Commerce Bancorp: Why Tim Long is Wrong

Jul.25.07 | About: Commerce Bancorp (CBH)

Allow me introduce you to one Timothy W. Long. He is Senior Deputy Comptroller in charge of mid-size and community bank supervision at the Office of the Comptroller of the Currency. Which is to say, among bank regulators, he is a very big cheese.

He also happens to be, I might add, one of the most ham-handed financial regulators I’ve ever had the misfortune to run across. In the late 1980s, for instance, Long helped bring about a premature consolidation of the New England banking industry when he forced lenders there to make unnecessarily large additions to their loan loss reserves following some deterioration in their portfolios of highly leveraged transaction [HLT] loans. In the end, Long’s overkill severely stressed banks’ finances so much that many were forced into fire sales. How that helped taxpayers (not to mention shareholders) I still don’t understand.

Then in the early 1990s, Long was the examiner-in-charge at Wells Fargo (NYSE:WFC). Same story. After the bankruptcy at Revco (a drug store chain that had been acquired via HLT financing), Long told Wells to write down its exposure to Revco debt--to zero. It was a ludicrous idea. Carl Reichardt, the banking legend who was then Wells’ CEO, pointed out that Revco was generating ample cash flow with which to service its debt. Long still said no. Reichardt flew to Washington to meet with Long’s boss, the head of the OCC. Still no. So Wells would have to write down the loans, which were current, down to nothing.

Rather than take what would have been a huge hit, Reichardt instead turned around and sold the loans for 50 cents on the dollar. They ended up being repaid at 100 cents. So once more, Long seemed bent on torpedoing a bank’s balance sheet, for no apparent good reason. How this is supposed to benefit taxpayers, again, I have no idea.

Long still wasn’t done at Wells. After HLTs came Wells’s commercial real estate book—which was generating ample cash flow. But yet again, Tim Long was convinced he knew more about the quality of Wells Fargo’s borrowers and collateral than the bank did. Sure enough, he demanded the bank drastically over-reserve for future credit problems that he alone saw. In the end, he was wrong one more time. Wells Fargo’s reserve for its commercial real estate loans proved to be over $1 billion in excess of what turned out to be needed.

If you have the sense that Tim Long is a power-obsessed bureaucrat who seems a lot more in love with throwing his weight around than he is with ensuring the safety of the banking system, you’re getting the picture. The reason I mention all this has to do with the recent goings-on at Commerce Bancorp (CBH). The head regulator there these days happens to be—you guessed it—Tim Long.

It’s of course no secret that I’m a big fan Commerce and its recently ousted CEO, Vernon Hill, and have been for more than a decade. I don’t believe any individual and institution have had a greater positive impact on retail banking in the United States over the last ten years than Vernon and Commerce have. Vernon has built a great institution for customers and shareholders. And perhaps most tellingly, Commerce is extremely sound financially—something that regulators should presumably be in favor of.

But we’re dealing with Tim Long here, so forget about rational behavior. It turns out Long doesn’t like Vernon. In particular, he doesn’t like the related-party transactions that occur between Commerce and various entities tied to company insiders, despite the fact that the transactions have been fully disclosed for years. But most of all, Tim Long doesn’t like bankers who don’t kowtow to his every command, regardless of how irrational.

Commerce and the OCC clearly could have resolved the related-party-transaction issues with a settlement far less draconian of the ouster of the company’s founder and CEO. As I say, all the related-party deals had been properly disclosed. None even remotely put at risk the safety and soundness of the bank. But that didn’t matter to Long. He’s a bureaucratic power freak, and wasn’t interested in merely a rational solution.

The fact that Tim Long still has a job at the OCC says there is something seriously wrong within that organization. That he continues to be put in ever-more responsible positions there is extremely troubling. And that he and his supersized regulatory ego forced out Vernon Hill, one of America’s greatest bankers, from the company he founded, simply because Vernon wouldn’t kiss his backside makes me furious and sick!

History will remember Vernon Hill as a great entrepreneur and revolutionary banker. History likely won’t remember Tim Long, at all, except perhaps as a poster boy of a regulator drunk with power that did more harm than good. Financial regulators are supposed to protect the safety and soundness of the banking system. They are not supposed to use the power of the federal government to destroy the careers of visionary bankers in order to feed their own egos. But that’s exactly what Tim Long has done. What a disgrace.

Tom Brown is head of