Submitted by Stanley Haar of Haar Capital Management, LLC

7 Questions for Jamie Dimon that no Member of Congress had the Courage to Ask

"What...me worry?"

The Golden Rule of government, “Whoever has the gold makes the rules”, was on full display in Washington over the past week as JP Morgan’s Jamie Dimon appeared at hearings held in both the Senate and the House to answer questions about the bank’s recently reported trading loss.

I am in full agreement with the argument that it is actually none of the government’s business when the shareholders of a private bank lose money due to the bad decisions of management, as long as the loss was incurred legally and does not threaten the integrity of the financial system.

However, the Congressmen and Senators missed an excellent opportunity to ask Mr. Dimon about any number of financial scandals (Madoff, Jefferson County, robo-signing, etc.) in which JP Morgan Chase has been involved,  including the on-going MF Global scandal.

In our representative democracy, where Senators and Congressmen are supposed to serve the public interest, not the interests of big campaign bundlers, it is sad to report that not one member of Congress had the courage to ask Jamie Dimon the following questions:

1.  It is reassuring to hear that JP Morgan has more than enough of its own capital to cover the trading losses that triggered this hearing. But suppose for the moment that under some circumstances the size of the loss were to grow to a substantially larger amount than you now anticipate. If you didn’t have enough capital to cover the loss, would you ever consider taking money from your customers’ accounts to cover the losses? That would be illegal, wouldn’t it?

Permit me to ask your one more not-so hypothetical question: If you were standing in the lobby of a JP Morgan Chase branch, and you saw through the window that one of your customers was robbing the candy store across the street, and the customer then ran into your bank with a bag of cash, would you let that guy pay off his car loan with the cash in his bag?

Isn’t that in essence exactly what happened last October with your customer, MF Global? According to the very detailed report released on June 6 by Trustee Giddens, the infamous transfer of $175 million from MF Global to your bank on October 28 to pay off an overdraft was a transfer entirely between JP Morgan accounts: from the segregated customer trust account to the MF Global Treasury house account to a JP Morgan London account. All of these moves were completely transparent on your blotter.

Your own employees, Donna Dellosso and Barry Zubrow, witnessed those transfers and were so concerned about them that they immediately requested a letter from Jon Corzine and Laurie Ferber, basically stating that they were not stealing customer money. You never got that letter, but kept the money anyway. Weren’t you concerned about receiving stolen property, and potentially being an accessory to the looting of customer accounts? Did you call the CFTC or SEC to report your suspicions?

[Mr. Dimon told the Senate Banking Committee that his bank received verbal assurances that the transfer was legitimate; however the Giddens report directly contradicts this………see page 134: MF’s in-house attorney, Dennis Klenja, “advised that he made no assurances of any kind to JPM”.]

JP Morgan was MF’s primary banker. You knew that they were scrambling to come up with cash to stay alive, day-by-day, hour-by-hour. Did you really think that they suddenly found a couple of hundred million dollars of excess cash in the segregated account? Or did you watch them steal customer money from a JP Morgan account,  and then ask for the letter as a CYA in case they got caught?

  

2.  Last month, your bank returned approximately $168 million in funds to the MF Global estate, money that you had been holding for over 7 months. Mr. Giddens believes that JP Morgan is still holding on to money that rightfully belongs to MF Global, and stated in his report that he will be suing you if no agreement to return the money is reached within 60 days. Are you aware of that? Can you tell us here today how much MF Global money is still being held by your bank?

 Do you have systems and controls in place to identify what money belongs to you and what money belongs to your customers?

Millions of people have custodial accounts at JP Morgan for their retirement funds or their children’s education. Should they be worried about their funds being commingled with the bank’s own funds?

It seems that JP Morgan has a habit of commingling its own funds with customer segregated funds. Weren’t you fined 33 million pounds in the UK last year for failing to properly segregate 23 billion dollars in client assets? That improper commingling took place over a period of 7 years, correct? And isn’t it true that in April of this year the CFTC ordered you to pay a fine of $20 million to settle charges that JP Morgan mishandled segregated customer funds at Lehman Brothers between November 2006 and September 2008? The CFTC also stated that after Lehman Brothers filed for bankruptcy, JP Morgan improperly declined to release customer segregated funds linked to commodity accounts. 

Is that your modus operandi, Mr. Dimon, when a customer of the bank seems headed for bankruptcy: to grab onto as much cash and collateral as possible, and then only release it after being sued or ordered to return it by regulators?

3.  MF Global had many subsidiaries scattered throughout the world, but effectively operated as one company underone management. Were you surprised by the fact that in bankruptcy, MF Global was treated as two entities, with the Holding Company allowed to continue operating under Chapter 11, led by the very same executives who had blown up the company? Did your attorneys (either in-house or outside counsel) ever meet with MF Global executives and/or attorneys to discuss or plan the structuring of the bankruptcy?

As a result of the Chapter 11, you were able to continue trading with MF Global, and were involved in a sizable transaction involving European sovereign debt in early November; is that correct? According to Mr. Giddens’ report and news articles published by the Wall Street Journal, over $14 billion in MF Global fixed income positions were liquidated by the London Clearing House at below-market prices, resulting in substantial profits for the buyers.  JP Morgan bought some of those bonds, along with the George Soros Family Trust, is that correct? And JP Morgan is one of the owners of the London Clearing House, is that also correct? Did you use your influence at the LCH to increase margin requirements for MF Global?

At the time when those transactions took place, it was already an established fact that over $1 billion was missing from customer segregated accounts, and you were certainly aware that customer money had been repo-ed to support those sovereign bond positions. So didn’t it seem probable to you that you were dealing in stolen property, sometimes referred to as “fencing” or money laundering? How much money did you make from those bond purchases?

In his report, Mr. Giddens stated that “because these transactions took place at the LCH, the Trustee has not had full transparency into these transactions or the amounts that might be owed to [MF Global customers]”. Given that JP Morgan is a co-owner of the LCH, perhaps you could ask them to provide some transparency on those transactions to Mr. Giddens. Don’t you agree, Mr. Dimon?

In another transaction that took place two weeks after JP Morgan was placed on the bankruptcy committee, you purchased MF Global’s ownership share in the London Metals Exchange (LME). That stake is now worth $103 million, a gain of over 150% in 7 months. Here again, JP Morgan is making a huge profit from dealings in the remaining assets of MF Global, while customers who had segregated custodial deposits in your bank await the return of their missing $1.6 billion. Does that seem right to you, Mr. Dimon? Don’t customers have priority under the law for recovery of their stolen money?

4.   When did you first become aware that MF Global was at risk of going under, Mr. Dimon?

And which of the following choices best describes your reaction; was it:

A)    As a custodial bank, we have a legal and fiduciary duty to our customers. How can we make sure that their deposits are protected?      

or was it:

B)    Holy Crap! Those guys owe us over a BILLION dollars. What can we do to make sure we get our money back?

Trustee Giddens reports (page 131) that two employees of JP Morgan, Fernando Rivas and Barry Zubrow, called Jon Corzine regarding the $175 million they owed to JP Morgan-UK.  Are you aware of that call? Did they make it on your orders? According to Giddens, your employees threatened to stop handling MF Global’s asset sales until JP Morgan got its money back. It seems that you were willing to push MF Global over the cliff unless they wired the money to you immediately.

Is that the standard way that JP Morgan does business? Do you think that threat was a factor in MF’s decision to reach into customer segregated accounts to come up with the money?

When was the last time that you personally spoke with Mr. Corzine? Did you speak with him during the last two weeks of October, last year? Did you ever say anything to him that might be interpreted as a threat, if MF Global caused losses at JP Morgan?

Mr. Corzine told our Committee under oath last December that he never directly ordered that money be taken from customer accounts to satisfy MF’s debts to you. Given that MF Global was in a desperate battle for survival and desperately trying to raise cash during the last week of October,do you think it would have been reasonable for him to think that suddenly MF Global had hundreds of millions of dollars in excess cash sitting around that they could wire to you? The total amount of customer money that is now missing, $1.6 billion, is equal to more than one and a half times the total net worth of MF Global as reported on their last financial statements. Would it be reasonable for a CEO to lose track of 150% of the value of his entire company? If, in fact, he didn’t ask about where the money was coming from, could it be that he it was because he didn’t really want to hear the answer, or already knew the answer? Isn’t this a classic example of WILLFUL BLINDNESS?

5.   Did any JP Morgan executives or attorneys participate in any way with the discussions or process involved in structuring the MF Global bankruptcy, including the decision to allow MF Global Holdings to continue operating under Chapter 11? Did anyone from JP Morgan, or representing JP Morgan, participate in the big conference call in the early hours of the morning of October 31 where those decisions were made? Was JP Morgan represented at the November 1 hearing where the Chapter 11 petition was approved?

6.  You have been a Director of the NY Fed since 2007, is that correct Mr. Dimon? Did you find it strange that, despite its small size and undercapitalization, MF Global was suddenly given Primary Dealer status by the NY Fed shortly after the arrival of Mr. Corzine? Prior to his arrival, MF Global’s application had been rejected, isn’t that correct? Do you think that the fact that Mr. Corzine was an old friend and colleague of Fed President Dudley [EB: see our post, "Breakfast with Jamie," for just how tight this couple is], and has lots of friends in high places here in Washington, might have had any influence on that decision? Did you raise any objections to it, or warn the Fed about the weakening financial condition of MF Global in 2011? If not, didn’t you have a duty to do so in your capacity as a Fed Director?

7.  As we sit here today, MF Global’s customers, many of whom had their segregated accounts at your bank, are still waiting for restitution of the $1.6 billion illegally transferred from those accounts. Who do you think is responsible for that? Should anyone be held accountable? Mr. Corzine, you, regulators??? Do you think that prison time would act as a good deterrent to this kind of thing happening again???

* * *

EB: And, since we can't mention "Dimon" without thinking of bonuses, here's a bonus question:

Mr. Dimon, as a director of the New York Fed, you would have been required to vote on any third party contract greater than $100,000 awarded pursuant to the so-called sole-source exception of New York Fed Operating Bulletin 10.  According to a New York Fed internal email compelled by Congressman Issa, BlackRock was awarded the contract to "wind-down," Maiden Lane under this very exception, despite, apparently, some consternation amongst those involved in the decision.  As a reminder, Maiden Lane was handed over the toxic Bear Stearns portfolio when the rest of the company was gifted to your very own JP Morgan, which loaned $1.15 billion to ML and was first in line to take any losses.  Yet, amazingly, BlackRock was able to trade ML to a profit by churning its MBS portfolio while it also traded MBS securities on behalf of the Fed as part of QE1.

Q: In your role as a director of the New York Fed, did you vote on whether or not to grant the BlackRock sole-source contract for Maiden Lane or any other ML-related contracts, for that matter?  Do you think there might have been a conflict of interest in this voting process, given your firm's involvement with Bear Stearns?  

Why is it that the GAO, which audited the ML contracts, is on record stating that no ML contracts were awarded pursuant to the sole-source exception, despite the internal email that discloses the contrary?  Mr. Dimon, were you involved in the decision to cover up the fact that BlackRock was inappropriately awarded a critical contract under suspicious circumstances, and then lie about it to the GAO?  Is there any other plausible explanation for these inconsistencies?

Exhibit A

Exhibit B

Will the DOJ Investigate if JP Morgan Used LCH.Clearnet As a Front to Tank MF Global and Take Customer Money?

It looks like Eric Holder's dogs at the Department of Justice are doing the CME Group a favor by investigating their largest derivatives swaps competitor, LCH.Clearnet, under Federal antitrust provisions.  But are they also going after the large banks, and JP Morgan in particular, in roundabout fashion?  And just where does the omnipresent MF global connection fit in?  From Reuters today:

LCH.Clearnet, the largest clearinghouse in the $400 trillion interest rate derivatives market and also a credit derivatives clearing service, is owned by its members including banks such as JPMorgan Chase, Goldman Sachs and Deutsche Bank. A spokeswoman for the firm declined to comment. 

The Justice Department is concerned that a small group of the world's largest banks can use their ownership and influence over key market infrastructure including clearinghouses, trading platforms and data services to impede competition. 

Justice Department spokeswoman Alisa Finelli declined to comment on specific details of the probe, or the firms involved. But she did outline three areas the DOJ is focused on.
"The Antitrust Division is investigating the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries," she said.

The Role of LCH.Clearnet

As followers of the MF Global saga may recall, it was LCH (among others) who delivered crushing margin calls on MF Global during its final week, $211 million of which in cash and securities was ponied up to LCH alone.  However, it was the final $310 million call that sent its UK affiliate into Special Administration (similar to US bankruptcy), since it was also on the hook for collateral calls on these trades.  From Trustee Giddens' June 6, 2012 report:

On many occasions, we've thrown out the fact that LCH is owned and operated by the large banks, including JP Morgan, but the DOJ investigation is one of the few media generating stories that highlights this fact.  The LCH bank syndicate also participates in revenue streams from its multi-trillion dollar SwapClear platform, as we noted here.  Finally, based on court transcripts, JP Morgan seems to have exerted influence over the bankruptcy structure and content of the first day motions.  

Lies Before the Bankruptcy Court

As Daniel Collins writes for Futures Mag (disclosure: quoting our own work):

[T]he original sin in the MF Global debacle is how the firm was allowed to be split — the futures commission merchant/broker dealer (FCM/BD) MF Global Inc. (MFGI) into a SIPC liquidation and the parent MF Global Holdings Ltd. (MFGH) into a Chapter 11 proceeding — with a shortfall in customer segregated accounts. 

It has been pointed out that this was aided by an attorney for MFGH telling a whopper to Bankruptcy Judge Martin Glenn at the initial hearing on Nov. 1.  Attorney Kenneth Ziman of Skadden Arps when asked about press reports of a shortfall told the judge, “I think, to the best knowledge of management, there are no shortfalls, Your Honor. All funds are accounted for, and I’m talking about the broker-dealer. That’s to the best knowledge. All funds can be accounted for.”

No one seemed to jump in to correct the record even though attorneys for the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) attended that hearing and Laurie Ferber, General Counsel for MF Global, acknowledged the day before that indeed there was a shortfall in customer funds. 

The Judge asked about this specifically so there is a chance he may have acted differently if he was given an honest answer. 

Several interested parties have stated that the appropriate action — one perhaps more likely to have occurred had the facts of the situation been clearly presented — was for a judge to place the entire entity in receivership. A receiver would have more power to pursue leads and claw back money and perhaps more importantly, a company that operated as one entity would not have been able to divorce itself from its responsibility of having to segregate customer funds and the priority of those customers’ property over general creditors would have been maintained. That is what happened in this case with MFGH and its main creditor JP Morgan attempted to jump in front of customers.

Just Who Was the Ultimate Counterparty to the Corzine Trade?

While the broker unit Trustee and prior press reports have cast LCH's role in the repo-to-maturity trades as that of simple clearing agent, a February 2012 London court filing by MF Global UK's Special Administrator, KPMG, gives a tantalizing clue that it might just have been LCH affiliates themselves who were the ultimate counterparties (thus, the trades would have been prop, not flow, as has been assumed [1]).  From the filing:

The Repo to Maturity claim (“RTM Claim”) 
81 From September 2010 onwards, the Company entered into a number of RTM transactions with MFG Inc involving European sovereign bonds.  Under the RTMs, MFG Inc would repo the bonds to the Company [MF Global UK] and the Company would enter into a corresponding repo of the same bonds with a market counterparty of which the most significant were London Clearing House entities.  MFG Inc has since submitted a creditor claim for $519,044,608 (£321,569,053) against the Company in connection with the RTM transactions. 

It would appear that "entities" denotes affiliation because, had KPMG meant the various hedge funds and banks that conduct clearing business through LCH, it would be more appropriate to call them "members" or "customers."

Soros Profits, Customers Lose

Further, it's instructive to recall that LCH, with permission from KPMG, liquidated the $14.7 billion gross portfolio at reportedly below market prices to George Soros and others.  From the Giddens' report:

After the SIPA proceeding commenced, information came to light that LCH had liquidated the positions in European sovereign debt that MFGUK maintained from MFGI. In a November 29, 2011 press release, LCH reported selling “MF Global’s fixed income positions, which had a combined nominal value of [Euro] 14.7 billion . . . with no recourse to the default fund.” According to some press reports, LCH sold the RTM positions at a discount from current market value to George Soros and others. Because these transactions took place at the LCH, the Trustee has not had full transparency into the these transactions or the amounts that might be owing to MFGI. The Trustee continues to pursue a full accounting from the MFGUK Joint Special Administrators on this and other issues.

Yet we know from KPMG reports that the margin that the US broker entity paid, and which ended up at LCH, was used to cover the loss on the firesale of the portfolio, per UK laws that are similar to US bankruptcy laws.

Now that the Department of Justice is involved, we would urge them to consider if LCH.Clearnet, acting under the sizable influence of JP Morgan, was simply a front for a scheme to defraud MF Global customers of their money in the final (and, lest we forget, "chaotic") days of the firm.

* * *

[1] We received a note shortly after original publication by Francine McKenna of ReTheAuditors, who said she had contacted several sources who advised that LCH.Clearnet does not engage in proprietary trading.  If that is indeed the case, then KPMG flubbed the disclosure and the ultimate RTM counterparties remain at large.  LCH.Clearnet did not respond to McKenna's inquiry regarding ultimate counterparties.

TARP Resistance is Futile: Zombie Community Banks Targeted by Former Treasury Insiders

A land grab shrouded in a banking takeover, wrapped in a financial crisis "rescue." As always, insiders get first dibs.  (And, yes, there is an MF Global connection.)

Only days ago, we learned from the Financial Times that the 19 largest US banks are $50 billion short of meeting new capital requirements under Basel III accords, with their smaller lending cohorts needing an additional $10 billion.  Amazingly (or not), omniscient Fed officials have divined "that most banks should be able to reach the new levels by retaining earnings during the next few years rather than by raising capital in the market" (emphasis ours).

Presumably, this earnings retention would not include most of the aforementioned smaller community banks because Paulson's TARP has trapped them in a Zombiefied state of smothering debt and capital starvation (not unlike what the World Bank and IMF did to its pirated victems circa 1990-2008), aided and abetted by Fed-induced yield starvation .

Who wins?  No less than the Federal Reserve itself, because Treasury has recently been auctioning off its preferred stock in the smaller banks at firesale prices, which guarantees the state regulated banks will be folded into the Fed securitization and rehypothecation cartel.  Of course, well-connected former bank regulators, such as a former Comptroller of the Currency, will (and already are) profiting handsomely from these transactions, which we detail below, as well as recently in the second segment on Capital Account with Lauren Lyster:



Who loses?  While we're far from an endorsement of the Federal and State banking system in principle, the smaller community banks were the last vestige of the pre-securitization/unlimited moral hazard age, when lending meant "skin in the game" (as opposed to feeding mortgages through the GSE/JPM/Goldman slice-o-matic) and when depositors were seen as an asset (and not only as a balance sheet liability).

While it might be argued that many of these smaller banks would have otherwise been resolved by the FDIC in the 2008 maelstrom, ex-Goldmanite Treasury Secretary Hank Paulson put these mom and pop banks into a shotgun government cartel IPO--preserved in TARP salt, only to have the meat picked off their carcasses years later.

"TARP Provided Lifeline to Community Banks"

So reads a subheading in the most recent SIGTARP report.  Yet, what follows is a recitation of what happened when the banks grabbed the money (at the other end of Paulson's bazooka)--they discovered it was tied to an anchor thrown overboard.

"707 [banks] were accepted into CPP [Capital Purchase Program]; 351 small-and medium-sized banks remain, along with 83 financial institutions in CDCI [Community Development Capital Initiative], for a total of 434. Treasury describes CPP as a program to provide emergency support to “viable” banks.623 There are signs that some CPP banks face difficulty in exiting TARP. Despite the dramatic efforts to expedite the exit of the largest banks from TARP, there appears to be no corresponding plan for community banks’ exit from TARP. The only exit strategy for smaller banks that has been announced has been SBLF, through which 137 banks exited TARP. A SIGTARP analysis of the 351 banks that remained in CPP on March 31, 2012, shows one-third had missed five or more dividend payments, and 32% faced formal enforcement actions by their regulators."  

Hence the smothering spiral of debt and capital starvation.

Why smaller banks, shut out of the NYC securitization, re-hypothecation Collective, can't compete:

"Community banks’ lending to small businesses has decreased recently while large banks increased loans to small businesses. Small banks — those with assets under $1 billion — have steadily lost market share in small-business lending since 1995, according to an analysis of loan data by information provider SNL Financial LC (“SNL”).613 That group of banks now owns just 34% of commercial and industrial loans of less than $1 million that were secured by collateral other than real estate, down sharply from 51% in 1995, according to SNL. During that same period, bigger banks with more than $10 billion in assets doubled their market share of such loans, SNL reported."

Why the POMO tithing scheme is for Primary Dealers only:

"Once a loan is made to a small business or consumer, a community bank typically holds onto it rather than securitizing or selling it,” Timothy Koch, a professor of banking and finance at the University of South Carolina, said at that conference. 612 “Unlike big banks, community banks generate most of their earnings from net interest income on loans, and rely on core deposits by customers in the same community to fund lending,” he said."

"Community banks need capital to pay off CPP investments, and raising that capital has been a significant challenge along with weakened loan portfolios and slow economic growth."

With long term yields below inflation, government securities are already carry negative for banks who can't wash them at the Fed. Hence, Chairman Bernanke is aiding and abetting the executive branch in the destruction of community banks.

On how the TARP death ray "vaporized" an entire set of market choices whose purpose was to provide an alternative to the government agency known as the Federal Reserve:

"Industry experts say the amount of new capital needed by community banks nationwide is substantial. According to analysts with investment firms Raymond James and Barack Ferrazzano Financial Institutions Group, and consulting firm McGladrey & Pullen, LLP, it will take $23 billion in fresh capital for community banks to repay TARP or SBLF funds; to absorb credit losses and boost loan loss reserves; and to meet higher regulatory capital ratios.614 A higher estimate of $90 billion in community bank capital needs came from StoneCastle Partners, an asset management and investment banking firm. It included $43 billion for healthy institutions to acquire weak and failing banks; $28 billion for banks to clean up their balance sheets; $12 billion to boost loan loss reserves; and $7 billion for internal growth.615"

Why smaller banks cannot access the capital markets:

"Banks with assets under $1.5 billion do not have access to capital from private equity firms, mutual funds, foundations, and other institutional investors, according to some who follow the industry. “Capital offerings for less than $20 million to $30 million are often too small for many institutional investors regardless of structure or investment thesis. Institutional investors have fixed costs to cover and deal size minimums. They simply cannot monitor an unlimited number of small investments, no matter how promising,” the Conference of State Bank Supervisors said in a recent white paper.618 Institutional investors also want a bank to have a business plan that allows the investors to eventually realize gains through a stock offering or by selling the bank to a larger institution."  

10% of smaller banks in the US are at risk.

FDIC won't be bailing them out.

They will be assimilated:

"Some industry experts predict a wave of mergers and consolidation among community banks over the next three to five years. “Size matters, and a rule of thumb used by many industry experts is that most banks eventually will need to be $1 billion in assets or greater in order to achieve the scale necessary to operate as an independent entity,” according to a white paper published this year by FJ Capital Management, LLC. “The typical merger can save 20% to 40% in operating costs, thereby creating significant earnings accretion for the combined entity.”620 FJ Capital estimated 413 banks are potential merger candidates because they were trading below tangible book value, and had substandard capital levels and/or elevated asset quality issues.62"

A typical single case: Bank of Hamptoms Road (Norfolk, VA)

According to the American University School of Communication, this bank's Troubled Asset ratio has hovered near 100% since the crisis onset and shows no hope of ever going black. It has $115 million of capital and $72 million in reserves against $185 million of non-performing "assets." Note the $60 million of "other real estate." The best thing that can be said about it is that it has stemmed the bleeding from $(215) million to $(95) million in the last year. It's still losing deposits, capital, reserves, and assets at double-digit percentage rates year-over-year. 

As late as July 2009, common shares traded above $200 (1:25 split adjusted). The last trade June 8, 2012 was $1.21 (1:25 split adjusted).

The TARP "rescue" drove the shares down 80% over the first 6 months. Then Treasury converted its $84 million in TARP preferreds into common for a 74% notional loss, the board diluted in September 2010, missed the TARP dividend, diluted again in June of 2011, and has been selling off branches throughout.

The bank's recent 10-Q produced these gems. First, the asset attrition spiral continues:

"The Company reported a net loss of $7.9 million for the quarter, compared to losses of $21.4 million for the fourth quarter of 2011 and $31.6 million for the first quarter of 2011. First quarter 2012 results benefited fromlower provision for loan losses [ew: at exactly the moment when non-performing loans are skyrocketing] due to continued improvements in credit quality and reduced operating expenses due to continued progress from the Company's expense reduction initiatives."

Then, yield starvation:

"Net interest income for the first quarter of 2012 was $16.7 million, down from the $17.5 million in the fourth quarter of 2011 and $18.2 million in the first quarter of 2011."

Third, because old habits die hard, unwarranted risk taking:

"Noninterest income was $3.1 million during the first quarter of 2012 compared to ($1.1) million during the fourth quarter of 2011 and $2.1 million in the first quarter of 2011. Noninterest income benefitted fromstrong origination volumes in the Company's mortgage unit which saw revenues increase to $3.3 million from $2.4 million and $1.3 million in the prior year fourth and first quarters, respectively. "

No doubt, someone will spin that as a "housing recovery." The increase in compensation costs related to bonuses to mortgage origination officers is relegated to a footnote.

A week ago, the bank holding company of Hampton Roads sold two of its failing branches to Bank of North Carolina (NASDAQ:BNCN), whose statement on the deal specifically mentioned the all-important $1 billion threshold, "Our goal of having a billion dollar presence in the Triangle will accelerate with this acquisition, and we are excited about offering our diverse product and service opportunities in both of these communities."  BNCN itself has a TARP ratio of ~50% and rising. 

As usual, it's the insiders who take over

The only money-good asset this dog [with fleas] (NASDAQ:HMPR) really holds is that "other real estate" line item, which is perhaps why the bank holding company is the target of a NY liquidation firm:

CapGen Capital Group VI LP and CapGen Capital Group VI LLC, both of New York, New York to increase their investment up to 49.9 percent of the voting shares of Hampton Roads Bankshares, Inc., Norfolk, Virginia, and thereby indirectly increase their investment in Bank of Hampton Roads, Norfolk, Virginia, and Shore Bank, Onley, Virginia.

This, and all the other TARP takeovers may be found in the Federal Reserve's H.2A report, "Notice of Formation and Mergers of, and Acquisitions by, Bank Holding Companies or Savings and Loan Holding Companies; Change in Bank Control."

Enter Eugene (Gene) Ludwig and the MF Global Connection

CapGen's leader, Mr. Ludwig, is a former primary dealer officer (Deutsche Bank) and Comptroller of the Currency, and whose business is "turnaround specialists." He is also the founder and current CEO of Promontory Financial Group, which has been granted special review and recommendation privileges by various Federal regulators to Bank of America, USBancorp, Wells Fargo.  Promontory is also a registered lobbyist for several prominent financial firms, including General Motors Acceptance Corporation (GMAC).

Last, but not least, Promontory was engaged by MF Global after a $110 million rogue trader debacle to provide, in part, "a comprehensive review of MF Global’s risk management and internal controls," according to Trustee Giddens' report of June 4, 2012.  The report explains:

"On May 26, 2010, Promontory reported to Holdings’ Audit Committee that MF Global had successfully and effectively implemented most of the Promontory recommendations and the CFTC undertakings and established an enhanced enterprise-wide risk management and compliance program and internal controls framework."

Of course, it would be internal controls that would be the demise of the firm, upon which former Crazy Eddie accountant, Sam Antar, recently commented, "All white collar criminals blame poor internal controls. I tried that trick at Crazy Eddie. The Feds were smarter back then."

While Promontory gave public cover for MF Global, Giddens' report reveals a few pages later that alarm bells were being simultaneously rung internally:

"Similar concerns surfaced in internal audit reviews. A Corporate Governance internal audit issued in May 2010 identified MF Global’s risk policies as not congruent with the changes to its broker-dealer business. Among the specific gaps identified by Internal Audit was liquidity risk reporting. Similarly, an Internal Audit report on Market and Credit Risk Management in October 2010 identified “High Risk” areas arising from the lack of controls over risk reporting. The report also reiterated that market risk policies had not been updated to reflect the current operating environment. The report attributed the failures to remediate gaps to staffing and budget constraints."

A land grab shrouded in a banking takeover, wrapped in a financial crisis "rescue."

The TARP zombie/takeover story is playing out with small variations throughout all the ~300 or so small banks which were trapped in TARP-assisted asset spirals. As stated above, many would have failed outright, further burdening the FDIC fund, perhaps to the point of exhaust, which may be the excuse of record. However, TARP gave Treasury a co-opt entry point to control the flow of equity on this sizeable section of community banking options. 

The Fed's merger notices are peppered with former officials using their insider positions and PE headhunters to profit from the "rescue." Whether the net result of killing off a whole tranche of Fed-free banking options was intentional, the combination of forced TARP and negative real interest rates will lead to fewer options and more Fed-centralized control of banking, as the process of slicing, dicing, and consolidating works its way up the food chain, aided and abetted by friends of Treasury. 

In future reports, we will detail other small bank merger and acquisition transactions by bank regulatory insiders, as well as develop the role of Promontory in the stress test/internal-policy-failure face-save kabuki that dominates the upper echelons of the extreme moral hazard tranche of the financial sector.

Special thanks to elliswyatt for serving as primary research contributor and TARP wordsmith.