary Merger any earlier than the time that approval to consummate the Proposed Acquisition is received."
As you know, ICP is opposing FRB approval of the Holding Company Application, and, hereby, of the BMA application. ICP anticipates submitting an additional comment on the BMA Application -- as of January 24, ICP did not find notice of the BMA Application on the Board's H2A Web site, but notes, in the January 11, 2001, cover letter to the BMA Application, the statement that newspaper notice is being provided on "February 11, 2001," and accordingly assumes that that is the earliest date upon which the comment period on the BMA Application could expire.
Because the Holding Company Application and the BMA Application are so inter-related (as acknowledged by the Applicants, see supra), ICP is hereby timely requesting that the comment period on the Holding Company Application be extended to coincide with the comment period on the BMA Application. The Applicants have apparently requested that the Board rule simultaneously on the Holding Company Application and the BMA Application; it would not make sense to consider only a portion of ICP's comments (that is, the January 22 and this comment) on the Holding Company Application, but to consider ICP's forthcoming comments on the BMA Application. ICP requests confirmation of the consolidated comment period, particularly in light of the Applicants' above-quoted request(s) in the BMA Application.
ICP wishes to take this opportunity to clarify and/or amplify the following statement, from its January 22, 2001, comment, at 8:
Significantly, in April 2000, predatory lending litigation was filed against "a unit of Old Kent Financial." --Orange County (Ca.) Register, April 27, 2000, Lawsuits Accuse Mortgage Lenders of Charging Excessive Fees.
For the record, the referenced "unit of Old Kent Financial" is National Pacific Mortgage, a subprime lender purchased by Old Kent in, and owned by Old Kent since, 1996. See P.R. Newswire of August 1, 1996; American Banker of August 6, 1996, at Page 10. To further assist the FRS with regard to the 2000 predatory lending litigation against Old Kent / National Pacific Mortgage, consider:
"The company operates under the name Republic Mortgage in the mountain states and National Pacific Mortgage out west. Credit grades run from A minus through D, with carrybacks up to 100% loan-to-value. It will not originate 125% LTVs." [FN: This last statement does not appear to be true, as to Old Kent, anymore. See< http://www.oldkent.com/loan/loan.html>: "You can take advantage of up to 125% of your home's equity with a Home Equity Term Loan..."].
--National Mortgage News, September 15, 1997, Pg. 31 (B&C Mortgage): Old Kent Expands into Subprime.
As stated in ICP's January 22, 2001, comment, ICP contends that this part of Old Kent's business, particularly but not only in light of the publicly-reported predatory lending litigation against it, should have been disclosed, and addressed, in the Holding Company Application.
ICP has also, since January 22, 2001 (and in light of Fifth Third's spokeswoman's statement that "[c]ompany officials are talking with government regulators about whether it will be necessary to sell any operations in markets where Fifth Third's increased presence might limit competition" -- see, e.g., Dayton Daily News, January 23, 2001, Tuesday, at Pg. 2E) more closely reviewed the portions of the Antitrust Memorandum that accompanied the Holding Company Application. Of the five markets in which the HHI screen is breached, Fifth Third apparently is proposing divestitures in two markets. [FN: These do not appear to include Grand Rapids, where Old Kent already controls 41.21% of deposits -- and in which the already over-powerful Old Kent is underserving protected classes (ICP understands, as of this writing, that these issues are separately being raised to the FRS, including issues concerning Old Kent's "branch" at 1300 Madison, SE, Grand Rapids). Nor are any divestitures proposed in the Muskegon-Grand Haven market (where the HHI would rise 481 points), or in the Benton Harbor-St. Joseph market (where the HHI would rise 507 points, from over an already over-concentrated 2475, to a hyper-concentrated 2982). The "Confidential" exhibit to the Antitrust Memorandum must be released]. The size of the divestiture proposal is not known to ICP, as Fifth Third has requested confidential treatment for it. ICP is contesting this and other Fifth Third requests for confidential treatment, and continues to await the Board's response to ICP's January 5, 2001, FOIA request (as well as to ICP's January 22, 2001, FOIA request). These outstanding FOIA issues also militate for the consolidated comment period that ICP is requesting.
On the current record, Fifth Third's applications and notices to acquire Old Kent -- including the BMA Application -- could not legitimately be approved.
If you have any questions, please immediately telephone the undersigned, at (718) 716-3540.
Very Truly Yours,
Matthew Lee, Esq.
* * *
January 22, 2001
The focus of this week's report (and work) is Fifth Third Bancorp's application to the Federal Reserve Board for approval of its proposal, announced on November 20, 2000, and then valued at $4.9 billion, to acquire Old Kent Financial Corporation. ICP requested a copy of Fifth Third's application the day after it was filed; upon receiving the application, ICP was struck that it did not even mention Old Kent's growing role in subprime mortgage lending, and that Fifth Third is not proposing ANY antitrust divestitures, despite the clear anticompetitive effects in at least five geographic markets. [Ed.'s note: this statement, on Fifth Third's still-unclear proposal, is modified, in ICP's January 26, 2001, comment, included in the Report of January 29, above]. ICP's comments, just filed with the Federal Reserve Board in Washington, are summarized below. But first, a review of the week's other banking news:
In the U.S., new deal announcements were few. Rather, the banking news revolved around the departure of CEOs. At Cleveland-based KeyCorp, CEO Robert Gillespie has announced he's stepping down on February 1. He's only 56 (see below); this may indicate or lead to a greater willingness on KeyCorp's part to be taken over... At Columbus, Ohio-based Huntington, Frank Wobst, 67, is stepping down as CEO on February 15. For his successor, Huntington looked south, choosing AmSouth vice chairman Tom Hoaglin (previously of Bank One - he's only been at AmSouth since February 2000). Dissatisfaction and palace intrigue in Columbus? Yes.
Two titans -- Citigroup and Bank of America -- are going in different directions. The Wall Street Journal of Jan. 19 speculates that Citigroup's Sandy Weill, 67, intends to stay on, despite an earlier announcement that a successor would be chosen by early 2002. The Journal's Paul Beckett quotes "[s]ome inside and outside the company... speculat[ing] that in the next two years Mr. Weill may make a legacy-defining play for American Express" - a combination which would form the first U.S.-based financial firm with assets over $1 trillion. When is enough, enough?
Right now, Bank of America CEO Hugh McColl, 65, seems to feel. The Charlotte Observer of Jan. 21 reports that on Jan. 24, McColl will tell his board of directors he's leaving in April... In other Charlotte news, the week saw a rumor that Fleet is looking to acquire First Union; both banks quickly denied it.
Overseas, France's Societe General is looking to acquire the leasing businesses of Deutsche Bank; U.S. insurer MassMutual said it has bought a said "substantial" stake in Mercuries Life Insurance Co. of Taiwan. This follows a previous MassMutual purchase in Hong Kong. Globalization, anyone?
And now, this week's special: comments to the Fed on Fifth Third - Old Kent:
January 22, 2001
Board of Governors of the Federal Reserve System
Attn: Jennifer J. Johnson, Secretary
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Re: Timely comment opposing the applications and notices of Fifth Third Bancorp to acquire Old Kent Financial Corp. and its affiliates
Dear Secretary Johnson and others in the FRS:
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 timely comment opposing, on the current record, the Applications and notices of Fifth Third Bancorp to acquire Old Kent Financial Corp. and its affiliates.
The Federal Reserve Board ("FRB") cannot approve a merger which would substantially lessen competition, and the FRB must consider the proposal's prospective effect on the convenience and needs of communities, including all involved institutions' Community Reinvestment Act ("CRA") records, and their actual effects on low- and moderate-income ("LMI") neighborhoods and communities of color (see, e.g., the Fair Housing Act, 42 U.S.C. § § 3601-3619, and the Equal Credit Opportunity Act, 15 U.S.C. § § 1691-1691f ).
First, the proposal is clearly anticompetitive. The Application's Memorandum on Competitive Considerations (the "Memo") acknowledges that the "1800/200" HHI threshold would be exceeded in five banking markets, as these have been defined for the FRB. Memo at 6, 11 and elsewhere.
In the Grand Rapids market, Old Kent already has an anticompetitive 41.21% market share of deposits. Memo at 19. It cannot be allowed to combine with another top-ten competitor in the market. By its own calculations, the HHI would increase from an already over-concentrated 2078 to a hyper-concentrated 2318 -- an increase of 240. As a purported mitigating factor, the Memo cites the presence of Bank One. Memo at 21. The weakened condition of Bank One is well known. Similarly, Flagstar Bank, FSB, while located in this market, is essentially a nationwide lender, not significantly focused on this market. Citing advertisements run by Chase and Deutsche Bank (Memo at 24) is unavailing, as neither institution competes in the retail product market -- this is particularly true of Deutsche Bank.
In the Muskegon-Grand Haven market, the proposal would represent the combination of institutions with market shares of 22% and 11%. Even as calculated with the Applicants, the HHI would rise 481 points, to an over-concentrated 1888.
In the Benton Harbor-St. Joseph market, this proposal would represent the combination of institutions with markets shares of 23.6% and 10.1%. Even as calculated by the Applicants, the HHI would rise 507 points, over an already over-concentrated 2475, to a hyper-concentrated 2982.
In the Holland market, this proposal would represent the combination of institutions with markets shares of 19.9% and 13.03%. Even as calculated by the Applicants, the HHI would rise 518 points, over an already over-concentrated 2163, to a hyper-concentrated 2681.
In the Fremont-Newaygo market, this proposal would represent the combination of institutions with markets shares of 24.3% and 10%. Even as calculated by the Applicants, the HHI would rise 485 points, over an already over-concentrated 2037, to a hyper-concentrated 2522. The FRB should follows its precedent in other rural markets (such as Blakely County, Georgia), and deny this merger application. Also, the FRB is required to consider the TRENDS toward lessening of competition, which have grown more pronounced since most of the Orders that Fifth Third cites. The FRB itself has acknowledged a need for a new, more rigorous antitrust analysis on bank mergers, particularly those affecting a number of contiguous markets. The FRB’s NationsBank - Barnett Order, 84 Fed. Res. Bull. ___ (Dec. 1997) (slip op. at 19) explicitly stated that "in future cases, increased importance should be placed on a number of factors where the proposal involves a combination that exceeds the DOJ guidelines in a large number of local markets," including "increased attention to the size of the charge in market concentration as measured by the HHI in highly concentrated markets, the resulting market share of the acquirer and the pro forma HHIs in these markets, the strength and nature of competitors that remain in the market, and the strength of additional positive and negative factors that may affect competition for financial services in each market."
If the FRB meant what it said in its NationsBank-Barnett Order, this proposal cannot be approved.
Second, Fifth Third's lending record is disparate. Fifth Third Bank, Cincinnati, in the Cincinnati Metropolitan Statistical Area ("MSA") in 1999 denied the conventional home purchase loan applications of African Americans 3.06 times more frequently than those of whites.
In the Cleveland, Ohio MSA in 1999, Fifth Third Bank, Northwestern Ohio denied the conventional home purchase loan applications of African Americans 4.39 times more frequently than those of whites. One (self-) justification for high denial rate disparities between whites and protected classes is that greater-than-average outreach is being made to protected classes. Fifth Third cannot raise that defense: in the Cleveland MSA in 1999, the aggregate industry made 23,017 conventional home purchase loans to whites, and 2,386 to African Americans, a ratio of 9.6 to one. Fifth Third Bank, Northwestern Ohio in this MSA in 1999 made 858 conventional home purchase loans to whites, and only 56 to African Americans, a ratio of 15.3 to one. Fifth Third Bank, Northwestern Ohio is 37% less likely to lend (and outreach) to African Americans in this MSA than the rest of the industry; meanwhile, it denies Africans Americans 4.39 times more frequently than whites.
In the Akron, Ohio MSA in 1999, Fifth Third Bank, Northwestern Ohio denied the conventional home purchase loan applications of African Americans 8.57 times more frequently than those of whites. Again, Fifth Third cannot raise the above-sketched defense: Fifth Third cannot raise that defense: in the Akron MSA in 1999, the aggregate industry made 7,787 conventional home purchase loans to whites, and 357 to African Americans, a ratio of 21.8 to one. Fifth Third Bank, Northwestern Ohio in this MSA in 1999 made 244 conventional home purchase loans to whites, and only six to African Americans, a ratio of 40.6 to one. Fifth Third Bank, Northwestern Ohio is 46% less likely to lend (and outreach) to African Americans in this MSA than the rest of the industry; meanwhile, it denies Africans Americans 8.57 times more frequently than whites.
In the Dayton, Ohio MSA in 1999, Fifth Third Bank, Western Ohio denied the conventional home purchase loan applications of African Americans 2.31 times more frequently than those of whites. Again in this MSA, Fifth Third's bank is less likely than the aggregate industry to lend (and outreach) to African Americans.
In the Columbus, Ohio MSA in 1999, Fifth Third Bank, Central Ohio denied the conventional home purchase loan applications of African Americans 3.03 times more frequently than those of whites.
In the Tucson, Arizona MSA in 1999, Fifth Third Bank, Southwest denied the conventional home purchase loan applications of Hispanics 2.97 times more frequently than those of whites.
In the Louisville, Kentucky MSA in 1999, Fifth Third Bank, Kentucky denied the conventional home purchase loan applications of African Americans 5.79 times more frequently than those of whites. In this MSA, Fifth Third's bank is less likely than the aggregate industry to lend (and outreach) to African Americans.
In the Lexington, Kentucky MSA in 1999, Fifth Third Bank, Kentucky denied the conventional home purchase loan applications of African Americans 4.25 times more frequently than those of whites. Again, in this MSA, Fifth Third's bank is less likely than the aggregate industry to lend (and outreach) to African Americans.
It should also be noted that in March 2000, Fifth Third Bank was charged with employment discrimination by the Department of Labor ("DOL"). See, e.g., DOL press release of March 8, 2000. Fifth Third settled the charges, agreeing to (1) pay 75 minorities denied jobs as clerks and tellers $171,000; (2) pay 26 women professionals and managers $247,000 in back pay, interest and salary adjustments; and (3) hire 20 of those 75 minority job applicants within the next 45 days. Cincinnati Enquirer, March 9, 2000, at Page A1, 5 - 3 Bank Settles Claim of Job Bias; Will Pay Victims, Monitor Practices.
These issues should have been, but were not, addressed in the Application. [FN: Furthermore, while the Application at 19 refers to Fifth Third's so-called "BLITZ" initiative, no report is provided of performance thereunder -- reports such as the ones the Board has recently required from, for example, Firstar, in its application to acquire U.S. Bancorp. Such reports should be requested and submitted (including an explanation of the relation between the current "BLITZ" initiative and Fifth Third's proposal to acquire an institution with over $22 billion in assets); and, the comment period should be extended].
Third, ICP was surprised, in the Application, that no disclosure was made, or discussion offered, of Old Kent's involvement in subprime lending, a topic about which the FRB, and many other regulators, legislators and community and consumers' organizations, have expressed much concern in recent months. For the record, Old Kent is a major player in the subprime lending market. For example, in the second quarter of 1999, Old Kent "produced $ 114 million in subprime loans... a whopping gain of 470%." National Mortgage News, August 9, 1999, B&C Volumes Slump for Some Firms, Depositories Register Gains.
Old Kent knows, and Fifth Third certainly knows (although it does not address the issue, in the Application) that Old Kent is a major player in subprime. Mortgage Servicing News of December 1999 (Customer Contact Called Key to Keeping Subprime Loans Above Water) quotes Old Kent Financial Services executive vice president Bill Garland that "'I think the difference in the collections of subprime loans is maintaining a close contact with borrowers. You have to anticipate'... Old Kent is servicing 4,000 subprime loans and has a delinquency rate of about 7.25%... Old Kent is currently in the process of setting up a separate shop for its subprime loans. The operation will be equipped with a predicative dialing system. There are also plans for an imaging system to reduce the amount of time it takes to refer a loan for foreclosure."
Significantly, in April 2000, predatory lending litigation was filed against "a unit of Old Kent Financial." Orange County (Ca.) Register, April 27, 2000, Lawsuits Accuse Mortgage Lenders of Charging Excessive Fees.
These issues should have been, but were not, addressed in the Application. ICP is requesting a hearing, specifically an evidentiary hearing under section 4 of the Bank Holding Company Act (under which Fifth Third has applied).
It should be noted that Old Kent's lending record is disparate as well. For example, in the Grand Rapids, Michigan MSA in 1999, Old Kent Mortgage Company ("OKMC") denied the conventional home purchase loan applications of African Americans 3.54 times more frequently than those of whites. In this MSA, Old Kent Bank denied the conventional home purchase loans of African Americans 2.27 times more frequently than those of whites. Note that in the Grand Rapids MSA in 1999, the aggregate industry made 14,771 conventional home purchase loans to whites, and 295 to African Americans, a ratio of 50.2 to one. Old Kent Bank in this MSA in 1999 made 521 conventional home purchase loans to whites, and only five to African Americans, a ratio of 104.2 to one. Old Kent Bank is 52% less likely to lend (and outreach) to African Americans in this MSA than the rest of the industry.
Similarly, Old Kent Bank was 62% less likely to lend (and outreach) to African Americans in the Detroit MSA than the rest of the industry in 1999, with conventional home purchase loans; OKMC was also below industry aggregate in lending (and outreach) to African Americans in Detroit in 1999.
In the Chicago MSA in 1999, for conventional home purchase loans, Old Kent Bank denied the applications of African Americans 3.64 times more frequently than those of whites, and denied the applications of Hispanics 2.50 times more frequently than those of whites. Both Old Kent Bank and OKMC were, again, below industry aggregate in lending (and outreach) to African Americans in Chicago in 1999.
The Application states, at 18, that branch closures "are anticipated," but failed to identify the branches to be closed, or to define what the banks consider to be the "close proximity" that will result in such closures. This information should be provided, and, the comment period should be extended.
Again, these issues should have been, but were not, addressed in the Application.
Finally, for this initial comment: ICP submitted a Freedom of Information Act ("FOIA") request on January 5, 2001, for all documents related to Fifth Third's proposal. The Federal Reserve Bank of Cleveland sent ICP the portions of the application for which Fifth Third did not request confidential treatment. ICP has yet to receive any response from the Board, ruling on the propriety of Fifth Third's requests for confidential treatment, or providing any other related documents. ICP requests an extension of the comment period on these grounds; and, ICP is today submitting an additional FOIA request.
On the current record, Fifth Third's applications and notices to acquire Old Kent could not legitimately be approved.
If you have any questions, please immediately telephone the undersigned, at (718) 716-3540.
Very Truly Yours,
Matthew Lee, Esq.
Developing... For or with more information, contact us.
* * *
January 16, 2001
While our main focus, on this Beat, is usually U.S. bank deals, and challenges thereto, this week a consumer challenge is brewing in the United Kingdom. Abbey National Plc officials met the U.K. Consumers' Association to discuss Lloyds TSB Group's 19.4 billion pound ($28.7 billion) bid for the No. 2 U.K. mortgage lender as the association mulls challenging the bid in a submission to the Office of Fair Trading. The Consumers' Association is considering lobbying against Lloyds TSB's proposal to buy Abbey National because it would create a bank with about 30 percent of the U.K. retail banking market, Delroy Corinaldi, an association spokesman told Bloomberg in a telephone interview. The trade body also intends to meet Lloyds TSB before Friday's deadline for submissions to the OFT. Well, all right....
Meanwhile, ABN-Amro (see final item, below) is reportedly considering buying ING's U.S./Barings business, and Goldman Sachs & Co., JP Morgan Chase & Co. and Citigroup Inc. are among a group of investment banks that have expressed interest in acquiring Cazenove & Co., one of the U.K.'s last stock brokerage partnerships, the publication Sunday Business reported.
In the United States, Chase on January 8 announced that it is buying the subprime mortgage operation of Advanta. Bloomberg News put the sales price at $1.6 billion. The American Banker reports that in 1999, Chase "originated $2.7 billion of subprime loans; Advanta, $2.6 billion." In 2000, Advanta was hit with a regulatory enforcement action, and its originations declined. But the 1999 volume represents the Advanta subprime unit's capacity. With this proposal, Chase would be doubling its subprime lending. Given the regulatory hoopla about this part of the mortgage business, throughout 2000, you'd expect scrutiny of this proposal, similar to that afforded Citigroup - Associates in the fourth quarter of 2000. But you might be wrong...
The Office of the Comptroller of the Currency doesn't expect any application from Chase for this acquisition, even though the announcement was made by one of Chase's national bank's operating subsidiaries. Since in 1998, when First Union bought The Money Store, the OCC at least received an operating subsidiary notice, considered community groups' comments on the deal, and imposed some conditions, the lack of any application or notice for this 2001 deal represents another effect of the Gramm-Leach-Bliley Act of 1999: banks' ability to buy controversial businesses -- here, a subprime lending operation subject to a cease-and-desist order -- without any pre-consummation notice, and no comment period.
The Federal Reserve Bank of New York, on January 17, is holding a Legal and Compliance Risk Conference, which a representative of ICP will be attending, and participating in, on the issue of how Fed examiners should consider subprime lending. Frankly, ANY consideration would be an improvement. ICP has gone back and reviewed the Fed's most recent Community Reinvestment Act performance evaluations of Chase Manhattan Bank -- an exam on which the Board extensively relied in approving the Chase - Morgan combination last month. The Fed's exam, released in late 1999, is 121 pages long, but does not use the word "subprime" once. The exam purports to have considered the lending of the bank and its affiliates, Chase Manhattan Mortgage, and Chase Manhattan Bank USA, N.A.. In response to ICP's comments in November 2000, Chase reported the following subprime loan volumes, during the period covered by the Fed exam:
Subprime First Mortgage Loans
Chase Manhattan Bank CMMC CMB USA, N.A.
1997 450 7,034 NA
1998 602 13,797 NA
1999 1,225 25,408 NA
Subprime Home Equity Lines/Loans
Chase Manhattan Bank CMMC CMB USA, N.A.
1997 825 NA 3,085
1998 1,155 NA 14,480
1999 472 NA 3,514
That's over 70,000 subprime loans -- not even mentioned in the Federal Reserve's (or New York Banking Department's) CRA performance evaluations of Chase. Apparently, there'll be no pre-consummation scrutiny of Chase's planned purchase of Advanta's subprime lending operation, which would double Chase's subprime lending -- and no "post-consummation" scrutiny, either, absent increased advocacy, and even legislative change. Welcome to 2001...
There are other ways the large banks are getting more and more involved in subprime lending. U.S. Bancorp for example, which has been meeting with community groups and minimizing its involvement with the subprime lender New Century, has now confirmed, in a January 9 response to Federal Reserve questions, that it controls at least "24.79 percent of New Century's voting securities." U.S. Bank also owns "warrants" to buy another 3.50% of New Century's voting stock. When one company owns or can own 25% of another company's voting stock, it is a "control relationship." But U.S. Bancorp is arguing against this, stating that it "does not believe that the Warrants should be deemed voting securities [for] purposes of this presumption because they are held pursuant to authority derived from the National Bank Act, and not the BHC Act, and hence should not be aggregated for purposes of Regulation Y with U.S. Bancorp's other holdings in New Century." January 9, 2001, letter, at 4. According to U.S. Bancorp, it could own 24% of a subprime lender though its holding company, and any other amount through its bank, and still not be held responsible to the subprime lender's activities. The argument is so ludicrous that U.S. Bancorp concludes: "U.S. Bancorp's investment in New Century is more appropriately resolved as part of the supervisory process... [I]n the event that Board staff determines that the facts of record support of finding by the Board that New Century is a subsidiary of U.S. Bancorp, Firstar request... that it be granted a one year period to conform the terms of the New Century investment to those prescribed by Board staff such that the Board would not view New Century as a subsidiary of New U.S. Bancorp." Whew! Similar to Citicorp-Travelers: "Give us a year, outside of any limelight, to 'conform' the arrangement" -- or to change the law. And what does the Fed say? That the comment period is closed, and that even some of the comments it received, and will consider, are being "accorded confidential treatment," and are being withheld. Ever transparent, the Fed prepares to rubber-stamp...
There were a flurry of settlements, on the (U.S.) Bank Beat, last week. Citigroup settled, for a mere $1.5 million, the pending discrimination case against Associates National Bank, then settled a pending class action against The Associates in Georgia. The Department of Justice reached a $8.6 million settlement with Indonesia billionaire James Riady, owner of the Lippo banking group, for having illegally used foreign corporate funds to back Bill Clinton's 1992 presidential campaign. The Associated Press' story on this reported that "[g]overnment documents said that the Lippo Group hoped to influence American foreign policy for its own advantage. Among its goals was to gain most favored nation trade status for China; normalization of U.S. relations with Vietnam; open trade policies with Indonesia; Community Reinvestment Act exemptions for LippoBank and a repeal of the Glass-Steagall Act which limited business opportunities for LippoBank." Well, the repeal of the Glass-Steagall Act was accomplished...
Finally, for this week, the next (received) installment from our Fleet Files, e-mail of the week:
Subj: Another Fleet Bank horror story!
Date: 1/6/01 7:52:43 PM Eastern Standard Time
From: [ ]
To: FleetWatch [at] innercitypress.org
We were long time customers of BankBoston and were very happy with their services. Then along came Fleet! We had an account that charged a flat fee ($8) for their basic checking account. When Fleet merged with BankBoston they immediately raised our monthly fee to $10 plus tacked on extra fees for using the ATM's, making deposits, writing a certain amount of checks, etc. We decided to close the accounts because we
just couldn't afford that anymore! However when we went to close the accounts the branches refused to because there was still a credit line (reserve) with an open balance owed. We were being billed separately for this reserve and did not understand why they couldn't continue to do that but just close the checking accounts. We stopped using the
checking accounts and they still charged us for them each month to the tune of approximately $15! Finally my husband talked to a manager on the phone who assured us that we could close the accounts and leave the reserve only opened until paid off. Again when I went to the Bank to try and close the checking accounts they insisted they could not do that. I had the name of the manager we spoke to and I told the "customer service rep." to contact him directly. It was only until then she relented and said "I'll close it but we're not supposed to and I'll have to charge you the 'anticipated' monthly fee ($14)". I had already spent way too much time in the bank arguing with her over closing it so I said "just please close them!" When asked why we were closing it I told her that we couldn't afford all the extra fees they were now charging and she told me we "just had the wrong account for our banking needs"! We didn't have the "wrong account" when it was BankBoston!!! ...It's a very scary thought to think that Fleet Bank is the 8th largest bank in the US and will probably only get bigger!
Massachusetts banking commissioner Thomas Curry has now written to the Federal Reserve Bank of Boston: "This . . . is to raise your attention to the mounting evidence received by the Division that operational problems may exist within Fleet." Curry has told the Boston Herald that he is not opposed to the Summit deal per se (this is not saying much, since Summit has no presence in the Bay State), but that federal regulators need to consider whether Fleet can handle another acquisition at this time. The answer? No.
At deadline, Crain's New York Business has reported that ABN-Amro is moving to sell off European American Bank, EAB, which has 97 branches in and around New York City. Crain's reports that ABN-Amro has hired "J.P. Morgan Chase & Co." to find a buyer -- which seems something of a conflict, since Chase might BE the buyer (by analogy, it's reminiscent of Dick Cheney, who headed Bush's search committee for a vice president, before selecting himself). Fleet, despite the above, might be in the mix, or HSBC, or North Fork, or Citigroup. Can you say... "consolidation"?
* * *
January 8, 2001
Something of a slow weak on the Bank (merger) Beat. NBT Bancorp of Norwich, NY announced it's buying First National Bancorp of Norfolk, N.Y.. The American Banker of Jan. 5 (at least online) put the sale price at $115 million; it would seem that a decimal point was omitted, since First National Bancorp only has assets of $114 million... In the U.K., Lloyds TSB had decided to put to the test Abbey National's stated reason for preferring to merge with Bank of Scotland: that the regulators would not approve a Lloyds-Abbey combination, which would control 30% of the U.K. consumer banking market. Lloyds has now applied to the Office of Fair Trading; a ruling is expected by February 2.
The action, such as it's been, on the Bank Beat has been outside of the United States and Europe. In Chile, securities regulators started a criminal investigation into a fake announcement faxed to Reuters that stated the Luksic family planned to buy another 25 percent of a holding company that controls Banco de Chile. The institution's shares rose 11.5%, then fell 14.1% when the hoax was exposed.
On January 2, the Venezuelan newspaper El Nacional quoted the president of Citigroup's Venezuelan unit, Philip Henriquez, that Citi could buy a small or medium-size Venezuelan bank this year, to add more branches to the 24 it now has in Venezuela. Citi has an option to buy 8 percent of Banco Union SA, Venezuela's fifth largest bank, which expects to complete a merger in February with the Caja Familia savings and loan.
On January 3, Colombia's Banking Superintendency announced "early warning" measures to detect and promptly solve problems among financial institutions. Among the triggers are "illegal, unauthorized or insecure practices."
In Taiwan on January 4, the Commercial Times reported that Chang Hwa Commercial Bank and International Bank of Taipei have won support from Taiwan's Ministry of Finance for a proposed merger. Finance Minister Yen Ching-chang said in an interview that Taiwan plans to merge its 12 state-controlled banks into three to five banks with Bank of Taiwan, Land Bank of Taiwan, and Taiwan Cooperative Bank be used as the "seed banks."
In Japan on January 4, the Nihon Keizai reported that the Japanese Bankers Association has established new rules that allow member banks to close accounts held under fake names; banks also will be able to close accounts and cancel ATM cards that haven't been used for a certain period of time.
In the United States, major banks' involvement in questionable subprime, including pay-day, lending, continues to expand. In the Federal Reserve Board's ongoing Firstar-U.S. Bancorp proceeding, the banks' on January 2, 2001, submitted to the Fed a response on the subprime issues that ICP's Dec. 4, 2000, comment had raised. Among other things, the banks' write:
"Firstar has corporate lending outstanding to the following companies that engage in subprime lending: Burt Commercial Finance, Security National Finance Company, Oxford Commercial Funding, Conseco, Inc., Advance America, Finance Supervision Company, Globe Loan Company, USA Check Advance, LLC, Bob Fays Rent to Own, AAA Cash Advance, Messanie Payday Loans, LLC, and Easy Money Express Company."
Firstar's extensive links, through loans, to pay-day loan and other companies has not been addressed in the Fed's -- or any other agencies' -- proceeding.
While banks invest in pay-day lenders, inner city communities continue to be stripped of access to normally-priced credit. Inner City Press has heard from Detroit that Comerica is moving to close its branch at 19222 Van Dyke, near the intersection of Seven Mile Road, in Detroit. This is the same Comerica that's applying right now to buy Imperial Bancorp in California, and that, in May 2000, announced grandiosely a reinvestment plan in the Motor City, its headquarters. We will have more, on Midwestern deals, in coming weeks...
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January 2, 2001
...On December 29 (updated below), ICP filed suit against the New York Banking Board's approval of Chase's appliciations to acquire Morgan. At an emergency hearing before NYS Supreme Court Justice Phyllis Gangel-Jacob, Chase "agreed to take no additional affirmative steps prior" to an oral argument scheduled for January 2, 2001. A Chase lawyer whipped out a document Chase had just filed in Delaware, stating that it proved that the merger was already done. But the document expressly said that the merger wasn't "effective" until Dec. 31 at 11:59 p.m.. "It's on automatic pilot now," the Chase lawyer said.
On January 2, there were oral arguments, beginning at 10:30 a.m., and running through 3:50 p.m.. The banks' lawyers had prepared affidavits: their chief financial officer Dina Dublon averred that
"[a]ny uncertainty about the future of the company -- even the perceived risk that the company might be broken up -- would likely have enormous adverse consequence to the trading prices of our stock. And because of the size of J.P. Morgan Chase and its prominent role in the U.S. and global financial services industry, any adverse effect on its stock could well spread beyond its stock to affect the broader stock markets generally."
From this, the banks' law firm argued that, even if a stay could be granted (or continued), "Petitioners must first furnish a bond to protect J.P. Morgan Chase from the adverse consequence set forth in the Dublon Affidavit." This point was pressed in oral argument as well, using the figure $3 billion (the banks' self-calculated annual cost savings). By this logic, a corporation or merger as large as this could never be subject to judicial review, except by a party with $3 billion. The banks went further, arguing that, although they needed New York regulatory approval, as Delaware corporation(s), New York courts have no power over them or their merger(s). While claiming this "lack of jurisdiction," the banks at oral argument urged that community groups not be allowed to seek judicial review of New York Banking Board decisions, since New York is a "financial capital," and the inconvenience of judicial review might make it less attractive. Another Chase affidavit cited this Web site, accusing it of providing "extensive commentary that covers a variety of topics including the progress of F[reedom] O[f] I[nformation] L[aw] requests on challenged transactions" (note: why this would be viewed as negative, in the context of this litigation or otherwise, is unclear), and went on to say that "Petitioners' challenges to banks other than Chase are documented not only on the website, but in trade publications such as American Banker and are too numerous to list. Some of the more high profile challenged have been to (a) Deutsche Bank's acquisition of Bankers Trust" (note: yes, on predatory lending grounds); "(b) E*TRADE's application to acquire Telebank" (note: yes, on CRA assessment area grounds, and how CRA should apply to Internet banks); "and (c) the merger of Travelers Group Inc. and Citicorp" (note: which the Independent Bankers of America trade association also sued). Apparently, a community group actually seeking to enforce the Community Reinvestment Act (and such public interest statutes as the Open Meetings Law) makes it, in Chase's view, a pariah (Chase's representative(s) used other, harsher terms, inappropriate for this short update). These were some of the arguments, as afternoon light faded outside in Foley Square...
The Court, alluding in an oral ruling to the bond (that is, $3 billion) issue, declined to impose any stay, stating that the banks showed that they would suffer irreparable harm if the court granted the petitioners' application for a preliminary injunction. The arguments under the Open Meetings Law, the Banking Law (including the New York Community Reinvestment Act), etc., have all been submitted. The banks' memorandum of law, at n.7, states that "[t]he Bank Merger (of C[hase] M[anhattan] B[ank] and M[organ] G[uaranty] T[rust] C[ompany]) is not scheduled to close until July 1, 2001. The ruling, including on that Bank Merger (which the Superintendent of Banks admittedly approved while the comment period was still open), is expected (well before) that time.
For or with more information, contact us.
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Click here for ICP's current Bank Beat Reporter
Click here for ICP's Bank Beat Archive #4 2000 (Sept. 26-Dec. 31, 2000)
Click here for ICP's Bank Beat Archive #3 2000 (July 17 - Sept. 25, 2000)
Click here for ICP's Bank Beat Archive #2 2000 (April - July 17, 2000)
Click here for ICP's Bank Beat Archive 2000 #1 (Jan.-March 27, 2000)
Click here for ICP's Bank Beat Archive #4 (Oct.-Dec. 31, 1999)
Click here for ICP's Bank Beat Archive #3 (Aug.-Sept., 1999)
Click here for ICP's Bank Beat Archive #2 (July, 1999)
Click here to view ICP's Bank Beat Archive #1 (April - June, 1999).
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