“How Come….” A Series

Episode 1: Large institutions are avoiding discussing a bank with current and past problems. How do we solve issues and systemic problems when everyone is playing hot potato with them?

The time is always right to do what’s right. – MLK, Jr.

Forward from the writer: In this series we will be looking at issues within our various institutions and systems to bring awareness and start proactive discussions with the aim of bringing much needed positive change. Change we all know is needed even if we don’t know the how. This is not about pitchforking people or parading seeming wrong doers in front of a virtual town hall for embarrassment and shame. Our society has done that for too long with unpleasant results. It’s also not about showing a problem without solutions. As I write in this inaugural piece, we are human and it’s obvious that in the journey of life errors will occur. Some forced, some unintentional. People will need help. The goal here is to create a space for us to look at what we are doing as a society through a particular issue and then, hopefully, bring positive change, with human dignity. Blame and shame doesn’t work. Let’s try something else. Like the good man said, you may say I’m a dreamer, but I’m not the only one. Yep, even with banking, which is where we will begin…

What is the robbing of a bank compared to the founding of a bank? – Bertolt Brecht

How sad is it that quote resonates today. Most would agree there are too many Mister Potters and not enough George Bailey’s, but is that fault of bankers or the system we keep running, unchanged?

The Federal Reserve, FDIC and other state and government agencies are tapped with monitoring banks, overseeing money and financial systems that directly affect our individual day-to-day lives as well as our country globally. And yet with thousands of people across the U.S. working at these various entities slated with protecting the financial health of banks and our monetary system, problems persist. Ah, humans.

Of course it’s not shocking that problems exist in banking, to err is human after all. However, it’s the persistent issues that demand our attention, especially when nothing seems to be done to rectify the situation, like, say, an institution with over a decade of problems continuing into the present, as with CEO Charles Chrietzberg’s Monterey County Bank. So when someone high within the rarified world of big-money investments, one involved with the specific and intricate dealings of finance is sounding an alarm and asking for help yet hearing crickets from said officials, that seems worth discussing.

This is what we have here with CEO Brett Jefferson of Hildene Capital, a diversified institutional asset manager specializing in Asset-Based and Credit opportunities. (Full disclosure from the writer: I have known him for years.) In the summer of 2022, Jefferson contacted The Federal Reserve, FDIC and the California Department of Protection and Innovation (DFPI) for help related to his concerns with Monterey County Bank, where his company has investments. He received a polite response and no action or follow-up. As it is a bank with a history of issues known to those officials, the bank’s most recent consent order was issued in November 2021, Jefferson is concerned.

“I think they [FDIC] needs to do something,” Jefferson says. “At least have a conversation with us to understand where we are coming from.”

“When it comes down to it their concern is the bank and the health of the bank. My concern is the investment I have but I’m also a taxpayer so if we lose money that’s a bad thing. I just want people to do their job because…I’m asking you government official a question and you government official is not answering. And that kind of bothers me.” 

That should kind of bother all of us. Not being answered by government officials happens in countries we call regimes, ruled by dictator types. So how come the result is the same here in the USA? Including for someone deep in the finance world.

Even though Jefferson is managing monies and investments in numbers most people only see on a calculator, and because those running the institutions named above likely will never have a problem paying for groceries or gas, and because even if a bank does fail those with monies in the bank are protected up to FDIC limits, it doesn’t mean the concerns and questions he’s raising should be ignored by officials.

When did we start accepting that our important agencies are run by secrecy and avoidance? Because that’s not in the P.R. pamphlet about the U.S.A. yet that’s’ exactly what’s happening and what most expect to happen. “That’s the way it goes.” When did apathy and accepting no accountability or response from our officials become who we are?

The short answer to why no one will talk about the bank is: it’s policy. Is that something we are all ok with our officials doing?

“Finally, I want to affirm my continued support for the objectives assigned to us by the Congress--maximum employment and price stability--and for transparency about the Federal Reserve’s policies and programs. Transparency is the foundation for our accountability, and I am committed to clearly explaining what we are doing and why we are doing it.” 

- Chairman of the Federal Reserve Jerome Powell in 2018

So how is a billion dollar asset manager getting polite replies from our nations top finance agencies? Here’s the backstory.

“Northern California Bank Corp, since we figured out what it was, has been a bank of concern because of the number’s they’ve had.”

Monterey County Bank is owned by Northern California Bankcorp. Charles Chrietzberg is the Chairman, President and CEO of both.

“We own this debt, we’ve owned it for some time and I asked the guy who works for me to look at it and see what’s going and he said it looks like they are paying themselves a lot of money, looks like it hasn’t gotten any better, they’re still deferring, so we just started writing them a letter, like hey, we own your trust preferreds, we’d like to know more about what’s going on here. And he [the CEO] said no and I don’t have to tell you, and I said fine. I started writing the FDIC and then basically revisited this email where he said, yeah, I might get shut down.”

In an email exchange in 2013 with Jefferson (where the CEOs lobbed insults back and forth), Chrietzberg wrote he had major problems.  

Let’s review:

Monterey County Bank had FDIC consent orders in 2013 and another in 2021. However, in 2010, the bank had an order to pay civil money penalty after being found to have engaged in “deceptive practices” related to two relationships with third party-card companies.

“The $292 million-asset Monterey County Bank in Monterey, Calif., agreed to a consent order and will pay more than $2 million in restitution to credit and debit card customers, settling claims it failed to properly disclose fees and other information.”

“The FDIC targeted the bank’s Balance Transfer Card, which, the agency said, promised to help consumers with spotty credit histories to pay down debt and obtain credit cards, as well as a debit card program marketed by a third party.”

“The bank also had to pay $300,000 “towards establishing local or national non –profit organizations for the purpose of consumer financial education and counseling, in both English and Spanish–“ – American Banker

Jefferson is concerned the banks current issues will end up with his investments suffering.

“This bank is under a consent order, that means they are not allowed to pay any dividends and the trust preferred payment is a dividend. So they can’t pay the trust preferreds and they can’t pay themselves a dividend from being a common shareholder, so they are getting around paying terms es a dividend by just paying themselves more money in salaries.”

Jefferson has thoughts on what could be going on with the bank and why it is askew. 

“In 2013 Charles Chrietzberg of Monterey County Bank's ratios were basically the same as they are now, and we needed up buying his trust preferreds at a discount because the CDO was liquidated and we could buy them at a discount. He defers for five years, which he can do, and then he comes up with the money not through the banks, because he’s not allowed to make the payments, but through some outside source. But what I find just appalling is his non-interest expenses, for things like rent and compensation, are some of the highest of banks in the country, he could be the highest paid bank executive of you looked at it on an asset basis in the country. And who else does he pay? His children. So this is some sort of crazy estate planning of taking all the assets out of the bank and then one day he’s going to call us up and say I’m declaring bankruptcy because I’ve just stolen all the money out of the bank.”

Of course that is not known at all, but it’s also why Jefferson is asking for information, oversight and assistance. He’s trying to ensure his investments get the maximum return. This is a world he knows well as he has years of experience with trust preferreds, a type of debt this involves. I asked him what a trust preferred is and he explained.

“It’s a form of debt that banks could count as equity. It was created in 1996 and every bank went out and issued as much as they possibly could. Because if you thinks about it, if you’re a bank and you need to have 10% in what’s called tier one capital and that’s equity, they were basically saying 25% of your tier one capital could be in this new instrument. And what the regulators made these banks do, what the trust preferred is, it needs to be 30 years in 10 years, and if you have a problem you have to be allowed to defer for five years before going into debt, normally you’d have 30 days.”

“In 2010-2016 there were 1400 banks in the universe with these CDO’s, 400 of them were deferred and most because regulators told them to defer…”

“And it’s also appalling that the FDIC,who can’t be busy right now, because there’s only 10 banks that have a problem, it’s not like 2010 through 2014 when there were 500 banks in the country with a problem…I don’t really know what he’s looking to do but I think it’s very shady what’s going on.”

“So I’m sitting here saying like when are we going toget to the point where it’s you call us one day, oh hey, we’ve declared bankruptcy because we’ve taken the money out of the bank. Which, we’ve seen that story before.”

Hildene’s CEO is asking for regulatory bodies to step in and help when they detect problems that, if not dealt with, could lead to something no one wants: the bank folding. But if no one will talk about what’s going on how can the problems be solved? Because solutions are available, as he offers some.

“There should not be an instance today when the FDIC insurance has to be paid because there’s enough capital out there people who want to buy banks and franchises.”

A request for an interview with Monterey County Bank was made but there’s been no response.

A request for interview with The Federal Reserve was made but there’s been no response.

A request for an interview with the FDIC was made but I was told by a spokesperson, “the FDIC does not talk about open and operating institutions.”

A request for an interview with the CDFPI was made but I was told by a spokesperson that the, “DFPI does not comment publicly on applications, examinations or investigations.”

When agencies don’t answer questions from the press or asset managers …what’s that called? Of course companies don’t want to get negative press, or to have panic around a bank. It’s in everyone’s best interest to handle issues quietly and with discretion without unneeded additional problems. However when a bank has a history of issues and then authorities are asked what’s going on and the reply is we can’t talk about it, trust in these entities and the process is hard to come by.

“What’s also sad is from 2008 til 2018 there were a lot of problem banks. There’s 10 banks on their watch list. 10. They got a whole group of people. So, you’ve got 10 banks that have a problem, you should go solve those problems because there’s a lot of you out there doing what?”

“In the problem times they are all over these banks. Look, if this bank gets shut down and the FDIC takes a loss, well that’s tax payers dollars. And if they are going to be taken of right now this bank has value then maybe they should just sell this bank. They’ve been under a consent order for like 15 years.”

“Banks are so highly regulated one would think you’d wants to go clean up all these problems and have a really pristine thing and be like, so you could say we have no banks on our problem list.  But to have a bank on the problem list for 15 years, that’s on and had a consent order for that long, to be paying their dividends out of the picket to basically not have to address the real problem, which is, you might be insolvent, this bank could be insolvent. And I just think that someone ought to do something.”

“But I’ve seen the problems before but then FDIC took a lot of losses on all the banks shut down. And the way I know that is because we kept track of all the ones with trust preferreds and in very, very small instances did we got any type of recovery so if we are not getting a recover that means that the FDIC is taking a loss. Was it a complete loss? Probably not.  Are things better now, are people paying up yeah. This bank could sell itself there’s no doubt this bank could sell itself and should be forced to sell itself but one thing they should not be allowed to do is over pay themselves and that’s whether they are doing fine or not. They should only be able to pay themselves exorbitant amounts of money through dividends.”

Many won’t be surprised that Jefferson’s frustrated by officials but that’s exactly the problem.  It continues.  Everyone I spoke with about this issue agrees there are problems and wants to solve them, so who goes first?  Which agency or bank starts the change?

Why are we ok with the secrecy and avoidance of accountability by those who are there to serve us all by overseeing and protecting our shared resources, in this case our monies? Those tasked with managing these big monies affect the overall banking world and finance, and that affects us all. They set the rules for everyone and so their seeming inaction, lack of accountability and secrecy is a concern. It matters because this system guides us all and if it’s not working – seen here in his interactions with various organizations and their response and lack thereof, as well as mine, we need changes. All the people at all these organizations are not bad, money-hungry, uncaring folks, most are just working within a system that is flawed and needs help to change. How does that happen?

It’s clear that some of our most important systems and oversight are not working to their top capacity. 

The question is, who will go first to start talking about the problems and making changes, both publicly and within the organizations? 

For tips about Charles Chrietzberg or Monterey County Bank, or to get interviewed for our next story, contact [email protected].