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Friday, February 19, 2010, 2:46pm PST | Modified: Friday, February 19, 2010, 3:04pm
Former Bank of Clark County executive pleads guilty to felony charge
Portland Business Journal
The Insider
The Bank of Clark County's CEO knew 10 months before the bank's failure that declining property values threatened to put it out of business, according to a plea agreement filed Friday in U.S. District Court by a former colleague.
The agreement outlines former Chief Lending Officer David Kennelly's guilty plea on a count of “scheme to conceal material facts.†It also provides new insight into the causes of the Vancouver, Wash., bank's Jan. 16, 2009, collapse.
It is not clear whether CEO Mike Worthy knew of Kennelly's scheme. But according to Kennelly's plea statement, at least five bank employees were aware of efforts to hide loan details from the Federal Deposit Insurance Corp. and state regulators.
When one of those workers ultimately tipped off the FDIC, Worthy “falsely responded†to a request to talk to bank employees, according to Kennelly's plea.
Kennelly's sentencing is scheduled for May 14. He faces a maximum penalty of five years in prison and a $250,000 fine.
The plea agreement prohibits him from working at any U.S. bank or credit union again. If he violates the agreement, he could face five years in prison and a $1 million fine.
No other former Bank of Clark County employees have been charged. The U.S. Department of Justice declined to comment on whether any are under investigation or may face charges in the future.
Kennelly's crime has its roots in decisions made from 2005 to 2007, during the housing market boom, when the bank began modifying its lending guidelines to win the business of real estate developers.
When home sales cooled, this strategy backfired. Banks are required to set aside a cash in a loan loss reserve account to protect against the risk of default. As property values dropped, the need for protection and reserves grew.
By early 2008, the value of properties underlying Bank of Clark County loans had deteriorated so much that bank officials began to worry about how regulators would react at their upcoming safety and soundness exam, according to a statement of facts in Kennelly's plea.
Worthy, described in the plea agreement as “Chief Executive Officer M.W.,†worried that loan loss reserve requirements would be so steep that they would threaten the bank's capital levels, according to a March 4, 2008, e-mail to Kennelly.
If regulators forced the bank to adjust loan values down based on new appraisals, Worthy wrote, that could start a chain reaction that could ultimately force the bank to stop using brokered deposits, the “hot money†the institution used to fund its loans.
“If that happens, we will be out of business,†Worthy wrote, according to the plea.
Although his prediction ultimately came true, for 10 months the bank held on.
In May 2008, according to Kennelly's plea agreement, “Kennelly and other members of the bank's management concluded that due to BoCC's deteriorating asset quality, lack of capital, and lack of liquidity, it should be sold.â€
But the institution did not find a buyer, while more and more appraisals showed that collateral values of housing development loans were dropping.
Then the FDIC and Washington state bank examiners scheduled a November 2008 safety and soundness examination of the Bank of Clark County.
The bank ordered new appraisals on 23 real estate-backed loans to prepare for the exam.
Before regulators arrived, Kennelly told a vice president identified as “K.B.†that there were several appraisals that Kennelly “did not want to see the light of day,†according to the plea agreement.
Over a series of meetings, Kennelly instructed at least five bank employees, all identified only by initials, to hide appraisals from bank examiners, according to the plea agreement.
Plenty of blame to go around. The greed of the realtors grossly inflating housing prices beyond their real value and contributing to this problem are getting very little of the heat.
Quote from: WarrenJ on February 21, 2010, 03:47:01 PM
Plenty of blame to go around. The greed of the realtors grossly inflating housing prices beyond their real value and contributing to this problem are getting very little of the heat.
I'm not sure that's the realtors fault. Housing were selling for what people felt they were worth.
Realtors get rich from creating the perception of higher values of real estate. There is plenty of blame to go around, from people silly enough to borrow overwelming percentages of their earning ability to purchase real estate at the top of its market, thinking their earnings and the values of the real estate couldn't go down, to the unbridled greed of the real estate, banking and finance industries. We have yet to see the worst of the effects of these actions.
Teddy Roosevelt hit it on the head nearly a century ago.
"Americanism means the virtues of courage, honor, justice, truth, sincerity, and hardihoodthe virtues that made America. The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living and the get-rich-quick theory of life."
I'm far from a supporter of real estate agents. I believe most are dishonest and care little about anything but making more money but.....they have very little to do with the price of real estate. They can try to sell something for a price they pick all day long. In the end someone agrees that the price they are asking is a price they are willing to pay. That's what sets the pricing. I guess you should be blaming all buyers of real estate.
The bigger issue with Realtors? Getting paid a percentage instead of a flat or hourly rate. Why should a Realtor make 6% or 12K selling a house in 2000 for 200K and make 6% or 30K selling the same house in 2003 for 500K? They don't have to do anything different but get to make 150% more? That's the problem with Realtors.
Good points. I do think though that the realty industry is certainly complicit with the banks in convincing and allowing people to spend far too much of their earning power on their housing, just to line their own pockets.
Perhaps it isn't a function of the price of the real estate but a function of the percentage of earning power of the buyer that was exploited.
The banks do carry the major responsibility. They of all groups know that all markets are cyclic and that the real estate market as it existed was unsustainable.
You make it sound like realtors go 'round forcing people to buy property, when the reality is the opposite. Realtors got hit harder than almost anyone during the past two years, and nobody's offering them any bailout $$ either.
During the height of the bubble, houses were getting multiple bids, and bidding wars were common. This was not because of realtors, but of buyers, and banks with lax lending standards. Don't blame realtors if you spent more than you could afford. Noone put a gun to your head.
Quote from: Bun-bun on February 21, 2010, 05:59:35 PM
You make it sound like realtors go 'round forcing people to buy property, when the reality is the opposite. Realtors got hit harder than almost anyone during the past two years, and nobody's offering them any bailout $$ either.
During the height of the bubble, houses were getting multiple bids, and bidding wars were common. This was not because of realtors, but of buyers, and banks with lax lending standards. Don't blame realtors if you spent more than you could afford. Noone put a gun to your head.
If they didn't save up funds during all those years of making big dollars then screw them.
Hopefully Mr. Kennelly took down some of the other execs too.
Quote from: WarrenJ on February 21, 2010, 05:22:53 PM
Good points. I do think though that the realty industry is certainly complicit with the banks in convincing and allowing people to spend far too much of their earning power on their housing, just to line their own pockets.
I bought a house within the last year-the realtor, at no point, was ever privy to what percentage of my pay I was spending. We told the guy our range-we looked at houses in that range. Simple as that.
Quote from: hbliam on February 21, 2010, 06:20:19 PM
If they didn't save up funds during all those years of making big dollars then screw them.
Agreed, but not the point of my argument. Saying that realtors are responsible for a bank failure is like saying builders are responsible for the bank failure.
Both professions are involved in the housing market
Both profit when a new house sells
Both groups got hit hard in the slump
My point is, if you need to blame someone, blame the person who bought a house they knew they couldn't afford, and blame the bank that knew they couldn't afford it, but loaned them a skillion dollars anyway.
If my steak is overcooked, I blame the cook, not the farmer.
Quote from: MrIncredible on February 21, 2010, 08:01:26 PM
I bought a house within the last year-the realtor, at no point, was ever privy to what percentage of my pay I was spending. We told the guy our range-we looked at houses in that range. Simple as that.
that's because you're a smarty
Quote from: Bun-bun on February 21, 2010, 08:05:13 PM
Agreed, but not the point of my argument. Saying that realtors are responsible for a bank failure is like saying builders are responsible for the bank failure.
Both professions are involved in the housing market
Both profit when a new house sells
Both groups got hit hard in the slump
My point is, if you need to blame someone, blame the person who bought a house they knew they couldn't afford, and blame the bank that knew they couldn't afford it, but loaned them a skillion dollars anyway.
If my steak is overcooked, I blame the cook, not the farmer.
You are directing your comments at the wrong poster.
[popcorn]
IMHO the only reason this crisis happened was the banking industry and the gubment, not realtors, not builders and not shady appraisers.
Was it the bankers' fault? Yes and no. The US gubment lowered the percentage of assets necessary to secure a loan. This ratio, when set in favor of more debt, raises the risk of the debt. So the banks started giving loans with lower assets and therefore higher risk. They could have protected this risk, as credit card companies do, by raising the interest rate. Instead, they protected this risk by selling it in derivative markets (sort of, but you get the jist). Could they have said as an industry that they weren't going to use the lower asset threshold? Yes, and some did. Others counted on derivatives to keep them in a better risk situation than the loans they were writing.
Couple this with interest rates held artificially (IMHO) low by the US Treasury and we had the recipe for the perfect financial storm - one that economist had been talking about and seeing globally for probably 8 years before it happened.
What happened next? Which chicken? Who's egg? That is a little harder to sort out, but I think it goes a little like this: On average, Amerikans are incapable of saving money. We, as a nation, have actually dipped into negative savings. With artificially low interest rates and more lax mortgage standards, people that already owned houses borrowed against future appreciation to pay for current consumption. The gubment pushed and pushed for home ownership, even for those that probably shouldn't own a home. Why did the government push? Because they knew that all of the asset bubble was being spent in the economy. In fact, it was fueling our growth. So why shouldn't the gubment encourage more deficit spending? (Because it was TOO RISKY - but nobody pays attention when it is raining money). Where did the bubble come from? Speculation on unsustainable growth levels spurred to life by this "artificial" injection of cash that was required as asset only a few years before. So we have a gigantic asset floating out there on bank asset sheets that is worth much less than value on paper. You can't hedge that sort of risk, at least not for very long.
I'm not saying some realtors didn't give bad advice. I'm not saying some appraisers inflated appraisals to meet loan needs. Trouble is, that shit has been happening long before this crisis and will continue. (I've had my real estate license in several states, so I'm not bashing realtors). What changed? The risk buffer, in the form of the debt to asset ratio, was lowered leaving the US banking industry teetering on the brink of melt down.
Quote from: hbliam on February 21, 2010, 05:10:34 PM
The bigger issue with Realtors? Getting paid a percentage instead of a flat or hourly rate. Why should a Realtor make 6% or 12K selling a house in 2000 for 200K and make 6% or 30K selling the same house in 2003 for 500K? They don't have to do anything different but get to make 150% more? That's the problem with Realtors.
That really makes no sense.
Quote from: WarrenJ on February 21, 2010, 03:47:01 PM
Plenty of blame to go around. The greed of the realtors grossly inflating housing prices beyond their real value and contributing to this problem are getting very little of the heat.
The realtor can't inflate the value of the house if no one is willing to buy it at the inflated price.
No one will buy it at the inflated price if a bank won't lend the amount needed.
The bank won't lend the amount necessary if an appraiser doesn't issue their professional opinion that the property is worth the amount in question.
This happened in Indy a couple years ago... a couple of bankers and appraisers conspired to over-value an entire neighborhood of ghetto-ass foreclosures and borrow absurd amounts against the properties. $25,000 homes were being mortgaged for $280,000.
Quote from: angler on February 22, 2010, 05:19:32 AM
IMHO the only reason this crisis happened was the banking industry and the gubment, not realtors, not builders and not shady appraisers.
Was it the bankers' fault? Yes and no. The US gubment lowered the percentage of assets necessary to secure a loan. This ratio, when set in favor of more debt, raises the risk of the debt. So the banks started giving loans with lower assets and therefore higher risk. They could have protected this risk, as credit card companies do, by raising the interest rate. Instead, they protected this risk by selling it in derivative markets (sort of, but you get the jist). Could they have said as an industry that they weren't going to use the lower asset threshold? Yes, and some did. Others counted on derivatives to keep them in a better risk situation than the loans they were writing.
Couple this with interest rates held artificially (IMHO) low by the US Treasury and we had the recipe for the perfect financial storm - one that economist had been talking about and seeing globally for probably 8 years before it happened.
What happened next? Which chicken? Who's egg? That is a little harder to sort out, but I think it goes a little like this: On average, Amerikans are incapable of saving money. We, as a nation, have actually dipped into negative savings. With artificially low interest rates and more lax mortgage standards, people that already owned houses borrowed against future appreciation to pay for current consumption. The gubment pushed and pushed for home ownership, even for those that probably shouldn't own a home. Why did the government push? Because they knew that all of the asset bubble was being spent in the economy. In fact, it was fueling our growth. So why shouldn't the gubment encourage more deficit spending? (Because it was TOO RISKY - but nobody pays attention when it is raining money). Where did the bubble come from? Speculation on unsustainable growth levels spurred to life by this "artificial" injection of cash that was required as asset only a few years before. So we have a gigantic asset floating out there on bank asset sheets that is worth much less than value on paper. You can't hedge that sort of risk, at least not for very long.
I'm not saying some realtors didn't give bad advice. I'm not saying some appraisers inflated appraisals to meet loan needs. Trouble is, that shit has been happening long before this crisis and will continue. (I've had my real estate license in several states, so I'm not bashing realtors). What changed? The risk buffer, in the form of the debt to asset ratio, was lowered leaving the US banking industry teetering on the brink of melt down.
Great analysis.
Quote from: howie on February 22, 2010, 07:58:11 AM
Great analysis.
Thanks. It's what I do for a living......
Quote from: angler on February 22, 2010, 08:10:28 AM
Thanks. It's what I do for a living......
I thought you fished?
Quote from: MrIncredible on February 22, 2010, 08:18:10 AM
I thought you fished?
If I could get paid to fish without having to guide dumb rich dudes (and I do mean "dudes" in the classic sense of the word), I would. Instead I do economics consulting, primarily for policy advocacy, for enviro NGO's and the sporting industry. I do get paid in fishing tackle sometimes......
Quote from: hbliam on February 21, 2010, 05:10:34 PM
The bigger issue with Realtors? Getting paid a percentage instead of a flat or hourly rate. Why should a Realtor make 6% or 12K selling a house in 2000 for 200K and make 6% or 30K selling the same house in 2003 for 500K? They don't have to do anything different but get to make 150% more? That's the problem with Realtors.
That's not this real issue IMO. I don't mind the flat rate fee...I mind that in many states the minimum rate that realtors charge is set by law, as a result of lobbying by the realtors. This eliminates competition among realtors. As a consumer you should be able to pay someone less if they're willing to take it, and a vendor should be allowed to charge less if they choose. Red Fin was/is in a lawsuit here in WA over this exact issue, as they don't adhere to the minimum % fee.
Seems to me that this is one very small fish in a very large murky pond. :-\
seems to me that the thread has been jacked...........I still hope the banker does go to prison and is fined and hopefully the powers that be who investigate this kind of thing bring more charges against more people and throw the lot of them in jail if they are found guilty of improper things. The law is the law and no one is above it. Ever! [thumbsup]
Badgalbetty is now off shopping..........oh its so good to be a girl!
Have a happy day!
BGB.
All this talk about fish is making me hungry.
Quote from: badgalbetty on February 22, 2010, 02:39:54 PM
seems to me that the thread has been jacked...........I still hope the banker does go to prison and is fined and hopefully the powers that be who investigate this kind of thing bring more charges against more people and throw the lot of them in jail if they are found guilty of improper things. The law is the law and no one is above it. Ever! [thumbsup]
Badgalbetty is now off shopping..........oh its so good to be a girl!
Have a happy day!
BGB.
Thread get jacked on this board?
I was gonna comment on this topic, but I've seemed to misplace my scapegoat. Let's just say it was bad decisions all around.
I have to add my two cents on behalf of realtors.
My dad is one, and he's a good one.
You all likely don't realize what goes on behind the scenes and how much most of these men and women work for that 6%
And speaking of 6%, that's not what they get.
Take a 100k house my dad has listed, 6% is $6000.
Another agent brings a buyer. That 6% get's split. Now he's down to 3%. Then that again get's split between him and the realty agency. Now he's down to 1.5%, or $1500. Since reatlors are independent contractors, they pay their own taxes. He'll get the check for $1500, but puts half of it away to cover takes (approx)
So now he's got $750 to work with.
He works 10-14 hour days, normally 7 days a week. Many of his listings he goes and sells people on listing with him. A smaller percentage contact him to list on their own. Sometimes it takes a long time to get people to list (one instance was years)
The good ones have their CRS and GRI accreditations, which my dad does. It also takes a lot of time to get those, and it's mixed in with normal work hours. My dad was doing 14 hour days for a long time to get everything done he needed to get done.
He'll do a market analysis to determin where a house should be priced. In the end the seller is the one that agrees to that, or doesn't and sets their price. If a realtor inflates a home's price they're really just shooting themselves in the foot. A house will sell for somewhere in a range of what the market says it's worth. An inflated price will leave the house sitting.
So to summarize, they're not all greedy people who don't care about the buyer/seller. Most of them do what's right for their client (i can't say all because some aren't that great)
BGB- sorry for the jackage ;D
OK, OK, I'll bite on the realtor thing. I'd like to say I'm sorry for the threadjack and thank BGB for starting the thread.
Two points:
1) This relates to the other thread on respecting another profession's right to make a living. They charge what they charge because people think it is a good value and pay it. Also, as Monsterlover pointed out, the fee is often (more often than not) negotiated WAY down from the starting place. I know because I have sold lots of property as a licensed real estate agent (seller's agent). If you don't like paying the fee, by all means do it yourself. Studies show that realtors generally earn their keep, but by a thin margin.
2) Realtors are the best example of what economists call the principal/agent problem. The jist of this issue is that your incentives as the seller of property and the incentives of the real estate agent run opposite of each other. The realtor's incentive is to earn his commission with the least amount of inputs of his time and materials. The seller's incentive is to sell the house for as high a price as possible. Let's say as the seller you want to sell your house for $250k, which is on the high side of your 'hood and the market in general. The realtor wants to sell it for $230k because he knows it will move quickly. For the sake of argument lets say the realtor knows that he can sell at $250k, but it will take another 30 days and another open house. If the seller gets their price, they make $20k more but the real estate agent only makes $1,200 more. That extra $1,200 is unlikely to cover his time for the additional 30 days. I'll let you guess what the realtor will advise their client to do. I'll also let you guess how willing the realtor will be to negotiate the price downward in all situations, particularly as the listing time grows. Defiinitely not in the seller's best interest.
I can't agree.
I'd wait 30 days and do an open house for an extra $1200.
The realtor wants the house to sell for as much as possible because they'll make more. If it's been f/s for a long long while, and they get that offer of $230k, likely they'd advise to seriously consider it.
How long till that next offer comes in?
Also to further support that they likely would wait the extra month for the higher price, keep in mind that the house that's listed for $250k is probably not their only listing.
They have other things to do in that 30 day time span that will pay them.
Hopefully [laugh]
Quote from: Monsterlover on February 23, 2010, 06:54:38 AM
I can't agree.
I'd wait 30 days and do an open house for an extra $1200.
The realtor wants the house to sell for as much as possible because they'll make more. If it's been f/s for a long long while, and they get that offer of $230k, likely they'd advise to seriously consider it.
How long till that next offer comes in?
Also to further support that they likely would wait the extra month for the higher price, keep in mind that the house that's listed for $250k is probably not their only listing.
They have other things to do in that 30 day time span that will pay them.
Hopefully [laugh]
This topic is also regional. Houses in my hood are selling for 600K-several million. So that poor realtor makes a paltry 9K if he has as crappy a commission structure as your Dad. The ones I personally know take 70-90% of the commission not 50%. So they are making 12K and up on a "cheap" house. Yes, some are honest but the majority are as angler said, motivated to your detriment. And no, $1,200 is not enough for most of these guys to work another 30 days trying to find a buyer. It wouldn't be for me either.
Quote from: hbliam on February 23, 2010, 01:33:08 PM
This topic is also regional. Houses in my hood are selling for 600K-several million. So that poor realtor makes a paltry 9K if he has as crappy a commission structure as your Dad. The ones I personally know take 70-90% of the commission not 50%. So they are making 12K and up on a "cheap" house. Yes, some are honest but the majority are as angler said, motivated to your detriment. And no, $1,200 is not enough for most of these guys to work another 30 days trying to find a buyer. It wouldn't be for me either.
I want to be more clear - just because incentives run cross purposes doesn't make them "bad" or "dishonest." The free market is about getting as much as you can for as little as possible - both for the consumer and for the producer or service provider. This gets a little weird with real estate agents because they are paid to have your best interests at heart. But they can't. This is how we all behave in the majority of transactions, the majority of the time. There is nothing wrong with that. It is important as consumers to keep our eyes open. Perhaps this is why Theo got so upset in the electrician thread. He feels the high price was an insult and feels they are being dishonest with him. On the contrary, the electricians are simply trying to get the most for their service as possible. They wouldn't put the price out there if they didn't get it and, because the bids were all clustered around each other, it was probably pretty close to the going rate.
That said, $1200 is in the neighborhood of my daily rate. Would I want to keep a house on the market for 30 days for one extra day income? Likely not as I could only afford to spend an additional 8 hours on the sale. Would a new guy with a much lower daily rate? Perhaps if he felt he would have less in it than he would get out. My point is everybody is different, but nobody works harder unless they have to (need the money) or the want to (motivated by something other than money). There is NO such thing as altruism.......There ain't no such thing as a free lunch either.
Quote from: angler on February 23, 2010, 01:49:43 PM
There is NO such thing as altruism.......
Alright, Hobbes. [roll]
[cheeky]
Thomas Hobbes or Hobbes of Calvin & Hobbes?
Quote from: angler on February 23, 2010, 05:13:08 PM
Thomas Hobbes or Hobbes of Calvin & Hobbes?
The first one.