Bank Regulators Issue Mroe Memorandums =

'Memorandums of Understanding' Surge As U.S. Races to Head Off More Failures By DAMIAN PALETTA and DAVID ENRICHAugust 26, 2008; Page C1 WASHINGTON -- Federal regulators have increased the number of struggling banks they have effectively put on probation, forcing them to fix their problems and try to avoid potentially costly failures. The Federal Reserve and the Office of the Comptroller of the Currency, two of the nation's primary bank regulators, have issued more of these so-called memorandums of understanding so far this year than they did for all of 2007, according to data obtained from regulatory agencies under Freedom of Information Act requests. These secret agreements can force banks to take steps including raising capital, cutting back on risky loans and suspending dividend payments. The depth of problems in the banking sector will become clearer Tuesday, when the Federal Deposit Insurance Corp. updates its list of "problem" institutions. The FDIC had 90 banks on its list March 31. There have been five bank failures since July 11, and many other banks are considered at risk by regulators. Government officials have been brokering the memorandums with institutions large and small, from National City Corp., a Cleveland bank with $154 billion in assets, to $660 million-asset First Private Bank & Trust of Encino, Calif., a unit of Boston Private Financial Holdings Inc. Banks are struggling with their worst crisis in a generation amid the deterioration of real-estate and credit markets nationwide. "The increase in [memorandums] is not surprising given the more challenging market conditions faced by many banking organizations," said Roger Cole, the Fed's director of banking supervision and regulation. They "are useful in specifying weaknesses in risk management and other areas that need to be addressed by bank management." Because banks don't have to disclose the memorandums, bank customers and investors generally remain in the dark. In some recent cases, federal regulators haven't disclosed more-serious enforcement actions against banks until after those banks have failed. Regulators are often wary of igniting a run on the bank, with panicked customers yanking deposits. Coral Gables, Fla.-based BankUnited Financial Corp. said Monday that its $14 billion banking unit recently entered into an agreement with the Treasury Department's Office of Thrift Supervision over concerns about capital levels, among other things. BankUnited didn't specify whether the agreement was a memorandum or some other type of directive, but the regulator is requiring the company to end its option adjustable-mortgage and alternative mortgage businesses. The inconsistency of public disclosures "is very frustrating as an investor in bank stocks," said Gerard Cassidy, an analyst with RBC Capital Markets, noting that an enforcement action represents a red flag about a bank's health and is likely to put the brakes on that company's growth. "It would be very helpful in an investor's analysis if they knew that an agreement was already signed." For regulators, the memorandums are an early-warning system about troubled banks but aren't meant to imply that a bank is at risk of failing. They are often a precursor to more-severe, publicly disclosed enforcement actions if conditions don't improve. "Enforcement actions, bank failures and so on are sort of trailing economic indicators," said Oliver Ireland, a former Fed attorney who is now a partner at Morrison & Foerster LLP. "We're probably not done with all this yet. Not by a long shot." Speculation about these pacts is enough to drive a bank's stock price down. Washington Mutual Inc. took the rare step in June of issuing a statement to knock down rumors that the bank had entered into a deal with its supervisor, the Office of Thrift Supervision. While regulators wouldn't disclose the names of banks with which they've entered into memorandums, three agencies provided tallies of how many agreements they've arranged, offering a snapshot of the problems engulfing the banking industry. As of June 17, the Fed had entered into 32 memorandums with state-chartered banks and bank holding companies. For all of last year, the Fed entered into 31 such agreements. The Office of the Comptroller of the Currency, a division of the Treasury Department that supervises national banks, entered into nine memorandums with banks through Aug. 15, compared with six in all of 2007. The FDIC, which insures deposits at the nation's banks and thrifts and also is the primary regulator of many smaller lenders, had entered into 118 memorandums as of Aug. 15, compared with 175 for of 2007. The Office of Thrift Supervision, which supervises federal savings and loans, refused to disclose its data. Senior Deputy Director Scott Polakoff said in an interview that the number had jumped. "We have seen a significant spike," he said. "The pendulum has swung" toward tougher regulation, said George Haligowski, chairman and chief executive of Imperial Capital Bancorp Inc. of La Jolla, Calif., one of a handful of firms to publicly disclose in securities filings having agreed to a memorandum. In certain years during the past decade, regulators issued more memorandums, indicating that regulators are still grappling to figure out how best to deal with troubled companies. For example, the Office of the Comptroller of the Currency brokered 32 in 1999 and 31 in 2000. The FDIC entered into 198 of these agreements in 2005. Typically, regulators choose to broker a private agreement if they feel management is being cooperative and the bank's problems can be addressed quickly. The cause of those spikes isn't clear. National City, the big Cleveland lender, confirmed it had entered one with the OCC and the Federal Reserve Bank of Cleveland several days after the fact had been reported in The Wall Street Journal.