SINK, DON'T SWIM

We've spoken in general terms about the difficulties a bank's directors and management face when hit with regulatory enforcement. The orders are complex, compliance challenging, and often contradictory.

The devil is definitely in the details, and the details are vital, with very unpleasant consequences for non-compliance.

But there's one thing that's absolutely essential to the suvival of the bank:

Be profitable.

Management and directorates get so focused on getting a hall pass from the regulators just to use the restroom that making money may not get the attention it needs.

Bad assets engender operational losses, and these are the two primary factors that trigger a supervisory love letter from Uncle Sam. The beleaguered bank can't make the bad assets go awy; only time (and deep pockets) will heal that wound. Unfortunately, the one thing that management does have a modicum of control over, operational profit, will be very difficult to accomplish.

And, if you're not profitable, you're dead. Next to liquidity (the ability to pay out withdrawals) there's no element of banking that the reulators monitor more closely. If a bank is under an enforcement actgion, core profit, that is, profit from traditional banking activities, must be demonstrated.

If it isn't, it won't matter how meticulously management meets the order's reporting deadlines, or how well structured the new policies and procedures are. even capital injections lose their impact if the capital account is constantly be drained by red ink on the operational side.

There myriad reasons why achieving profitability can be almost impossible if a bank is under an enforcement action. Actually, it's a corporate work release program. You get to go to work in the morning, but often little else.

For one thing, the bank's main business line may have been taken from it. For example, if a major activity was construction lending, then,inevitably,the bank's asset problems will involve construction loans. It can be counted on that the Cease and Desist order from the regulators will mandate no further construction lending. Period.

It won't say, "Make good construction loans", or "Make them carefully". Rather, it'll be, "What is it that you don't understand about DON'T?".

So, it's likely your previous business model has been suddenly terminated. The bank has to find a new revenue producing business line,fast. And it has to pass regulatory muster, which isn't easy considering that the short list of acceptable activities is pretty short.

Some points to carefully consider:

• How will yoou make money out a new activity? Obviously, the bank hasn't made big money doing it previously.
• Who's going to do it? The bank's current specialists aren't going to turn into new experts overnight, and you don't have much time to make the transition..
• The bank's current management and staff may simply not have the time to realign the business model. They're working on problem asset mitigation and enforcement compliance, which is pretty much a full time job.
• You don't have a lot of rope. Positive results must be quickly apparent.

For a bank, being under a regulatory enforcement action is kind of like being dumped from a boat a couple of miles from land without a life jacket. You're making good progress swimming for shore when the Coast Guard comes along and says, "Stop swimming, tread water".

"But if I do that, I'll eventually drown".

"Hmmm"

Under the circumstances, calling on competent outside help may be essential to survival.

QUOTE OF THE WEEK:

No mercy

"I did not run for office to help out a bunch of fat cat bankers on Wall Street".

President Barack Obama