Lesniak to bank regulator: You don't understand

State Senator Ray Lesniak was a director of the failed bank.

Years ago, before he was elected to Plainfield's City Council, the late Ray Blanco and I had a conversation with Mayor Al McWilliams about trying to interest Elizabeth's First BankAmericano in opening a branch in Plainfield.

The bank, which had as its stated mission offering a full range of banking services to the Hispanic (and Portuguese) community, seemed a perfect fit for Plainfield, where the number of Spanish-speakers had grown rapidly over the previous decade.

McWilliams agreed it would be something to look into, but in the press of everyday matters, the idea of attracting an Hispanic bank never took off, especially after George Norcross' Commerce Bank (since taken over by Toronto Dominion Bank and now known as TD Bank) became interested in Plainfield and local branches of other banks -- particularly Bank of America -- began to aggressively court Hispanic customers.

Suddenly last summer, or so it seemed to this casual observer, First BankAmericano was closed down by the FDIC, to be reopened as branches of Crown Bank (see Ledger here).

Turns out, however, that there was quite a backstory, including a severe warning letter from the FDIC in 2007 --

...Rutgers business professor Darius Palia says the FDIC's 2007 warning letter is a stunning criticism of the board of directors' policies.

"Usually it'll be two or three items. This was like a blanket," Palia says. "It's loans, management, security, capital. It was right across the board." (Story here.)

Casual observers were unaware of the scale of issues involving the bank's board of directors, or even who those directors were. And certainly unaware that Sen. Bob Menendez had attempted to intervene with the FDIC to save the bank. That is until February, when the larger story broke (see here, and here) and Lesniak and other directors' roles got more scrutiny.

Lesniak went on the counter-attack, publishing an OpEd piece on PolitickerNJ (see here), explaining that directors --

...even brought their loan needs to the bank, despite having long-standing relationships with other, bigger banks, so First BankAmericano could make the profits from the loans, a policy approved by banking regulators and a good business practice as well...

Still, the story refused to quite die.

The other day, listening to WNYC in the car, I was surprised to learn that the FDIC is looking further into the matter of the failed bank, spurring the public radio station to examine the bank's loans and finding its CEO, Holly Bakke (a former state banking commissioner), unable to explain how the bank 'ended up with such a lopsided portfolio of bad loans -- or how the board of directors allowed it to happen'.

WNYC's story went on to relate that the bank had given Lesniak a loan for $575,000 in 2002, in which he pledged a Cape Cod house as collateral, selling it two years later for $200,000 less than the loan amount.

What caught my ear next was Lesniak's voice saying --

...anybody who has any modicum of knowledge of lending practices probably at the level of the eighth or ninth grade in school understands that mortgages are given as collateral for many things (emphasis mine --DD)...

Hmmm. Mortgages given as collateral?

Having recently finished reading Niall Ferguson's Ascent of Money (also a PBS series, see here), I thought the PROPERTY (i.e., the Cape Cod house) is given as collateral, to ensure that the lender can be made whole if the borrower defaults by taking possession of the collateral. (See an explanation here.)

Not only was my understanding of the lending process -- and by inference, Niall Ferguson's -- faulty by Lesniak's lights, he implies the FDIC doesn't know what it is talking about either.

We'll see.

The FDIC after all, is THE regulator, which makes them THE DECIDER, to use a once-familiar phrase.

And the Senator is a former officer, with assets the FDIC can go after if it decides there was any hanky-panky.

The FDIC will have the final say about whether there was
hanky-panky at the failed First BankAmericano.

---

• Ledger, 8/01/2009: "Regulators close NJ-based bank"
• WNYC, 12/28/2009: "Bank Autopsy: NJ's First BankAmericano"
• Examiner.com, 2/10/2010: "First BankAmericano scandal breaks wide open"
  
• Record, 2/10/2010: "Lesniak, others got insider loans at failed bank"
• OpEd, PolitickerNJ, 2/28/2010: "Lesniak on First BankAmericano"
  
• WNYC, 3/28/2010: "In New Jersey, a bank is dead, but not buried"
• PBS: "The Ascent of Money"
  
• Wikipedia: "Collateral"
  

-- Dan Damon [follow]

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