The Bank Nationalization: It's Worse Than You Think

Although headlines have focused on the 19 banks that have undergone stress tests, the government's hand in forcing changes in bank management is omnipresent throughout the banking sector.

Reports FinCri Advisor

Examiners have become much more aggressive in demanding that bank boards conduct lightening quick reviews of management, sometimes by requiring the bank to hire an outside consultant and occasionally with an eye toward outright replacement of the CEO or other senior staff..

"Examiners are getting as concerned about the management of banks as about the assets," says banking consultant L.T. (Tom) Hall of Atlanta. Most often, the demand to conduct a management review is made by FDIC in Cease & Desist (C&D) orders. But even banks without C&Ds are being told to conduct such studies if an enforcement action is likely, he says...

Plus, the number of such orders is skyrocketing. There were 56 C&Ds in the first quarter of 2009, including 26 that required a management report and another three that directed the board to replace the CEO outright. By contrast, FDIC issued 19 C&Ds in Q1 2008, only nine of which required a management report...

While OCC has issued fewer enforcement orders than FDIC, its regulators also are increasingly focused on management questions. The agency issued just 11 C&Ds in Q1, but seven (64%) required a management report or replacement of the CEO. In Q1 2008, OCC issued three C&Ds, none of which required a management report...

Former Fed examiner Pat McElroy Jr. of Risk Management Partners in Dallas, says he has been hired by several banks recently to write management reports required by regulators. Typically, the report comprises interviewing the management team and board members to assess their knowledge, experience and skills; evaluate the organizational structure; identify issues and shortcomings; and - sometimes - recommend the removal of officers or additional hires, he says... "The regulators have such broad powers to make their own determination," McElroy says. "It's not just a function of a percentage of capital to assets any longer. It's more of a subjective view of regulators."

Clearly, the potential for politicizing the banking sector through management changes is here.

Not only will banks in the future be required to finance some politically favored sector (regardless of whether it makes business sense) but banks will have to have management that believes in the politically favored sector.

We aren't completely there yet, but the route has been decided upon, and Obama is looking at the map.