You’d think I was trying to get the codes for Fort Knox. Information is power, so what does that make obfuscating it?   In this article we are going to taker a deep look into what some seem to believe are unethical activities at Monterey County Bank.

Note from the writer: in this series we look at events and stories with an eye towards problem solving and solutions, not pitch forking and shame. Our society has done that last part for too long with not great results. Let’s try something lighter, shall we...

“The FDIC would have loved trust preferreds to have gone away because then their problem and job would have been easier. They are the ones who encouraged trust preferreds to be issued. They are the ones who wrote papers on what a great thing it is and then … when there was a problem, they said, ‘gee this is a bad thing, I can’t believe this ever happened.’ But you were the one who basically was encouraging people to do it. So they have a very selective memory and they have a very a selective way of asking people when they need help and don’t.” Brett Jefferson, President of Hildene Capital

Last month, we looked at Charles Chrietzberg’s Monterey County Bank, under longtime consent order, as an investor sought assistance from various federal institutions for his concerns about the bank. He has mostly heard crickets, as did I when I asked officials about the situation.  Institutions like The Federal Reserve and the FDIC cite a policy of not discussing currently operating banks. (Am I the only one to hear the voice of SNL’s wise Church Lady observing, “Well, how convenient!”)

As a follow-up to that story, I wanted to look at the basic question of trust preferred securities (TruPS) as Tier 1 capital and how it came to be, within 15 years, a policy that went from promising and widely used to legally phased out.

Seemed pretty basic: who put it forth and how did this even become policy? Again, not to blame and finger-point, but so we can understand and learn from it to avoid similar issues in the future. (Another thing to file under basic: how are psychology and sociology not a factor in considering policies?)

After all, in the end TruPS did seem to be an indicator of troubles:

“Institutions that relied on TruPS for regulatory capital were financially weaker for it, took more risks, and failed more frequently than those that did not.”  FDIC Supervisory Insights, Winter 2010

Yikes.

Begin at the Beginning

Richard Branson said a big business starts small and it’s the same thing with ideas. At some point somebody had an idea, shared it with another, maybe a hallway conversation, and then it grew. Sometimes that idea is for a new product and sometimes it is a policy, but it always starts small. It comes from somewhere. It has a seed.

I make this simple point because the policies that drive our lives don’t come out of nowhere. A person thought of it. So a policy like TruPS becoming Tier 1 capital came from someone, then more got on board, until it become policy. What I’m finding notable however, is that the origin story is hard to find. Obscured maybe, but rather a Tabula Rasa. This I didn’t expect. I mean, it was a major policy that was discussed by hundreds (thousands?) before becoming policy and affecting millions. Sure, it was back in 1996, but how come no one wants to talk about it? Why so secret squirrel and buried away?

“Big business can make laws as easily as it can break them– And with as little impunity.” Ralph Chaplin, American Labor Activist

Everyone acts like, well, we planted apple trees so wow, these oranges it’s sprouted (risky investments, lost monies and many, many, many, fallen banks) is shocking. So let’s get rid of it and keep moving. “Nothing to see here, folks.”

But that means many smart people shaping policy in these organizations didn’t see it coming, which is also head scratching. It doesn’t make sense.

Finance and banking is full of aggressive, risk-taking people.  That is not necessarily a bad but just requires watching and reigning in – especially when hundreds of millions of people’s financial health depends on it.  So how come it keeps not happening? How come big banking errors keep happening with impunity and no accountability?

Information is power, so what does that make obfuscating it for Monterey County Bank and others like it?

In a time when information can be readily easily accessible with the touch of a few keys, having government institutions with search engines that are less effective than askjeeves, and in the "most advanced” country in the world no less, is… notable. Because this too is the doings of people. This is intentional.

The Federal Reserve and FDIC tout transparency, on websites and in speeches, however a search of just press releases on trust preferreds at the FDIC brought up 15 documents and one was from 1994 titled the Rose Law Firm.

Really? Are people seriously going to keep bringing Hillary into everything?

How come finding basic information and analysis on major policies within the institutions tasked with approving and monitoring is so challenging?

The Federal Reserve has come under scrutiny in recent months for its aggressive interest rate hikes designed to, as Chair Jerome Powell said, “get wages down and then get inflation down.” The Fed’s own research has warned that its aggressive policy mirrors a similar one that caused a “severe recession” under Paul Volcker in the 1980s, as The Intercept recently reported. Even the United Nations, which recently warned that the Fed’s rate hikes risk “inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020.”  The Intercept, October 2022

The above article titled ‘The Fed Likes to Tout Its Independence. So Why Are Big Banks Lobbying It?’ describes off-the-record meetings between banking officials and Federal banking employees. It details how lobbying groups employ people that previously worked in these very government agencies.

The same pool of people on both sides does muddy things…

but most obviously, it makes clear that risky - aggressive - behaviors are continuing.

“Powell will roll back critical rules that help guard against another financial crisis — and that is simply a risk we cannot afford,” Warren said in a floor speech.

The intense lobbying the Fed is subjected to is targeted at these banking regulations. To take just one example, the Chamber of Commerce, the main business lobby in the U.S., reported lobbying on Powell’s nomination along with “Federal Reserve regulatory reform” — i.e., deregulation Powell was known to favor — as part of its $15.39 million lobbying activities in the first quarter of 2018. The Fed under Powell would go on to water down key elements of the Dodd-Frank banking regulations passed in the wake of the 2008 financial crisis. The Intercept, October 2022

Dodd-Frank ushered in many regulatory changes after the 2008 financial crisis, including the end of TruPS as tier 1 capital. The document ended up being over thousand pages.

In working on the story it was pointed out to me that one of the changes the Federal Reserve made after the crisis was a new position on the board, the vice chair of supervision.  The current position is held by a Yale lawyer and academic who also has worked in the government, most notably in the Clinton administration at the Treasury Department. TruPS as tier 1 capital started in 1996.

It Can’t Only be Elizabeth Warren and Journaliat Calling for Change

The lack of transparency by federal agencies is part of a bigger problem. In working on the story I found most people couldn’t speak to me, or if they did it wasn’t on record. This is a function of a world that is so focused on blaming and finger-pointing that understanding how and why we’re doing things is roadkill. This of course, is not a positive thing for the simple fact that darkness is not the most healthy environment for anything human to thrive in.  Policies included.

“Scandals involving insider trading and unreported meetings between Fed officials and major financial services groups are baked into the foundation of the Federal Reserve as a system created by and for bankers.“ The Intercept, October 2022 

“The Federal Reserve Board on Tuesday approved a final rule to help ensure banks maintain strong capital positions” is how they titled their press release on implementing sweeping changes that were needed as a result of hundreds of failed banks and an economic crisis. That’s some spin. And superfluous in light of the above quote from The Intercept.

Now, failure is not necessarily the worst thing in the world. It’s a necessary part of success as most say, and a part of our human experience that too often is vilified. And positive spin is not necessarily horrible. However, not looking honestly at things is where we get more problems.  And with information on the origin of TruPS hard to find, it’s hard to have a sincere look at these policies formation to ensure it doesn’t happen again. Let alone to trust the same agencies to do the job. Especially when most of the people that work in these agencies went to the same schools so got the same training.

“Over the past two years, the failure of several federally insured depository institutions was due largely, or in part, to their investment in TruP CDOs.”  FDIC Supervisory Insights, Winter 2010

It needn’t be so inside baseball that information is behind locked sites that require payment or security. It’s our information. These are our policies. The path that lead to them should be readily available and accessible to learn from.  That they’re not demands attention.

Numerous articles talk about the plethora of issues within banking and finance, including the fact that many people working there were previously in banking. And considering the pool of people within this world is pretty small to begin with, we’re talking people from many of the same schools, we’re expecting these people to monitor each other.  It’s a tall order but ethical conduct is for all of us. When major institutions do not act with integrity, economic collapses happen. That’s why access to information is key. 

Sun Tzu talks about deception being a part of defense. With no one answering when investors and journalists call asking questions it’s a wily one. Especially when we’re all supposed to be on the same team. 

There’s a movie where a character is asked what’s the biggest lie he was ever told. His answer, ’it’s not that simple.’ “It’s how they get you to give up.”

It is simple.

Cui bono. Who benefits? Why in 2023 are two of the most important financial institutions in America stonewalling citizens? When are we going to be able to look at our failures as honestly as our successes?