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by Eric LuseMutual holding companies and their savings bank subsidiaries continue to, provide outstanding service to their customers and communities. Recent, efforts by certain activist shareholders to persuade Congress to eliminate, the voting rights of mutual holding companies (and, indirectly, their, depositor members) are no more than thinly veiled attempts to force mutual, savings banks and mutual holding companies to convert to stock ownership, ultimately sell out to larger financial institutions., These activists are attacking mutuality and mutual holding companies in, the name of good corporate governance, when in fact their proposals would, turn corporate governance on its head., It's no secret that activist shareholders have made fortunes investing in, mutual-to-stock conversions over the years. Recently, however, the number, full conversions has slowed significantly as more and more mutual, institutions have elected to raise capital gradually through the mutual, holding company structure., This makes a lot of sense, because most mutuals are well capitalized, a full conversion, which involves the sale of 100% of the value of a mutual, savings bank, often raises far more capital than an institution can, effectively reinvest. This typically results in low returns on equity and, shareholder pressure on management to either improve returns or sell the, bank. This, of course, is precisely what the activists want., Let's consider what a mutual holding company is and why the structure was, created in the first place. Before 1989 there was only one way for a, federal, mutual savings bank to raise equity capital -- fully converting to stock, ownership. It didn't matter how much capital it actually needed, since the, conversion required selling 100% of a savings bank's value in a single, transaction., While this process worked well for many savings banks, others had, difficulty reinvesting capital and adjusting to the immediate change in, control associated with full public ownership. In the late 1980s Congress, many states authorized the mutual holding company as an alternative to the, approach of full conversions., With a mutual holding company, only a minority interest in a mutual, savings bank is sold to the public, so capital can be raised as needed. As, result, the depositors remain the majority owners of the bank., Mutuals have embraced this structure, more than 230 mutual savings banks, have formed mutual holding companies since 1989. Of these, nearly 130 have, sold stock to the public in so-called minority stock offerings. In the, process, they have raised about $4.5 billion of capital for the banking, industry and have generated exceptional returns for investors. Moreover, there has never been a failure of a savings bank operating in the mutual, holding company structure., mutual holding company, to stockholders? Let's, briefly review the facts. First, publicly traded mutual holding companies, provide the same SEC-mandated disclosures to the investment community as, other public companies, and they are subject to the corporate governance, standards of Sarbanes-Oxley., Moreover, all stockholders in a mutual holding company have identical, voting rights, and their votes count, even if an individual stockholder, can't, force a sale of control. Boards of mutual holding companies are responsive, public stockholders, and it is incorrect to suggest that such stockholders, have no voice or influence., The interests of management often parallel the interests of public, stockholders, since the former are usually significant stockholders with, same objective as other stockholders -- to generate solid returns, consistent, with safety and soundness., In addition management does not, as the activists suggest, ignore public, stockholders on things like cash dividends, stock repurchases, second-step conversions. Mutual holding companies pay attractive dividends, actively repurchase their stock, and historically have undertaken, second-step, conversions when market conditions warrant., Lastly, the claim that mutual holding company boards face conflicts of, interest that are not faced by other corporate boards is misleading. All, boards periodically face potential conflicts (such as when they set their, compensation, decide whether to pay higher dividends or reinvest in the, business, or make charitable contributions), and their responsibility is to, address the conflicts and act in the best interests of the corporation., Even if the activists' complaints had merit, the solution they offer --, taking away the voting rights of mutual holding companies as majority, stockholders -- makes no sense. Since a mutual holding company by law must, control a majority of the common stock of its savings bank subsidiary, shouldn't it control the election of directors like any other company's, majority stockholder?, It is well-established law that a majority stockholder does not have to, concede to the wishes of minority stockholders. It is also well-established, law that depositors have ownership rights in a mutual savings bank and a, mutual holding company, and that such rights continue until the mutual, holding company converts to stock ownership., Since the depositors elect the directors of the mutual holding company, (which in turn elects the directors of its subsidiary savings bank or, holding, company), taking away a mutual holding company's voting rights is, tantamount, to taking away the voting rights of depositors. Keep in mind that, depositors, have the right to elect new management if they are not satisfied with a, mutual holding company's performance. If the activists really want more, control over mutual holding companies and their savings bank subsidiaries, they should exercise their voting rights like any other depositors and run, for election to the mutual holding company's board. This is fair and does, involve eliminating important mutual voting rights., But the activists' real agenda is not about fairness or good corporate, governance. It is all about being able to maximize short-term profits by, forcing the sale of community banks. It's OK for activists to try to, influence the boards of mutual holding companies, but it's not OK for them, suggest that Congress should take away the voting rights of mutual members, serve their agenda., Mr. Luse is a partner at Luse Gorman Pomerenk & Schick PC, Washington-based law firm that specializes in financial services.
Published in American Banker (2006)
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by competitive advantage., The most recent turf wars have been with credit unions and over the proposed Wal-Mart Bank., S&Ls Then, Credit Unions Now. The last time the banking industry complained about an unlevel playing field with a major financial industry involved another type of federally insured depository thrift, savings and loans., Under the Fed's Reg Q, beginning in *1966-, S&Ls had a distinct rate advantage over banks (initially 0.5%, but later 0.25%). But unlike credit unions, S&Ls paid taxes and had to comply with laws similar to those governing banks., Bankers protested the rate differential, a powerful marketing tool in an era of deposit rate controls. The influential S&L lobby, however, convinced Congress that an attack on them was an attack on the American Dream of homeownership., That industry's focus on home lending, the reason for their favored regulatory treatment, was also the beginning of their end when their mismatched balance sheets encountered inflation-induced double-digit interest rates, the gradual elimination of rate controls, and the birth of less-regulated competitors, like money market mutual funds., Without reliving the morbid details of the S&L crisis and bailout, the impact on the industry was simple -- strong thrifts became banks, and weak thrifts became history. The surviving thrifts, including mutuals that pay taxes, now march with bankers in their protests against their common credit union enemy., Credit unions have an unfair competitive advantage in the retail market, in the form of compliance with the Community Reinvestment Act., The resultant lower cost of operations allows them to pay higher deposit rates and charge lower fees and loan rates. Like S&Ls, credit unions, with their powerful lobby and friends in Congress, have maintained a government-granted competitive advantage that makes them a lower-cost provider., The Data Disclosure Disadvantage. Another competitive advantage credit unions enjoy over other federally insured depositories has not previously been discussed as a matter of public policy., This is their exemption from the disclosure of midyear branch deposit data, something banks and thrifts have been doing for over 25 years., This was an insignificant issue when credit unions were employer-based and had no retail branches. Today, however, this disclosure exemption translates into a valuable advantage., other than watching customer traffic and tracking transferred accounts., A recent branching study I conducted on a local market confirmed just how significant credit unions are today in retail banking., The FDIC reports roughly $1.5 billion on deposit in about 45 bank offices in this market. Community-based credit unions, with their rapid growth and branch expansion, now have 15 offices there, many of them dwarfing nearby bank branches. After looking at total credit union deposit levels and local branch customer activity, I estimated that the 15 offices have about $500 million of deposits., Thus, the FDIC data understates the size of this retail banking market by 25%, in terms of both offices and deposits. This is a significant amount, even if these deposits were given less weight because of credit unions' perceived smaller competitive impact., This is a matter of public policy, The Politics of Credit Unions. S&Ls justified their favored status through their promotion of housing finance when no other industry was so specialized. However, there is no compelling public policy argument for these credit union exemptions., With the increased concern over the budget deficit, I cannot understand how Congress can justify the tax exemption for this $700 billion industry, which reported nearly $6 billion of net income last year. The Tax Foundation estimates that the exemption costs the government about $2 billion annually., As a staunch CRA advocate, I see no reason why credit unions nationwide are not subject to the law, those in Massachusetts have been subject to CRA-like ones since 1982. Their reports, along with my experience in consulting for both banks and credit unions, show that some do a much better job than others in serving their entire community., Not surprisingly, Even the strongest credit union supporters should concede that their exemption from branch data disclosure is unwarranted today., Sears Then, Wal-Mart Now. Before Wal-Mart became a household word, Sears was our nation's top retailer for most of the last century, not just with its sprawling nationwide store network, but also with its mail order catalog and telephone support, the snail-mail predecessor of online retailing., With its excellent growth, franchise, and reputation, Sears decided to branch into financial services., It had long been a player but became a major force in 1931 with the establishment of Allstate Insurance and, later, Allstate Savings and Loan in California, which became Sears Savings Bank. Sears later acquired the industry leaders Coldwell Banker Real Estate and Dean Witter Financial Services., With the success of its financial affiliates, the retailer established the Sears Financial Network in 1982. These one-stop financial centers, planned for more than 800 stores nationwide, would offer full-service insurance, realty, investment, and thrift services., financial supermarket where customers could buy stocks, bonds, insurance, and houses, and even open IRAs. The launch of Sears Mortgage Corp. and the Discover card (with no annual fee, a high credit limit, ) further strengthened its position as a major financial provider., As it has done with the proposed Wal-Mart Bank, Despite these protests, Sears pursued its in-store financial operations, but they never met with great success. Sears finally closed them and later spun off its major financial subsidiaries., Other retailers, like J.C. Penney and K-Mart, even toyed with the idea of in-store financial centers, but they suffered the same fate. Meanwhile, these major retailers suffered, since they took their eye off their core business, which was being targeted by aggressive competitors like Wal-Mart and category killers like Toys-R-Us., Like today's supermarket chains, whose in-store branches have met with only sporadic success, these retailers learned that retail banking habits were difficult to change, mainly because of the continued preference for traditional delivery systems, with their high-touch and evolving high-tech capabilities., The same general arguments against Sears' getting into the banking business are now being used against Wal-Mart. Stripped of all its rhetoric, the banking industry is again trying to protect its turf from a new, aggressive competitor with deep marketing pockets., Let the Market Regulate. Wal-Mart is a low-cost provider as a result of disciplined and experienced management, not unlike Southwest Airlines and other new competitors that have shaken up traditionally regulated industries., Credit unions, however, are low-cost providers as a result of direct and indirect tax exemptions. While success of the former companies can be justified, and even commended, the opposite is true for the latter., I am not suggesting that Wal-Mart will follow in Sears' footsteps, or that credit unions will suffer the same fate as S&Ls. That is for the market to decide., Banking regulators and Congress are charged with representing the public interest, rather than that of the banking or credit union industries. History has shown and will continue to show that competition is in the public interest. Competition, however, is not enough if it is played on an unlevel playing field, as presently is the case with credit unions., Good public policy would suggest not only a more positive view of Wal-Mart's planned entry into banking, but also the gradual elimination of the branch data disclosure, and tax exemptions for credit unions, in that order.
Published in American Banker (2006)
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by Alex J. PollockTo the Editor:, Visa is in process of a key governance transition, moving toward a board which will have a majority of independent directors., May 12, page 10], Duncan MacDonald criticized this move, -- but he is wrong. To see why, consider a little history., Today, Visa is a huge, complex nonstock cooperative association involving thousands of banks, with an organization similar in some ways to a big trade association. But it began in an ordinary business structure as a part of Bank of America, a publicly traded banking corporation. In this normal corporate form, Amadeo Peter Giannini., A brand-name charge and credit card which would be able to compete with American Express and Diners Club was a naturally national idea, but it was to be issued by banks. Retail banking under the laws and regulations of 35 years ago (anti-competitive and already outmoded as they were) was limited to a local or intrastate business., It would take the cooperation of a large number of banks to create the national card, which we now take for granted. But the other banks did not want to commit to a product owned and controlled by Bank of America, one of their largest brethren. What to do?, The response to this dilemma was a brilliant organizational innovation: a cooperative credit card association of a very large number of banks which would issue cards under a common brand, with votes in the association proportional to each bank's card volume., This was a great answer for its day and then for more than three decades of quite amazing growth. That's a good, long run of success. Now, however, Made vulnerable to risk and cost by their heretofore successful cooperative structure, Visa and MasterCard settled one big lawsuit in a very expensive manner, have more threatening suits in process, and have experienced reductions in interchange fees by regulation in a number of other countries., not to the card-issuing banks., Mr. MacDonald has praised this move in American Banker, and it does directly address the issue. But Visa's governance change is a step in the same right direction. It should be praised, not attacked., Visa is moving away from having a board of constituency representatives, similar to a trade association, where directors are from and represent one or a group of card-issuing member banks. Instead, it will have a board which will ultimately have a majority of independent directors., Although this does not entail the definitive refocusing of board duty that the MasterCard restructuring does, it cannot help but make important changes in the thought, deliberation, culture and, operation of the board., of the board, as asserted by Mr. MacDonald, but one board of a quite different kind than before. This appears to be a quite sensible change, responding to challenges, a financial world, a banking structure, a market position, and a set of risks very different from those of the early 1970s., Personally, and as the observation of an outsider, I predict this will not be the end of structural movement away from cooperative and toward corporate forms at Visa. But it is certainly a good evolutionary step, adapting to the demands of the environment, as was done historically -- just this time in the opposite direction., Alex J. Pollock, Resident fellow, American Enterprise Institute, Washington
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by Paul DavisSynovus Financial Corp. is broadening the retooling of its commercial banking operations., Last year the Columbus, company said it wanted to do more commercial and industrial lending and less commercial real estate lending. Now it wants its commercial unit to bring in more deposits and fee income., Frederick L. Green 3rd, a vice chairman at Synovus, said a team led by Chuck Garnett, the chief executive of one of the company's 40 banks, National Bank of South Carolina in Sumter, is studying ways to generate more cash management, leasing, and asset management revenue., We've gotten a pretty good head start already, and we have opportunities to get better, Mr. Green said in an Aug. 1 interview., He said the company expects to distribute a comprehensive set of policies and procedures to the 40 banks by the end of this month., To increase commercial deposits, Mr. Green said., Excluding acquisitions, Synovus' commercial deposits were up 6% at midyear compared with a year earlier and accounted for 40% of deposits over all. Retail deposits rose 13% and were 60% of the total., Synovus is also training its bankers to offer capital markets services in all its markets., but that once Synovus issues guidelines across its various markets, the effort will gain steam., Last year Synovus set a goal of 13%-16%-a-year growth in C&I loans within five years. In this year's second quarter, though, C&I loans, at $5.5 billion, made up 23.4% of total loans, versus 25.4% in the second quarter of 2005. (Consumer loans were 14% of the total in this year's second quarter.), C&I loan growth was faster than in the first quarter: 5.8% compared with the year-earlier period, versus a 4% year-over-year increase in the first quarter. For the full year in *2005-, Synovus executives have acknowledged that the process will take time. Its president and chief executive, Richard Anthony, in the second half., The company has reported some progress, though, in asset-based lending operations, which take their cue from another of the 40 banks, Bank of North Georgia in Alpharetta., Mark Holladay, Synovus' chief credit officer, said in its earnings conference call last month that its asset-based-lending portfolio doubled, to $60 million, in the second quarter, and that it should reach $115 million by the end of this quarter., and in the first quarter it achieved that goal., In the second quarter, however, deposits rose 14.7% and loans rose 15.5%. Synovus executives have said that competition for deposits is intensifying but that they are hopeful the company will bounce back., Kevin Reynolds, an analyst at Stanford Equity Group, said that the retail effort has been successful and that he is confident Synovus' commercial banking program will meet its objectives., This is a management team that has a good strong track record of execution, Mr. Green, when asked if Synovus was eyeing new markets, said it is considering building branches in Mobile, Ala., one of the markets rebuilding after last year's hurricanes. Synovus has seven banks in Alabama, but it would probably enter the Mobile market through one of its two banks in the Florida Panhandle, Mr. Green said., We wouldn't need a new charter, but we would promote it as a new community bank
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by Isabelle LindenmayerThe pressure to reduce interchange rates is likely to intensify, and card, issuers would have to compensate by cutting costs and creating enticements, that go well beyond reward programs, a report due out today says., The slew of interchange-related lawsuits that merchants have filed against, the card associations and their issuing banks, the handful of merchants, trying alternative payment methods, and the threat of government, said, Ariana-Michele Moore, the report's author and an analyst at Celent LLC., Already, card companies have blinked., Last month Visa U.S.A. said it would hold credit-card interchange rates, steady this year, departing from a long-standing pattern of regular, increases. Also last month, Kenneth Chenault, American Express Co.'s, chairman and chief executive, under pressure - from above by merchants and regulators and from below by, Banks are increasingly worried, to counter the pressure., Innovative solutions, include Bank of America Corp.'s Keep the, Change program, in which debit-card purchases are rounded to the nearest, dollar and the difference is automatically transferred to a savings, account, and Citigroup Inc.'s enhanced customer service program that lets, credit-card holders dial zero to connect with a live operator., particularly as, the smaller banks start to realize that they can't compete against the, the old-fashioned way. As a result, traditional reward, programs are likely to wane, and annual fees may eventually come, back into style., Merchants are slowly realizing that they are funding the ever-growing, competition among issuers for wallet share, according to Ms. Moore., Many of the arguments that issuers have used for years to support high, It's no longer an issue of, getting cards in consumers' hands. Now it's all about gaining wallet, Competition is heating up in the debit world as well, where rewards are, slowly gaining popularity. For smaller banks, however, because debit, interchange is generally lower, the rationale is tenuous for creating a, debit reward program that can compete with those of some of the larger, issuers., Debit-card interchange may ignite debates just as heated as credit-card, interchange, according to Celent. Because issuers are pushing customers to, use their signature debit programs, which have higher interchange rates, than PIN debit, and because these rates are creeping up, merchants may put, more pressure on issuers to reduce the rates - and debit interchange may, buckle before credit, Ms. Moore said., Government intervention is particularly worrying to the industry, A lot of ... [banks] are annoyed by the lawsuits. Those are a nuisance, But financial, institutions are taking a beating in general in the cards space ... [from, the government], and they're always quick to think they need to act before, Indeed, many bankers and analysts are closely watching the effect of, interchange regulation adopted by several countries in the past two years., Most recently, under pressure from Mexico's central bank, bank issuers, there trimmed interchange rates on credit cards in February and will do so, for debit cards and credit cards, again, in April. And in 2002 the Reserve, Bank of Australia capped interchange fees on Visa and MasterCard issuers., Yet at a House Energy and Commerce subcommittee hearing in February, members signaled that mandating more transparency would probably be as far, as Congress goes., Ms. Moore's report points to two outcomes that are not likely or advisable., First, eliminating interchange entirely, which many merchants want, would, not reduce the price of goods to their level before the advent of credit, cards, the report said, because merchants would probably pocket the, benefit rather than passing it on to cardholders., Second, Discover Financial Services' February decision to let merchants, impose a surcharge for payments made with Discover cards is unlikely to be, copied, the report said., would cause such a state of chaos in the consumer, purchasing market that merchants would be the only ones to lose out, said.
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by Jody ShennCharles Schwab Corp.'s interest in home mortgages has grown enough for it, to get its sales force more involved in marketing them -- but not enough, the discount brokerage to bring the nitty-gritty tasks in-house., Last month the San Francisco company renewed its 2003 contract to, outsource servicing, back-office, and some sales work to PHH Corp.'s, home-loan unit, with PHH taking mortgage applications from Schwab clients, over the phone and online., The direct-to-consumer channel, which markets loans online and through, the mail, generated the bulk of Schwab's mortgage volume early on. But over, the last year and a half Schwab's financial advisers have been selling more, of the loans., Today there is an almost even split between the direct and adviser, channels, said Richard Musci, the chief lending products officer at the, $5.95, billion-asset Charles Schwab Bank, a subsidiary based in Reno., for brokerage clients to, want to talk about their debt with their advisers, Mr. Musci said in an, interview last week. Part of that has to do with baby boomers planning for, their retirements, demand for second and investment homes, making Schwab's first mortgage volumes somewhat less dependent on, refinancings, he added., Mr. Musci said Schwab has never seriously considered creating an in-house, mortgage platform, however, because the business is so cyclical. An, and free, the marketing and selling of, Mr. Musci noted that Schwab entered the credit card field in a similar, fashion in 2004 by having MBNA Corp. (now Bank of America Corp.) issue a, Schwab-branded Visa card. It will probably keep the partnership model in, - involved, in loan decisions, Schwab last year made them dual employees of the, brokerage, and the bank unit, Mr. Musci said. That extended preemption powers to them, allowing them to take conversations further and hand off fewer potential, Musci said. It also helps encourage borrowers to refer acquaintances, looking, Bob Andwood, the vice president for private-label solutions at PHH, seeing a lot more activity, in the next, couple, source of mortgage sales., Before deciding to stick with PHH, Mr. Musci said, Schwab considered, several other outsourcers that responded to the request for proposals it, issued before the 2003 contract expired., The relationship has produced more than 50, 000 loans since April *2003-, Mr. Musci said. That includes about $1.5 billion of first mortgages per, year., Mr. Musci said that in using outsourcers, Schwab emphasizes presenting a, consistent image. For instance, when Schwab customers seeking loans through, PHH call centers are put on hold, they now hear news ticker headlines, Schwab staple., This year PHH will better integrate Schwab customers' online access to, their mortgage and other Schwab accounts and make it easier to get loans, from, Schwab online without offline contacts, Mr. Musci said. Charles Schwab, Bank is, considering starting to provide banking services to professional business, such, to woo borrowers for home, equity lines, which it retains along with most adjustable-rate first, mortgages, Mr. Musci said., Not a, day goes by where someone in the Schwab organization doesn't think about, mortgages -- a, fairly popular option for its type of customers -- Mr. Musci said the alert, has not affected demand. The loans allow borrowers to use investments as, collateral in lieu of down payments, but can be subject to the equivalent, margin calls., Of the regulatory body's cautionary note, We want to, make sure clients are well aware of the pros and cons of any products they, Neither side gave the new contract's length., PHH has not announced a major new client since being spun off last, January from Cendant Corp. But in October, MetLife Inc. extended a, relationship with PHH.
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by Bill StonemanEmployees of First National Bankshares of Florida Inc. expected some changes when Fifth Third Bancorp bought their company early last year., However, many did not realize how intensely and quickly those changes would hit them., The need to sell immediately was higher at Fifth Third, said Robert W. Dyer 3rd, Mr. Dyer's experience may not tell everything about the differences between Fifth Third and First National, but cultural disparities, including contrasting approaches to selling, appear to have contributed greatly to the most visible result of the transaction: According to industry observers and insiders, First National employees, from executives to tellers have left the company in droves., Gary Tice, First National's former chairman and chief executive officer, never worked for Fifth Third. His two top lieutenants, Garrett Richter and Kevin C. Hall, did for a time but have since left., A few months after taking over, Fifth Third bought out about 10 managers a rung lower, apparently in the belief that they were not coming around to its way of doing business. Commercial lenders have since moved from Fifth Third to a raft of smaller banks in Florida., The departure of so many First National employees is a clear sign that Fifth Third, which is known for its aggressive sales culture, miscalculated its expansion in Florida, according to several analysts and insiders. (The company already had a small operation in Naples, Fla., First National's home base, when the $1.5 billion deal was announced in August 2004.), said Fred Cummings, an analyst with KeyCorp's McDonald Investments in Cleveland., It remains unclear whether outward appearances tell the full story. Fifth Third says its expanded Florida operations are doing well without the First National employees who left., While it is true that turnover has been larger than what we thought it would be initially, we think our numbers and our momentum speak for themselves, said Kevin T. Kabat, Mr. Kabat would not provide exact figures for the staff turnover, but he did say that from June 30, *2005-, to June 30, *2006-, loan balances in Florida jumped 23%, deposits 16%, and fee income 20%., Fuller data describing Fifth Third's performance in Florida are difficult to find. The company does not break out results in its financial reporting to investors. As a result, it's impossible to tell how loan and deposit growth in a particular region translates into increased earnings., The most current deposit, figures available from the Federal Deposit Insurance Corp. are over a year old and show market-by-market totals from June *2005-, leaving plenty of room for interpretation., That month, six months after the deal closed, Fifth Third had $1.8 billion of deposits in the Naples market, But that comparison may not be entirely valid, according to Mr. Kabat, because some escrow funds were moved and later recorded in Fifth Third's Cincinnati headquarters., Ohio or Michigan - is not hard to follow. Statewide, deposits grew nearly 14% in Florida from June 2004 to June *2005-, according to the FDIC., The big questions about Fifth Third's performance in Florida, observers say, are how much of the state's growth the company can capture and how big a share it needs., Company executives say that with 90 branches across the state, compared with the 16 it had before the acquisition, Fifth Third is better positioned to open additional offices and leverage a name that many midwesterners recognize when they move to Florida or go there on vacation., Fifth Third has opened five branches in Florida this year and has 16 more in the pipeline, according to Mr. Kabat, who said that even more will follow, especially in the Orlando and Tampa markets., If we just keep up with the market, we'll do very well, Others, however, say that Fifth Third, whose earnings growth has stalled in the last two years after many years of industry-leading results, must take market share away from other banks to earn a sufficient return on its investment. And early indications do not look good, some experts say., Fifth Third would not regard just participating in Florida's growth as meeting its objective, said Gary Townsend, an analyst with Friedman, Billings, Ramsey Group Inc., Though it is clearly a highly profitable and strong company, its business model does not position it well to capture market share, at least not without giving up some profitability, Mr. Townsend said., Fifth Third competes particularly on the basis of price, which generates more loan and deposit balance growth than it does earnings growth at a time when long-term rates are no higher than short-term ones, At the same time, Bank of America Corp. and Wachovia Corp., the banking companies with the biggest deposit share in Florida, have done more than Fifth Third to close the traditional gap between big banks and small ones in customer service, so it is more difficult to win their customers away, Mr. Townsend said., As challenging as it is to determine whether a bank is winning, holding, or losing deposit share, growth at some of the small, independent banks in Naples make it easy enough for analysts to question whether Fifth Third is keeping up., Assets at Orion Bancorp Inc. of Naples, for example, grew 38% last year, to $1.74 billion, while the loan portfolio grew 41% and deposits grew 29%. Assets at TIB Financial Inc., which is also based in Naples, grew 30%, to $1.08 billion, while loans grew 35% and deposits grew 34%., Moreover, according to observers, the departure of many commercial banking officers would seem to be a particular blow to Fifth Third., It makes you wonder whether their accounts aren't leaving as well, said Ben Bishop, the chairman of Allen C. Ewing & Co., an investment bank in Jacksonville., When asked about the number of commercial account departures since the acquisition, Mr. Kabat said, While we certainly are not immune to the normal account attrition experienced with any conversion, Former First National, Fifth Third bankers and competitors say cultural differences, perhaps an amorphous concept at times, can make a big difference in where people want to work., People at Fifth Third take great pride in charging hard, said Bill Valenti, Mr. Valenti and others say difficulties can easily arise when trying to bring the employees of an acquired company into the fold too quickly., The stronger the culture is at the acquiring bank, the stronger the ego is, and the more difficult it is to allow the other people to be absorbed in and buy into the culture, Mr. Valenti said., Without quite endorsing that analysis, Mr. Kabat suggested that it has merit., Fifth Third's not for everybody. Our culture is a strong one, We give people an opportunity to decide. It works out for some, Turnover has slowed markedly in recent months, though it has not abated entirely, Mr. Kabat said., Just the same, there is nothing wrong with asking for business, When you sell an appropriate service to a customer, Mr. Stoneman is a freelance writer in Albany, N.Y.
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by Christine BuurmaGuaranteed income, withdrawal, and accumulation options for variable, annuities have increased dramatically in the past year, and insurers say, they, expect even more such riders to be introduced in 2006 as banks and other, financial services providers try to tap the burgeoning retiree market., But simplifying the options will be crucial to their success in the bank, channel, according to industry observers., Demand for living benefits -- particularly those that provide benefits, for surviving spouses and automatically lock in market gains -- has risen, the baby boomer generation looks for ways to create a regular income stream, for its now approaching retirement years, said Rob Scheinerman, a senior, vice, president at AIG Sunamerica Retirement Markets Inc., a Los Angeles, subsidiary, of American International Group Inc., So many people are beginning to focus on how they're going to draw, and the variable annuity, in a position to do that really well. The industry is recognizing that we, Living benefits give policyholders both principal protection and the, potential for investment gains, said Greg Salsbury, president of the, institutional marketing group at Jackson National Life Insurance Co. in, Lansing, Mich. Jackson National Life, a subsidiary of Britain's Prudential, has introduced guaranteed withdrawal and income benefits since 2004., They do a pretty good job of resolving an age-old investing challenge, There is rarely, anything, Insurers must make sure they can afford the living benefits, however, said. In *2002-, Allmerica Financial Corp., which has since renamed itself, Hanover Insurance Group Inc., was forced to stop selling variable life, insurance and annuity products after the bear market made their guaranteed, death benefits unaffordable liabilities., It's important that carriers not get into a bidding war and price the, Mr. Salsbury said., A survey released last month by Diversified Services Group Inc., a Wayne, consulting firm, said 80% of insurance companies expect living, benefits, to continue growing for the next several years., A new entry in the annuity market in 2005 was the living benefit for, surviving spouses. In December, Phoenix Cos. became one of the first, annuity, providers to offer such an option. Its rider guarantees a minimum income, stream for life to the surviving spouse., Borden Ayers, a principal in the retirement management market practice at, Diversified Services Group, said he expects more providers to offer, spousal-benefit riders this year, given retirees' concerns about, inheritance, issues., Living benefits with automatic step-up features that let investors lock, in investment gains annually for a certain period without having to make an, election each year are also expected to proliferate in 2006 as providers, look, to simplify riders for salespeople and clients, Mr. Ayers said., AIG's MarketLock withdrawal benefit, launched last week, is one such, option. In addition to offering the automatic step-up feature, it imposes, investment restriction on policyholders within the variable annuity, contract,, as many such riders do., It's a much simpler, customer-friendly and rep-friendly structure, The rep or customer doesn't have to worry about missing, Living benefit riders fall into three basic categories: guaranteed, minimum withdrawal, guaranteed minimum accumulation, and guaranteed minimum, income. A withdrawal benefit lets policyholders withdraw a fixed percentage, -- typically 5% to 7% -- of their annuity premiums annually for a specified, period, regardless of market performance., Guaranteed income benefits ensure that the policyholder gets a periodic, income stream that is a fixed percentage of the premium for as long as he, she lives. And guaranteed accumulation benefits promise a stated minimum, contract value to the policyholder when the annuity contract is redeemed, regardless of market performance., Diversified Services' survey said 63% of the insurance companies, contacted offered at least one living benefit rider with their annuity, products. Forty-four percent offered a guaranteed minimum withdrawal, benefit,, 40% an income benefit, and 37% an accumulation benefit., Product simplification is essential, particularly in the bank channel, because the plethora of riders may overwhelm bank customers and platform, representatives, Mr. Scheinerman said., Providers need to make sure that there aren't all these restrictions, all these moving parts that the rep or client needs to worry about, said., The MarketLock benefit includes extensive training materials for bank, sales representatives to help them decide which riders are appropriate for, which customers and how to balance clients' other assets, such as pensions, Though demand for living benefits has risen in the past year, regulatory, pressures may hamper their growth somewhat, Mr. Ayers said. Some banks may, reluctant to sell riders because they are unfamiliar with the products and, concerned about their suitability for clients.
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by Patrick RuckerCongress is gearing up to probe several recent moves by the Federal Housing Finance Board, including a proposal to boost the retained earnings of the Federal Home Loan banks., But a House Financial Services subcommittee hearing tentatively set for July 11 could prove to be a doubled-edged sword for the Home Loan banks and their supporters., Though there is widespread opposition to the retained-earnings plan and several other actions by the Finance Board, the banks worry the hearing could raise touchy issues for them and that a frosty reception for the agency could further damage their relationship with their regulator., Several lawmakers are already voicing concerns about the Finance Board's March 15 proposal to require the Home Loan banks to hold retained earnings equal to $50 million plus 1% of nonadvance assets., I have talked to members of the Home Loan banks who think the Finance Board is creating a problem to solve a nonexistent problem, Rep. Barney Frank, D-Mass., said in an interview Wednesday., Rep. Frank said it also troubles him that the Finance Board has chosen not to appoint public-interest director seats at the Home Loan banks., On average, each Home Loan bank is missing five board members, or roughly a third of the required total, because the Federal Housing Finance Board has not made statutorily mandated appointments. Of the 82 appointed positions on the banks' boards, about 70% are vacant., The situation is likely to worsen by yearend, when the remaining appointed board members will complete their three-year terms, leaving more than 40% of the 200 total board positions vacant., Rep. Frank said, absolute animus towards the private, Though the Home Loan banks and industry groups have complained about both subjects, and filed more than 500 letters against the retained-earnings proposal, many are still nervous about the hearing., said one industry source, It could start with retained earnings, It's never a good idea to ask a question if you don't know the answer, said Karen Shaw Petrou, Calling a hearing could lead not only to a discussion of retained earnings, the Home Loan bank system., Several banks have had to restate their past financial statements and had difficulty registering with the Securities and Exchange Commission -- issues that could come up at the hearing., Some fear that Finance Board Chairman Ronald Rosenfeld, who is expected to testify, could receive harsh treatment at the hearing, worsening the friction between the agency and the banks., There is no point in holding our regulator up to ridicule, In recent years the relationship between the Home Loan banks and their regulator has been rocky at best, and it reached its most contentious point three years ago, when then-Finance Board Chairman John Korsmo was openly hostile to the banks at times., The Home Loan banks angered Mr. Korsmo by initially opposing a plan to force them to register with the SEC. At the time Mr. Korsmo was backed by the Bush administration, which argued that all housing government-sponsored enterprises should be registered with the SEC., however., Some Home Loan banks have asked lawmakers to tread carefully., Rep. Paul Gillmor, R-Ohio, has met with officials from the Cincinnati Home Loan Bank, which would have to raise more than $100 million under the retained-earnings proposal, and offered assistance, according to the lawmaker's spokesman., They have said that they're trying to work something out with the regulator -- that there has not been a role yet for Congress to provide, said Brad Mascho, a spokesman for Rep. Gillmor., Another key voice could be House Financial Services Chairman Michael Oxley, who is also from Ohio. A spokeswoman did not return calls seeking comment., Some banks clearly welcome the hearing., We think a hearing is a great idea -- the more dialogue the better, said Barbara Hembree, Other matters are also expected to surface., Rep. Jim Leach, R-Iowa, but was rebuffed., said Rep. Leach's spokesman, Gregory Wierzynski.
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by Joe AdlerAhead of a looming yearend deadline, regulators are seeking to clear up confusion surrounding the steps that banks must take to ensure the security of their Web sites., In a release Tuesday, the federal bank and thrift agencies outlined which online transactions require enhanced authentication measures, offered suggestions to institutions, and confirmed that compliance is mandatory by Dec. 31., and left several banks unsure how best to meet the criteria., online activity and on uncertainty over whether regulators were requiring banks to use multifactor authentication for those transactions., In answers to 35 frequently asked questions, the regulators on Tuesday sought to resolve such issues., The release said banks do not have to automatically use multifactor authentication, but must perform a risk assessment and have a system in place to thwart hackers capable of getting through a basic password system., authentication, which is typically a simple username and password, is not acceptable for any transactions deemed high-risk, regulators said. They said any transaction that involves the movement of funds to other parties, including online bill payment, and transfers to separate accounts at the same institution, should be considered high-risk., Any system that permits the movement of funds to other parties and, or the access to customer information ... is 'high-risk, ' necessitating stronger authentication or additional controls, the FAQ said., Still, any high-risk transaction does not necessarily require multifactor authentication, the regulators said. They said banks could take other steps, including layering on extra protection to ensure their systems are not vulnerable., The guidance does not call for the use of multifactor authentication, The use of multifactor authentication is one of several methods that can be used to mitigate risk as discussed in the guidance. However, For high-risk transactions, allows a bank to verify a customer's identification on the Web site without the customer's entering additional information., Multifactored authentication is an adequate response, but also 'layered security' or compensating controls can be adequate responses, said Michael Jackson, the Federal Deposit Insurance Corp.'s associate director for technology supervision., Many banks are already adopting such practices., system for small-business and retail customers, said Alecia Kontzen, Wachovia's e-commerce operational risk manager. The system is designed to sense a fraudulent login without a customer's knowing how., In addition to a password, called a key fob that flashes a changing number for a customer to enter., Other possible methods include a keycard with a code unique to a customer, tools that can scan a fingerprint or a person's iris, challenging questions that only the customer can answer, or a geographic positioning of a customer's computer determined by a bank through the customer's Internet service provider., The October guidance was issued by the Federal Financial Institutions Examination Council, and followed the implementation of multifactor authentication already by some large banking companies, as well as a 2004 FDIC study on how hackers were breaking into systems., One important unanswered question was how soon regulators expected enhanced systems to be in place. In their FAQ, the regulators confirmed earlier supervisory letters that said banks must comply by yearend., The agencies expect that institutions will complete the risk assessment and will implement risk mitigation activities by year-end *2006-, the agencies said., of the deadline, The agencies are clearly saying it needs to be implemented by the end of the year, said Patricia Milon, a senior vice president for regulatory affairs and the chief legal officer for America's Community Bankers., Mr. Jackson said regulators avoided being too specific because they want banks to take advantage of rapidly changing technologies for protecting online information., Since we released the guidance, there were new types of technologies developed, We're very nonprescriptive, or as we call it, That has continued to raise questions, however, about the best way to comply., The guidance wasn't prescriptive in nature, which our bankers like, but when it isn't prescriptive there are always going to be questions, said Don Rhodes, You're probably not going to see the username and password go away. But you will see it used in conjunction with other types of security, whether it's a token, a smart card, In the FAQ, the agency also said banks cannot allow a customer the option to opt out of enhanced security procedures., Permitting customers to opt-out is not an effective risk mitigation strategy and would undermine the effectiveness of the control, the agencies said., A customer that opted out, said Mr. Jackson, For instance, if a hacker entered your system, they won't be limited to that one customer or one account that they hacked
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by Matthias RiekerEmerson L. Brumback, M&T Bank's president and chief operating officer, was considered by many to be a contender to head both the bank and its parent, so M&T Bank Corp.'s announcement Wednesday of his imminent retirement surprised analysts., Mr. Brumback, who will turn 55 on Friday, and Michael Pinto, the 50-year-old vice chairman of the Buffalo company and the head of the bank's Middle Atlantic division, were both widely seen as favorites to eventually succeed Robert E. Sadler Jr., as the chief executive officer of the bank and the company., Now some analysts say Mr. Pinto may emerge as the front-runner when Mr. Brumback retires Friday. He will continue to work as a consultant until next year, while Mr. Sadler, and other executives will assume his responsibilities, the company said., Mr. Brumback, however, I had no aspirations whatsoever to be the chief executive officer of M&T Bank. It's not something I wanted to do, That left analysts almost as stunned as the retirement announcement itself., He was certainly considered one of two potential successors, said Adam C. Barkstrom, an analyst at Stifel Nicolaus & Co. Inc., as the front-runner to eventually become the CEO., Several analysts said they shared that notion., Mr. Brumback joined M&T in 1997 from Bank One Corp. as the executive vice president in charge of the consumer business. In 2003 he was appointed the bank's president and chief operating officer, while Mr. Sadler succeeded Robert G. Wilmers as its chairman. (JPMorgan Chase & Co. bought Bank One, of Chicago, in 2004.), Ever since his promotion, Mr. Brumback had been widely considered a possible successor not only to Mr. Sadler as the bank's chairman, but also to Mr. Wilmers as the head of the holding company. Last year Mr. Sadler became the holding company's CEO and president. Mr. Wilmers, remains M&T Bank Corp.'s chairman., Promoting Mr. Sadler only reinforced analysts' perceived succession plan., Joseph Fenech, a Sandler O'Neill & Partners LP analyst wrote in a research note issued Wednesday., I am very honored that people think I can do that, Mr. Brumback, who is from Cincinnati, moved to Buffalo when he started at M&T. His family moved back four years ago, and he has been commuting since., but added that he Mr. Brumback had never hinted to analysts that he was mulling retirement. According to Ms. Reeves, As the head of retail banking, he was involved in seven acquisitions by M&T during his nine-year tenure. The last one, the purchase of 21 Buffalo and Rochester branches from Citigroup Inc., is expected to close this week. (M&T did not say how much it would pay.), Mr. Brumback was in charge of integrating M&T's largest, and most challenging acquisition ever -- the 2003 purchase of the troubled Allfirst Financial Inc. from Allied Irish Banks PLC., in part because of its size. Allfirst had $16.5 billion of assets, it has been a tremendously successful acquisition, probably our most successful acquisition, However, Thomas J. Monaco of Sterne, Agee & Leach Group Inc. said, He and other analysts said M&T's management team is extensive enough to deal with Mr. Brumback's departure., One analyst, who requested ity, said he had expected the executive to move up higher, faster, and that he was surprised when Mr. Brumback was not promoted when Mr. Sadler became the CEO.
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by Jody Shenn and Todd DavenportThe new accounting standard for servicing rights, which the industry, lobbied for, will make it harder to compare companies' results and create, confusion about the assets, says the lone dissenter on the board that, approved the standard., impair, according to a note in the statement issued, last week., The other six members of the Financial Accounting Standards Board voted, to approve the statement. Ms. Schipper disapproved because it gives, servicers, between two methods of accounting for the assets' value over, time, the note said., Today, servicers generally can only recognize the assets at their, original cost (less amortization) or current market value, whichever is, lower, on a quarterly basis., Under the new standard, servicers are still allowed to use that method on, a quarterly basis, but they can choose instead to simply recognize assets, fair value. The fair-value method eliminates the major problem for, companies, that hedge the asset with derivatives that drove the rewrite., Today, without special steps, changes in derivatives' fair values get, recorded in income statements but servicing values are capped at cost, creating the potential for misleading pictures of performance. (If the, derivatives qualify for hedge accounting under FAS 133, the servicing's, value, can exceed the cap - but qualifying takes measuring and proving hedge, effectiveness, which can be costly and difficult.), Ms. Schipper preferred a new standard that called for using only fair, value, inherently, Comparing companies will be difficult because many will choose to use, straight fair-value while others will not. And in Ms. Schipper's view the, standard will add to the confusion by allowing servicers to use different, treatments for different parts of the servicing portfolio., Board members hash out accounting pronouncements at weekly public, meetings, and it's not unusual for them to air opposing views -- though, most, disagreements are ironed out as standards work their way toward completion., Disagreements about fair value tend to be about the pace of implementing, rather than its propriety., The board has made the point in a number of their recent pronouncements, that they see fair value as a more relevant measurement attribute, so it's, not a surprise that one of the board members thinks that ... [FAS 156], said Charles Gilman, an accounting policy adviser, the American Bankers Association., The standard requires new and detailed disclosures, including the listing, of the servicing assets' fair value by all companies, Ms. Schipper, who was a professor at Duke University's Fuqua School of, should be predicated on the nature of, the item being measured and not on management intent (in this case, hedge, Regardless of management's intent in holding, servicing rights, changes in fair values of those rights represent economic, At a conference in New York Tuesday, Eric Sieracki, the chief financial, officer of Countrywide Financial Corp., reiterated it has not announced, whether it will elect to use fair-value accounting., It is widely assumed, however, that Countrywide, the largest mortgage, servicer, will. And Mr. Sieracki did say that fair-value accounting, which, would have allowed it to post $110 million of additional profits last, and eliminate, -- by, continuing to use the old method for some servicing classes -- Countrywide, would gain nothing in either a rising or falling rate environment. But he, gave no firm answer on whether it would do so., Companies must adopt the new standard, which amends FAS 140, in the first, fiscal year that begins after Sept. 15, and in certain cases are permitted, do so earlier., Buy Me, Don't tell New Century Financial Corp. that secondary-market buyers of, subprime loans have gotten too skeptical., in the market - in which buyers are paying more for some, originators' loans than for others' - has resulted in their paying more for, New Century's loans than it thinks it could make by putting them in the, portfolio and securitizing them, Patti M. Dodge, its chief financial, officer,, said at the Piper Jaffray & Co. conference. That is why the Irvine, Calif., real estate investment trust expects to miss its portfolio-growth goal for, New Century has already sold forward most of its production through June, at prices slightly more than 2% above par, said chairman Robert Cole., Mr. Cole and Ms. Dodge said it appears Argent and Ameriquest, units of, longtime New Century rival ACC Capital Holdings, are less worrisome than, they, used to be., In the middle of last year New Century's sales force was easily listing, the ACC units among their three most competitive subprime rivals. Today, that, is no longer true, focus is, after a $325 million settlement with attorneys general and, banking, regulators from 49 states over its lending practices., Quotable ..., If that happens, you're going to have bigger problems. You're going to, be stocking water, bullets, Mr. Sieracki, on the possibility of five straight years of home price, declines.
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by Stuart Levey, Treasury under secretary for the office of terrorism and financial intelligence, As the 9, The Terrorist Finance Tracking Program was just such an invisible tool. Its exposure represents a grave loss to our overall efforts to combat al-Qaida and other terrorist groups., The Society for Worldwide Interbank Financial Telecommunication (Swift) is the premier messaging service used by banks around the world to issue international transfers, which makes its data exceptionally valuable. The Swift data consists of records of completed financial transactions, it does not provide access to individual bank account information., In response to a subpoena, which allows the government to compel the production of information pursuant to presidential declarations of national emergency., We issue such administrative subpoenas regularly, and our authority to do so is clear. In this case, Swift representatives are able to monitor these searches in real time and stop any one of them if they have any concerns about the link to terrorism. In addition, a record is kept of every search that is done. These records are reviewed both by Swift's representatives and an outside independent auditor., What we had not spoken about publicly, however, is this particular source. And, unfortunately, this revelation is very damaging., I can assure you, however, that our efforts will not wane. With our interagency colleagues and our partners abroad
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by Damian PalettaRep. Spencer Bachus, R-Ala., appears to have pulled ahead of Rep. Richard, Baker, R-La., in the race to succeed Rep. Michael Oxley as chairman of the, House Financial Services Committee., Rep. Bachus may benefit from having supported the winning candidate for, House majority leader, Rep. John Boehner, who beat Rep. Baker's choice, Rep., Roy Blunt. He also may benefit from Rep. Baker's public feud with the White, House about oversight of Fannie Mae and Freddie Mac and about federal, efforts, to rebuild after Hurricane Katrina., Though a lot can happen on Capitol Hill before yearend, lobbyists and, others said that last week's race for a House majority leader, who will, have, a significant say in picking committee chairman, would play a major role., said one bank industry lobbyist, who asked to, Both Bachus and Baker, rolled, the dice. Baker came up snake eyes, Rep. Baker publicly backed Rep. Blunt two weeks before the vote. Rep., Bachus never announced whom he was backing -- but after the election he, told, an American Banker reporter that it was Rep. Boehner., Larry Sabato, the director of the University of Virginia's Center for, Politics, factor ... but it's, Another key to the chairmanship race could be White House influence, Rep. Bachus has probably gained favor by largely supporting the, administration on big issues., In contrast, Rep. Baker has challenged the administration's decision to, oppose his bill to create a new regulator for the government-sponsored, enterprises. The outspoken Louisiana politician has also criticized Don, Powell, the administration's point man on rebuilding the Gulf Coast, opposing the Baker bill to create a federal agency that would purchase and, rebuild damaged homes., Last week Rep. Baker was visibly frustrated at a press conference that, took place after Mr. Powell published an op-ed in The Washington Post that, criticized the bill, saying it would create too much bureaucracy., To see the Gulf Coast rebuilding coordinator seemingly spending less, time coordinating with, and expending more effort fighting, the supporters, a proposal that originated in one in the affected states is dumbfounding, Rep. Baker said in a the press release., Despite White House opposition to the Louisiana bill, Rep. Baker has, continued to push it, gross, about it and lobbying office to office against it., Rep. Baker has also continued to fight for his GSE reform bill. The, administration announced in October that it opposed the legislation, saying, the new regulator that Rep. Baker had proposed would be too weak. But Rep., Baker, in an interview with American Banker that month, insisted that the, bill would accomplish all of the administration's objectives. He said he, stunned that the White House continued to oppose it., The fights with the White House left many industry observers concluding, that the administration would almost certainly back Rep. Bachus for the, committee post in the fall., Rep. Bachus said in an interview last week that the tension between Rep., But Mr. Sabato said that Rep. Baker's fights with the White House could, aid him in the end, particularly if Republicans choose to distance, themselves, from the administration as the November elections near., Other factors are also in play, including fund-raising, ability to carry, a bill through committee, and seniority., In at least two of those categories, Rep. Baker is ahead. He has been in, the House since *1986-, six years longer than Rep. Bachus, and according to, Center for Responsive Politics he leads in fund-raising for this election, cycle by $662,963 to $584,405., Mr. Sabato said that certain questions about the contenders would have to, Can the leadership, depend, What's the view of interest groups who, are supporters of the Republican party -- and that obviously includes the, Reps. Bachus and Baker said they are not concentrating on the chairman, race., Rep. Bachus said in a, In the case of the, Financial Services Committee chairmanship, as in most other cases, it is, almost all idle speculation. The chairmanship of the committee will not be, scheduled for a vote until the next session of Congress. Until that time, A spokesman for Rep. Baker echoed those sentiments., What Congressman Baker is concentrating on is helping Chairman Oxley, accomplish his legislative goals this year and working with new Majority, Leader John Boehner and House leadership to push a conservative reform, agenda, and expand our majority, without which all of this discussion is pretty, Democrats might retake the House (they have 201 seats, to the, Republicans' 231). If they do, Rep. Barney Frank, currently the ranking, member of the committee, would probably win the chair., Though considered the front-runners, Reps. Bachus and Baker are not the, only names being floated to succeed Rep. Oxley, who has announced that he, will not run for reelection this year., One other candidate is Rep. David Dreier, R-Calif., who has more, seniority than either of the front-runners. He is the chairman of the House, Rules Committee and on a leave of absence from the Financial Services, Committee. It is unclear if Rep. Dreier wants the chairmanship, however.
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by Hannah Glover, Money Management ExecutiveEven as traditional pension plans decline in importance, 401(k) programs, are taking on many of the automatic features that are typical of defined, benefit plans, especially as a means of dealing with low participation, rates., For years experts have warned that, though companies offered their, employees the defined contribution tools to prepare for retirement, chose to use them, making for a generation of workers with uncertain, futures., Correcting that is simple, James Cornell, a senior vice president of, Fidelity Investments' FIRSCo Plan Sponsor Strategy, told the Investment, Company Institute general membership meeting here last month. Enrolling, employees, picking their portfolios, and even investing in annuities are, being done automatically in a rising number of defined contribution plans., We use the power of inertia, BlueCross BlueShield of South Carolina has done just that, according to, Barbara A. Kelly, its vice president for human resources. Until recently, low participation had plagued the insurer's 401(k) plan. Started in *1983-, it suffered when the company stopped matching employees' pretax savings., In *1989-, the staff doubled, and by the mid-1990s, poor participation among, rank-and-file workers had caused the company's plan consistently to flunk, Internal Revenue Service nondiscrimination requirements., In an effort to comply, automatic enrollment was adopted in 2000. Any, employee who did not opt out had 2% of his or her salary deducted for, deposit in the company plan., But because many employees never allocated their contributions, most of, their savings sat in money market funds. With low balances and small, returns, the plan ran afoul of IRS regulations that restrict 401(k), programs whose benefits go disproportionately to highly paid employees, and the maximum contribution was capped at $8, In 2003, we, Ms. Kelly said., That's when the company increased the automatic enrollment to 6%, reinstated a company match, and moved the default investment from money, market funds to life-cycle accounts. In *2005-, the employee contribution, rate automatically rose by one percentage point. About 2.4% of the staff, 169 people, opted out., From 2003 to *2005-, participation surged by 37 percentage points, to 94% of, the company's 12,800 employees., Ignorance of investing and the intimidating responsibility to make, life-shaping decisions also have kept many U.S. workers from saving for, retirement, said Warren Cormier, the president and founder of Boston, Research Group., very, with their plans. But when plan features were rated, The lowest level of satisfaction is, the ability of the educational program to help them make decisions and, auto[matic] features are, Despite initial concerns that automatic enrollment might roil employees, uninterested in participating, neither Mr. Cornell nor Ms. Kelly could, recall any serious complaint about the process. Notifying employees, up-front that they can opt out at any time protects companies from legal, liability., Choosing which fund an employee's savings are channeled into, however, Mr. Cornell told, They said we're doing it in the best interest of our, and produced a letter that FIRSCo makes, available to plan sponsors and their employees., Because workers of different ages and incomes may have different needs or, feelings about investing, providers that want to compete should consider, offering plans tailored to specific employees, said Barry Schub of New, Our belief is [in] crafting a plan with, In general, investors fall into a few categories: those who want to manage, their own retirement account holdings but also want feedback on their, choices, those who don't know how to assemble a portfolio but want to, watch its progress, and those who only have a retirement account because, they have a job and are otherwise naïve when it comes to the markets., You have to learn the pattern through their behavior and tailor the, Mr. Schub said. This means different, educational and marketing materials for each group, tailored programs might have been prohibitively costly, but electronic, document delivery and on-demand-publishing erode such barriers., Not all workers are confident, however, that the investment decisions they, make now will serve them well in the future, especially given the rising, cost of health care and more general inflation, said Tom Johnson, a senior, vice president in the MassMutual Financial unit of Massachusetts Mutual, Life Insurance Co., Mr. Schub said. Adding, annuities to a qualified plan can provide just that, Annuities turn off many advisers because, once a client agrees to buy one, there are no real fee opportunities for advisers. But annuity providers, struggling to maintain their business as employers bail out of the defined, benefit space, are focused on ways to push their products through defined, contribution sales channels., One tactic is to let the earnings in a qualified plan be reinvested in an, annuity. For the plan beneficiary, buying an annuity offers a retirement, income guarantee to complement what amounts they can draw down from their, It's a baseline guarantee of a lot more money for a, Mr. Johnson said., Ms. Glover is an associate editor of Money Management Executive, SourceMedia publication where this article first appeared.
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by Duncan A. MacDonaldThe bank card industry did little to shore up its defense of interchange, at a House committee hearing three weeks ago. Although the hearing was, irrelevant, it was still an opportunity to rally the troops with some fresh, thinking., But that didn't happen, as it should have, because the industry's chief, spokesman at the hearing is a genuine star: Tim Muris, a former chairman of, the FTC., Unfortunately, his testimony was weak, preposterous -- that the risk from the 40-plus antitrust lawsuits against, He got away with it, however,, because nobody on the committee asked how he arrived at the number and no, media report recognized the about-face it represented., In the runup to the Wal-Mart lawsuit, the industry's tack was to downplay, any financial exposure. It did this to minimize pressure on issuers to make, unwanted SEC disclosures., starkly doing the opposite, was Muris trying to tell us the industry, has lost hope? That its new strategy is to try to win by spreading fear?, Of course, everybody should be scared., If the merchants prevail, the consequences to the payments system could, be terrible. But instead of showing how that might happen, how even $100, billion could be at risk, Muris offered little to promote allegiance., He may have made things worse when he admitted that interchange is a, albeit legal under antitrust law. The real issue, that the merchants want to use that law to replace market-driven, interchange, of course are hot buttons to portray the, other side as enemies of free enterprise. Muris knows, however, that the, Sherman Act invites lawsuits to impose controls on pricing fixed by, collusion., He also knows that two decades ago a federal court imposed such controls, on the bank card industry., The NaBanco decision held that Visa and MasterCard could fix interchange, only up to a point, beyond which there would be a violation of the Sherman, Act., In short, the bank card industry already is living under price controls., In fact, it has relied on NaBanco for years to justify its interchange, fees., It even offered the decision as a model when it defended interchange in the, late '90s before the European Commission., In the current lawsuits it will have to do the same., That is, unless Muris was sending a signal that the industry has decided, that its numerous increases of interchange in recent years have made, continued reliance on NaBanco untenable., As it is, NaBanco is a problem for both sides. At its core, the decision, limits interchange to the utility cost of processing transactions over the, associations' systems. If the federal court in Brooklyn adopts NaBanco, plaintiffs' potential damages will be cut in half or more., They could also be cut by some of the nonutility kickers allowed NaBanco, in particular the cost of cardholder free rides, which run in the billions., To exploit the free ride to its advantage, the merchants will have to, abandon their quest to kill interchange altogether and argue that NaBanco, conceded too much -- that the only component of interchange should be, utility, costs., As I have written before in these pages, there is more than enough to, condemn the free ride., It distorts pricing and discriminates against consumers and merchants, across the bank card and retail systems. Nothing like it exists anywhere, else, in our economy, probably because it is a stepchild of collusion that in any, other industry would be deemed illegal., It works this way. Issuers collude in agreeing to provide the free ride, and then in passing on its cost proportionally to cardholders who revolve, to merchants via the interchange fee., In each case those on the low end of the economic scale are forced to, cover the cost for those on the high end., The argument for merchants whose customers are predominantly revolvers, (perhaps the majority of all merchants) would be:, Why should we have to pay interchange for a free ride our customers don't, get? What gives you the authority to force us to subsidize your wealthier, cardholders and high-end retailers whose customers don't revolve?, Symbolically, the story for the court boils down to banks colluding to, favor the Tiffanys of the economy at the expense of inner-city stores and, discounters like Kmart., It has a flaw, however, in that it could risk splitting the plaintiff, class., In short, the free ride is a problem for both sides of the interchange, divide. The defendants should not try to defend it using the Muris line, that, interchange, and thus its components, are an output of the normal workings, market forces. That's nonsense., If anything, interchange is closer to the pricing model of European, cartels., Like those cartels, the bank card industry fixes prices and gets special, monopoly licenses and protection from regulators, who have a strong, interest, in limiting competition and keeping pricing high and convoluted., That's not free enterprise. It's a system that's rigged. If it were truly, competitive, bank card prices would be much lower than they are today., Mr. MacDonald is a former general counsel of Citigroup Inc.'s Europe and, North America card businesses.
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by David BreitkopfAfter spinning off Western Union Financial Services Inc. next week, First Data Corp. expects to generate revenue of $7 billion this year, and long-term gains of 8% to 10% per year in both revenue and earnings, executives said Wednesday., In a meeting with investors and analysts in New York, the Denver company detailed its post-breakup organization and financial structure. It plans to spin off the money transfer company Sept. 29., First Data also unveiled a major customer win Wednesday. Pam Patsley, the president of First Data International, announced a long-term agreement to process credit cards and loans for Barclays Bank PLC., The British banking giant will shift its U.K. Barclaycard co-branded portfolio to First Data's VisionPlus processing platform, and the deal could eventually expand to include Barclays' accounts in other European countries, Asia, and South Africa, The processor had already discussed much of its new structure since announcing the breakup plan in January, but it disclosed several key financial details at Wednesday's meeting. After Western Union becomes independent, First Data will have three divisions. The international unit is the smallest, and is expected to post revenue of $1.2 billion this year. The commercial services division will bring in about $4 billion, and the financial institution services division will generate $1.8 billion. The international division is the fastest-growing, as evidenced by the Barclays deal, and its top line is expected to have 24%-27% growth this year., First Data reported total revenue of $2.9 billion in the second quarter., I think we're very much headed in the right direction, and would not change much, said Henry C. Duques, First Data's chairman and chief executive., In July, First Data said it planned to shift much of its debt to Western Union, a move analysts said would give First Data more financial freedom to pursue growth after losing a significant revenue source., After the spinoff, First Data will be left with $4.6 billion in debt, but Kim Patmore, its chief financial officer, that debt to $2.1 billion. Western Union, post-breakup, will have $3.5 billion in debt., like to do business with companies with higher ratings, Mr. Wheeler said., Lawrence S. Berlin, an analyst for First Analysis Securities, at its business segments, for analysts, investors, and customers., If you clarify your services, your products, to your customers, eventually it will show up, and the investors will be happy, Mr. Berlin said., Some analysts seemed disappointed during the meeting that First Data does not expect higher revenue growth. Mr. Berlin, however, said he was not surprised by the anticipated gains of 8% to 10%., It's a good company growing nicely, but it's not a rapidly growing company, though if its international business takes off, overall growth could also pick up by the end of the decade
Published in American Banker (2006)
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by Cheryl Winokur MunkAfter a sleepy 2005 in variable annuity sales, the outlook is, brightening, an analyst says, and Jackson National Life's first-quarter, results -- its best quarter ever for variable annuity sales overall, best, sales period in banks since the third quarter of 2003 -- are an example., The Jackson National Life Insurance Co. unit of London's Prudential PLC, reported more than $1.5 billion of variable annuity sales overall for the, first quarter, up 51%. Of this, $153 million was sold through banks, a 50%, jump from the year earlier and 47% more than in the fourth quarter. The, company did not set a record for bank channel sales but had its best, showing, since the $209 million in summer 2003., Though not all the data are in, said Kenneth Kehrer, the president of, Kenneth Kehrer Associates, a Princeton, N.J., consulting firm that tracks, bank annuity sales, he expects many of the companies that distribute, variable, annuities through banks to post first-quarter increases., Last year variable annuity sales in banks were barely up. This is good, news for the variable annuity underwriters that sales look like they are up, Mr. Kehrer said., Of course, growth in the broader variable annuity market depends on, factors like stock market performance. And Mr. Kehrer said growth also will, such as, guaranteed minimum income or guaranteed withdrawals for life, which give, investors a safety net as well as the potential to participate in a market, rally., At Jackson National Greg Salsbury, an executive vice president of Jackson, National Life Distributors, attributed the sales growth much less to living, benefits than to factors such as hands-on support from the wholesaling, team,, lower-cost variable annuity options, and an unbundled structure, allowing, investors to pick and choose among features., The sales growth at Jackson National came as it bolstered efforts to, provide education and resources to advisers. For instance, it spent much of, But What, -- that proved popular with, financial, advisers. The brochure highlights seven challenges to funding retirement, analyzes them, and points to possible solutions, Mr. Salsbury said., appears to be the hottest feature, and, Mr. Kehrer said, viewing the, annuity, industry as a whole. These riders have become somewhat controversial, however, as critics question whether investors really know what they are, getting for their money., Jackson National, by contrast, has been more focused on its seminar, systems group, a business unit designed to help advisers conduct, prospecting, seminars to generate sales, Mr. Salsbury said., The Lansing, Mich., company is a middle-ranking player in the bank, variable annuity channel. It was ranked 14th in the channel last year, with, $457 million of variable sales, according to data from the Kehrer firm., That, was far behind the leaders such as Hartford Financial Services Group Inc., the Connecticut insurer that was ranked first with $4.47 billion of bank, variable sales, Pacific Life, with $2.8 billion, and Axa Financial Inc.,, 3, with $1.64 billion., Mr. Salsbury said he is counting on the 77 million baby boomers to fuel, sales as they reach their 60's and look for investments that can provide an, There is an increasing awareness of how, variable annuities can solve the retirement-income riddle, Ms. Munk, a former American Banker investment and insurance products, reporter, is a freelance writer in New Jersey.
Published in American Banker (2006)
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by Joe AdlerMany bankers are upset by plans to change the way deposit insurance premiums are levied, with some complaining the process is unfair while others argue the rates will be too high., But a top executive at KeyCorp counters that critics are missing the point. Ashish Dev, Key's executive vice president of risk management, said the premium plan unveiled by the Federal Deposit Insurance Corp. in July is missing a key ingredient., That plan is too focused on a bank's risk of failing, and should be expanded to consider how much a bank's failure would cost the FDIC, Institutions that could cause disproportionate losses, according to Mr. Dev, should pay higher premiums -- even if the risk is remote., Mr. Dev is an unlikely messenger for this argument, which he pitched to FDIC officials during a Sept. 15 meeting. If implemented, his plan would likely result in the largest banks in the country, including KeyCorp, paying more in premiums., No one is focused on first measuring ... the overall risk that FDIC is exposed to, said Mr. Dev, The deposit insurance reform law passed in February required the agency to develop a new risk-based premium system, which it unveiled a few months later. To date, most of the criticisms of the plan have focused on fairness and moderation, with banks urging the FDIC to take its time in implementing the system and some charging they are being penalized based on their size and age., Mr. Dev said that such complaints are missing the forest for the trees., Are large banks treated as fairly as small banks? Some say new banks have gotten a free ride, and so on. If you go along those lines, there is no single best policy that can satisfy everybody. There is always going to be a gripe from somebody., I thought if you could at least get the basic risk objectively, then you can sit down and discuss objectively whether the number is too much or too little, Those new factors are intended to gauge the impact to the Deposit Insurance Fund if the bank failed. For example, Mr. Dev noted a large bank with a high ratio of assets to deposits would be able to cover losses relatively easily without costing the FDIC much in resolution costs. However, a failing bank with a high ratio of deposits to assets would cost more during the resolution process -- and should therefore pay a higher premium., Mr. Dev said the FDIC's plan, by focusing on the risk of failure, does not completely address the actual risk to the fund., A bank can fail, and still its amount of insured deposits may be so small that its assets, obviously at a discount, could still cover the insured deposits, While large banks have always feared that a new pricing system would automatically mean they would pay a higher premium, Mr. Dev said in some cases, that makes sense. An institution with a low risk of failure but a large share of the nation's deposit base could still send shockwaves through the system if it failed, and cost a lot of money for the FDIC to clean up., -- or losses to the FDIC in a given year that were unexpected. Such banks -- which Mr. Dev estimated constitute the largest 87 in the country -- would be charged more under his model, They are tall trees standing in a jungle of 8, 000 trees, The losses stemming from a large bank failure are not a new topic among regulators, economists, and lawmakers. The FDIC has held symposiums for how it should handle such a failure when it occurs, and policymakers have debated whether some banks are so big the government would have to step in to reimburse uninsured creditors., banks a higher premium, but ultimately did not address those concerns in its proposal., Collectively, banks have plenty of incentive to ensure the FDIC gets it right. Under a 1991 law, the Treasury secretary, in consultation with the president, can step in to stop a large bank from failing if it determines the loss could have a systemic effect. The cost of that bailout, however, would come from a special assessment on all financial institutions., Mr. Dev, though somewhat of a lone voice, does appear to have some supporters. His views were echoed in an FDIC comment letter from the Clearing House Payments Co., and argued that large banks able to issue subordinated debt would be in good position to cover their losses., Virtually every metric used in the proposal relates to the risk of default, loss given default, wrote Jeffrey Neubert, the Clearing House's chief executive, Some observers agreed that addressing the risk of failure is only part of the equation. Bert Ely, an analyst in Alexandria, said small banks taken down by fraud, for example, pose a greater expense to the FDIC than other types of failures., Over time, smaller banks are going to have a higher loss rate, expressed as a percentage of insured deposits, Jim Chessen, the American Bankers Association's chief economist, commended Mr. Dev's broad examination of the issue, A concern will be whether or not any new approach or different approach would treat institutions large or small in a fair way
Published in American Banker (2006)
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by Matthias RiekerThe latest deposit market share numbers from the Federal Deposit Insurance Corp. show shifts in several of the nation's most attractive banking markets., The FDIC data, showing deposits as of June 30, represent genuine retail market share grabs for some companies but more routine deposit movement between branches for others., In Chicago, Fifth Third Bancorp improved its ranking, while ABN Amro Holding NV's LaSalle Bank Corp. gained market share. But Bank of America Corp. has fallen back in several markets, including New York. JPMorgan Chase & Co., meanwhile, gained market share in New York but lost ground in Texas., There was also movement in Florida, with Fifth Third gaining market share and B of A and Wachovia Corp. losing some ground. However, the state is poised for a shake-up now that Wachovia has acquired Golden West Financial Corp., which is based in Oakland, Calif., but is big in Florida., Buying Golden West made Wachovia Florida's biggest bank by deposits as of June 30 and pushed B of A to No. 2., With Golden West's, the $698 billion-asset Wachovia holds 19.92% of Florida's deposits. B of A had 19% of the state's deposits on June 30, down 160 basis points from a year earlier. The Charlotte company's total deposits there fell 12%, to $69.2 billion, from a year earlier., BJ Losch, chief financial officer for Wachovia's general bank, Mr. Losch said he expected Wachovia to maintain the top spot despite fierce deposit pricing competition in the state., However, many bankers and analysts have been reluctant to view the data as gospel, because it includes brokered, commercial, and online deposits bankers can move easily between locations. They note that deposits based at headquarter branches can particularly distort market share. Nevertheless, they concede that the comprehensive study remains without alternative and can be a powerful marketing tool., When we call commercial customers, and we can say, 'Did you know that we are now the fourth-largest bank in Chicago?' it means something. And it is important motivation for the staff, said Larry Magnesen, senior vice president of marketing at Fifth Third., However, JPMorgan Chase's gain in its hometown of New York is almost entirely the result of a $40.5 billion gain in deposits at its headquarters branch on Park Avenue, including a $7.3 billion transfer from Texas., A spokesman for the $1.3 trillion-asset JPMorgan Chase said the movement of deposits between Texas and New York was for tax reasons. He said that the company was happy with its New York gain, More telling is Bank of America's New York slip, said Andrew Collins, an analyst with Piper Jaffray & Co. The $1.45 trillion-asset Charlotte company's market share in New York fell 63 basis points, to 6%, and it traded its No. 3 rank with HSBC Holdings PLC's HSBC Bank USA, which had been No. 4., to prepare of its Jan. 1 acquisition of MBNA Corp., Mr. Collins said. For example, the Charlotte company had become less aggressive in pricing particularly commercial deposits, Mr. Collins said., Fifth Third trailed Wachovia by a wide margin in Florida, but it gained market share and deposits in what is one of its most important growth markets, Mr. Magnesen said. The Cincinnati company fell one notch, to No. 11, in deposits, but it gained 8 basis points in market share, to 1.48%, and its deposits rose 12.5%, to $5.4 billion, from a year earlier., In Chicago it was the other way around: the $106 billion-asset Fifth Third became the fourth-largest bank by deposits (Northern Trust Corp., which does not focus on retail deposits, fell from No. 4 to No. 7), but its market share fell 30 basis points, to 3.23%. But its deposits rose 4.9%, to $8.5 billion., LaSalle was the big winner in Chicago. The $116 billion-asset company, the second-largest bank by deposits in Chicagoland after JPMorgan Chase, gained 119 basis points in market share, to 14.1%., David Rudis, LaSalle's head of retail banking, said in an interview Wednesday. But he was quick to add, Mr. Rudis said that LaSalle's gain stems mainly from private banking, and the trust and commercial business -- concentrated in its headquarter branch at South LaSalle Street. Deposits at that branch rose 28%, to $23.3 billion., However, Chicago is seeing unprecedented new branch building, and yet the entrance to the marketplace appear to have minimal impact, Mr. Rudis said., The JPMorgan Chase spokesman said that, excluding its main Chicago branch at Bank One Plaza, the company gained $1.2 billion of retail deposits there., Countrywide Financial Corp. replaced Bank of America as the second-largest deposit gatherer in Texas. JPMorgan Chase slipped more than 3 percentage points in Texas, to 15.8%, and posted a 5.2% decline in deposits, or $3.5 billion, to $63.5 billion. Had it not moved the $7.3 billion to New York, however, its Texas trends would have looked better., B of A's Texas market share slipped 61 basis points, to 10.78%, but its Texas deposit balance rose 7%, to $43.4 billion., The $193 billion-asset Countrywide is not a retail bank but keeps online, brokered, and escrow deposits in Texas. The Calabasas, Calif., company's share was 12.5%, up 3.94 percentage points from a year earlier
Published in American Banker (2006)
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