Summary
More banks are failing today than at any time in the past 20 years. Special skills are needed to manage troubled and failed banks.
Analysis
And, we’re back…!
Remember the banking meltdown
of the mid-1980s to mid-1990s? Here we
are twenty years later, except that this time, the vexing problem is
single-family residential financing instead of commercial real estate
financing.
Institutional Management
Considerations
When a financial institution
encounters a high volume of problems with a particular loan type or with their
entire portfolio, then the institution has to be managed in a highly
specialized way in order to address the unique problems with the
portfolio. It is not logical to expect
that the management that brought the financial institution to its present troubled
condition will have the objectivity and the ability to shift gears and properly
manage the financial institution and its problems in a manner that will allow
it to survive. This is when an
experienced interim financial institution manager must be brought in.
Identifying Desirable and
Undesirable Assets
From the first day, the
interim manager must undertake the matter of getting a handle on the quality of
the assets contained in the various segments of the financial institution’s
asset portfolio. For example, today many
institutions have decent quality loans to consumers, businesses, and perhaps
also to commercial real estate owners, but have clearly recognizable problems
in their single-family, construction, and acquisition and development loan
portfolios. The nature and severity of
these problems must be estimated, and a plan established and implemented to
capitalize on the institution’s strengths and to mitigate and shore up its
weaknesses.
As one small example that often
works, it is sometimes desirable to rent out REO and OREO rather than let them
sit, incur tax, insurance, and maintenance expenses, and physically deteriorate
without producing any financial return at all.
And sometimes, the residential renters turn into purchasers down the
line. I have successfully implemented
the same renting practice for commercial properties as well. It depends on the circumstances.
A realistic net present value
analysis is useful in making these decisions.
Identifying Who is a Part of
the Problem
Another decision area that
has to be addressed beginning the first day on the job is the matter of which
personnel stay and which ones have to leave.
This can best be accomplished by an interim manager brought in to run
the institution since he or she will not have any established relationships
with the staff that would affect his or her decisions.
Some employees will have an
unreasonable attachment to and expectations for some of the troubled assets,
usually those assets that they originated.
Some employees will refuse to accept that their institution has hit the
wall and expect it to all – including the new interim manager – to simply go
away, therefore viewing you as a nuisance.
And some employees simply have poor judgment, poor business skills, a
poor attitude, and a poor work ethic.
These employee decisions have
to be made regardless of the intended future of the institution. Even if the assets of the institution are to
be sold off and the institution closed, people who are a part of the problem
will be a hindrance in managing the institution and the assets and getting things
cleaned up to the point that the assets can be sold. And if the entire institution is to be sold
or merged, stripping out the obvious problem personnel beforehand will help
facilitate the sale since a purchaser will certainly bring in its own
management team that understands the purchaser’s goals and systems.
“Live or Die” Decision
At some point, a decision has
to be made as to whether the institution can be salvaged. While the interim manager may have some input
into this decision, the actual decision usually will be made by the
governmental regulators.
Keep in mind that in light of
the Bear Stearns bailout, Fannie Mae bailout, Freddie Mac bailout, AIG bailout,
$700 billion subprime loan bailout, and who-knows-what-else-bailouts, it is
unlikely that any federal funds will be available to fund a bailout of an
institution today. This means that the
bank has to be reconstituted into a functioning and workable institution by
making prudent adjustments to the present assets and liabilities as well as to
assets and liabilities that are added during the reconstitution period.
This does not mean that a new
alchemistic accounting trick has to be developed and applied, but rather that
Adam Smith-style supply-and-demand and return-on-investment principles need to
be reintroduced into the system. How
much income will this asset produce over its likely life? What value does this asset’s anticipated
income stream and residual value have to a likely purchaser? Where are the funds going to come from to
purchase this investment?
Regulatory Interface
In addition to all of the
aforementioned mountainous jobs, the financial institution’s interim manager
must interact with the various regulators that have an interest in the bank’s
welfare. This is no small task since it
is common for an institution to be operating under a Cease & Desist Order
issued by the banking regulators and specifying various items that the
institution must address by certain dates.
These items might include an assessment of the bank’s staffing and
management, maintenance of Tier I capital, reduction of delinquencies,
write-offs, creation of a business plan, creation of a plan to reduce exposure
to certain problem loans, creation of an ethics policy, etc.
Summary
Managing a troubled or failed
financial institution is a tough and lonely job not recommended for the inexperienced,
weak or timid. It requires immense
experience, imagination, credibility, a sense of strategy, ethics, and a
personality that is oriented toward action. Keep these factors in mind when hiring a manager or interim manager to run a troubled bank.
