Banking New York Nov/Dec 2012 by The Warren Group

THE INDUSTRY MAGAZINE FOR FINANCIAL EXECUTIVES & PROFESSIONALS

A ‘BLIP ON THE RADAR’? VIKRAM PANDIT IS CAST OUT OF

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NOVEMBER/DECEMBER 2012

CITI’S BOARDROOM +INSIDE: TD BANK OWES $67 MILLION FOR ROLE IN PONZI SCHEME DISTRESSED HOMEOWNERS FACE LOOMING FISCAL CLIFF LARRY MCDONALD SPEAKS HIS MIND

• VOLUME 25

BANKING NEW YORK Volume 25 | November/December 2012

A VIK-TORY

04 BANK PROFILE

BOARD?

FOR THE

Flushing Financial Corp.

06 GUARDING THE GATE

Combating Today’s Relentless Cyber Attacks

NEWS 08 TD Bank Held Liable in

Ponzi Scheme

09 Frank Talk About Dodd-Frank 10 Tax Break’s End Could Add to

State’s Foreclosure Woes

12 A VIK-TORY FOR THE BOARD

How History Will View the Ousting of Citi’s CEO

16 Q&A

Larry McDonald on the State of the Industry, and Where We Go from Here

18 SOCIAL MEDIA

Banks and Financial Institutions Must Embrace the Changed Customer Dynamic

20 BEST PRACTICES

CONTRIBUTING WRITERS THIS ISSUE Scott Van Voorhis, Steve Viuker, Linda Goodspeed

EDITORIAL ASSOCIATE EDITOR

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Preventing Cross-Channel Fraud

BANK PROFILE

Flushing Financial Corp. By Linda Goodspeed

fter four straight years of record earnings, Flushing Financial Corporation’s march toward diversity in funding, loans and operations appears to be paying off. Flushing Financial, with $4.4 billion in assets, is the parent company of Flushing Savings Bank, a full-service bank with 17 John Buran branches in Queens, Brooklyn, Manhattan and Nassau County. Over the past several years, Flushing has been steadily moving from a traditional thrift to a more commercial enterprise. In October it completed that journey when it filed an application to merge the savings bank with its wholly owned subsidiary, Flushing Commercial Bank and convert from a federallychartered savings bank to a New York state-chartered commercial bank. “Characterizing us as a thrift is no longer relevant,” said John R. Buran, president and CEO. “We have a more balanced and diversified loan portfolio, more diversified funding sources. There are still improvements to be made. But we’ve come to a milestone in our evolution.” Mark Fitzgibbon, director of research at Sandler O’Neill, which recently upgraded Flushing’s stock to “buy,” agreed: “They’ve transformed from a sleepy little savings and loan bank out on Long Island into a dynamic little commercial bank.” “They’ve made a couple of interesting moves that have put them in a good position,” said Thomas Alonso, vice president and senior analyst at MacQuarie Securities group. “They’ve historically been a thrift, but began to push into the commercial side. On the 4 | Banking New York

deposit side, they’ve benefited from being in the New York market, which has been a bit more stable.” Since 2006, Flushing has grown deposits 12 percent annually. Core deposits have grown at an even faster rate (nearly 20 percent annually) thanks in part to a new interest bearing checking account for businesses that became permissible under the DoddFrank Act. Flushing began offering the new business checking account in July 2011. “That new account has enabled us to rapidly grow our business deposit base to more than $100 million,” Buran noted. Flushing has also built its deposit base through its online banking division, iGObanking.com, which offers competitively priced deposit products to consumers nationwide. “We opened that in ’06, and it now provides around $450 million for funding,” Buran said. Flushing’s strategy also includes reaching out to the area’s many ethnic groups, particularly Chinese and Korean residents. Many branches have staff who can converse with customers in their native languages and dialects. The bank translates marketing materials into different languages and advertises in media outlets that reach these groups. It has also put prominent members of these communities on its advisory board, and supports various cultural and charitable events in these communities. The result is a $400 million Asian “bank within a bank.” “We feel we are in a unique position to serve these communities,” Buran said.

A BALANCING ACT On the lending side, Flushing has also worked to diversify and balance its portfolio. “At one time we were a little heavier in commercial real estate and single-

family homes,” Buran said. “Over time we started shifting the mix.” A big part of this new mix is multi-family housing and mixeduse real estate, including shopping centers, professional office buildings, community service facilities and other income-producing commercial properties. Together, these two sectors now account for 65 percent of Flushing’s loan portfolio. “Over the last few years, we began to de-emphasize non owneroccupied commercial real estate,” Buran said. “We wanted to develop full relationships with our customers. Growing our deposit relationship was part of our strategy of re-shaping our loan portfolio. It makes for a better risk dynamic and better overall returns.” Flushing has also succeeded in reducing delinquent, non-performing and classified loans, although not as quickly as Buran would like. At the end of 2011, loans delinquent over 30 days totaled $186.8 million, a decrease of $25.8 million from the previous year. “A lot of these loans have been held up in the court system,” Buran said. “It can take three to four years to get a foreclosure through the courts. But we feel we’ve turned the corner. Our nonperforming loans have started to stabilize and trend down.”

LOOKING AHEAD Going forward, Buran is “cautiously optimistic.” He notes the bank still has the ability to reduce funding costs further even if and when interest rates begin to rise. “None of us know what will happen with the interest rate environment,” he said. “By laddering out our borrowing and our liabilities and funding sources, we are in position to take advantage of rate changes.” ■

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GUARDING THE GATE | By Matt Lidestri

Combating Today’s Relentless Cyber Attacks

ould a curious toddler be the model for today’s cybercriminals? A colleague recently suggested this idea, and it made me wonder. Consider the typical two-year-old toddler. To him, almost any object begs to be touched, shaken, or tossed across the room. While childproofing can help, it often doesn’t matter how carefully the adults have prepared and locked away their breakable objects – to a toddler, everything is fair game. Similarly, cybercriminals seek opportunities for theft and invent ways to sneak past anything that stands in their way. The curious toddler analogy may better describe the early, more innocent days of cybercrime. Ten years ago, the Code Red, SQL Slammer and “I Love You” viruses overloaded servers, defaced web sites, and created headaches for the IT community at large. While these attacks were clever and had a significant impact, they generated more noise than outright theft. Today’s cyber-criminals possess the persistence but not the innocence of the curious toddler. Criminals probe for vulnerabilities in operating systems, web browsers, and other third-party applications in order to make money. Cyber-criminals can leverage these vulnerabilities to deploy advanced malware packages, such as Zeus or TDSS. With annual cybercrime losses estimated as high as $20.7 billion in the U.S. and $110 billion globally, it’s little wonder why our not so innocent toddlers are so persistent. Criminals have also complicated the situation by developing methods to evade detection from security

countermeasures. A prime example is the Black Hole exploit kit – one of the most prevalent and successful tools available to cyber-criminals today. Black Hole’s approach is relatively simple – convince users to click on a malicious link embedded in an email or a compromised web page from a known and trusted website. The initial URL will often redirect the user’s browser to several compromised servers until it reaches a malicious Black Hole server. There the exploit kit detects the browser and plugin versions, and exploits known vulnerabilities. Next thing you know, the victim’s PC is sniffing sensitive information or joining a botnet. Black Hole’s streamlined infection technique is complemented by measures to reduce detection. Black Hole uses random, short-term URLs to stay ahead of web filters which need to categorize the URL in order to block it. Black Hole’s malware packages are scrambled on-the-fly to reduce the effectiveness of anti-malware programs and intrusion prevention systems. The latest version of Black Hole (2.0), claims to support exploits for the latest vulnerabilities and incorporates additional logic to only serve attacks that are likely to succeed. Also, the “redirect URLS” are more unique and randomized than in previous versions. Good as our defenses may be, our relentless cyber-criminal adversaries try to stay one step ahead by continually developing better tools and methodologies. In a world where even layered defenses are challenged by the growing sophistication of cybercriminal tools and tactics, how can we better protect our organizations in a

cost-effective manner? Here, the persistent toddler analogy works well. With so many penetration attempts starting with a social engineering pitch, it makes sense for staff to view any email with an unusual link or attachment as a potential phish, and any physical visitor capable of leaving an infected USB drive for an unsuspecting user to find. These attacks may be simple, but also they’re also effective. Security awareness training is an important first line of defense against these attacks. While some argue that the ‘human factor’ is the hardest to control, I would counter that this increases the training’s value. Security systems can’t protect us against everything, unfortunately. Of course, training is just one of many layers that help us protect our organizations. In light of today’s persistent attacks, it makes sense to periodically review and question the effectiveness of our defenses. Viewing security as a process rather than a checklist helps everyone focus on optimization wherever and whenever we can. Low-cost approaches for protecting your institution include modifying firewall rules and/or deploying new web filtering technology to help deal with some of these driveby style download attacks. The idea is to continually wring more value and protection out of our current security infrastructures. Like any parent “childproofing” a home, we need to do the best we can to prepare and protect our systems and data from relentless and ever-advancing attacks. ■

Matt Lidestri manages Internet Services and Security at Avon, Conn.-based COCC, Inc., a 43-year-old firm specializing in outsourced information technology and support. York 6 | Banking BankingNew New York

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NEWS

TD Bank Held Liable in Ponzi Scheme By Steve Viuker

t was a Ponzi scheme without precedent, making headlines in newspapers throughout the United States – and it wasn’t helmed by Bernie Madoff. Instead, it was a South Florida lawyer named Scott Rothstein, and what made this scheme different from any before it was that a bank was ordered to

Rosenfeldt and Adler. Rothstein paid bribes to politicians, judges and law enforcement officials, and he raised thousands of dollars for the campaigns of many state and national politicians. Testimony and court documents show that Rothstein used an account at a TD Bank branch as an integral part of the scheme. Conspirators in his scheme allegedly posed as TD Bank employees, and one of Rothstein’s associates devised a fake TD Bank website on which fake account balances were posted for investors. Mandel said key TD Bank employees knew of the fraud and assisted Rothstein in assuring investors their money was sound. In a sworn deposition, Rothstein claimed he gave former TD Bank vice president Frank Spinosa more than $50,000 to ignore signs of illegal activity. Called to testify in the Coquina trial, Spinosa invoked his Fifth Amendment right against self-incrimination 150 times. “TD Banks’s ALM program at the time was stunningly incompetent,” said Mandel at the recent conference. “There were numerous violations of the bank secrecy act. It was like the bank took the regulatory guidelines and threw them in the garbage. The bank even violated it’s own internal policies and controls. Throughout the entire scheme, there is no evidence that the bank identified any transactions as suspicious. “Only after the Ponzi scheme collapsed did TD Bank investigate any of the wire transfers,” said Mandel. “TD’s AML department couldn’t identify money laundering if they were hit in the head with a baseball bat. But being negligent does not equal aiding and abetting fraud.” “The scheme collapsed roughly on Halloween 2009 and we filed the lawsuit in March 2010,” said Mandel. “We went

Toronto-based TD Bank owes an investment group $67 million for its role in a $1.2 billion Ponzi scheme operated by a now-disbarred attorney. pay as part of the settlement. At a recent conference in New York City held by the Miami-based Association of Certified Financial Crime Specialists, Marc Nurik, the attorney for Rothstein and David Mandel, the attorney for Coquina Investments, spoke about the crime. Toronto-based TD Bank owes an investment group $67 million for its role in a $1.2 billion Ponzi scheme that was operated by now-disbarred attorney Rothstein. Now serving a 50-year prison sentence after pleading guilty, the 49-year-old lawyer has been cooperating with federal prosecutors. The verdict came in a lawsuit filed by Coquina Investments, based in Corpus Christi, Texas. It was the first to go to trial of several pending lawsuits filed by wronged investors against the bank and others. According to reporting by The South Florida Sun Sentinel, the scheme was one of the largest frauds in South Florida history and triggered the failure of the Fort Lauderdale law firm Rothstein, 8 | Banking New York

to trial on a rocket sled for a federal case on Nov. 8, 2010, and got the verdict on Jan. 8, 2012. The reason we went to federal court was that we also brought RICO charges, which were dismissed. But aiding and abetting fraud worked out very well for us.” The Association of Certified Financial Crime Specialists (ACFCS) reported that on Sept. 28, U.S. District Judge Marcia G. Cooke closed the door on any lingering hope that TD Bank may have had in her courtroom to diminish the size of the verdict, which included $35 million in punitive damages, or to retry the case. Cooke’s “Omnibus Order on Post-Trial Motions” rejected more than a dozen TD Bank arguments on why it deserved a new trial, ranging from flawed jury instructions to improperly-awarded damages. The ACFCS said the die was cast against TD Bank in an Aug. 3 ruling by Cooke that established that the bank knew about Rothstein’s fraud and had maintained unreasonable money laundering and fraud controls. Cooke reminded the bank repeatedly in her new order of that any error was “harmless” in light of her ruling that it is “established” that TD Bank had “actual knowledge of Rothstein’s fraud.” And in a scene right out of Hollywood, the Wall Street Journal reported a top Barclays compliance official, who was notified in 2008 about problems brewing within the bank, is now in a similar position at another major bank. Stephen Morse was the head of compliance at Barclays Capital, the U.K. lender’s investment-banking arm. He was warned that Barclays was trying to fudge the London interbank offered rate and regulators criticized the department headed by Morse for failing to act on employees’ concerns about manipulation. In late 2011, Morse became head of compliance for TD Bank Group. ■

Frank Talk About Dodd-Frank By Steve Viuker

ew York City was the place and Dodd-Frank/Basel III was the topic at a recent Marcus Evens conference. “Dodd-Frank has laws and Basel III puts flesh to those ideas in a very concrete way,” said Clifton Loo, head of economic capital at SunTrust Banks. “There are some things being done in Dodd-Frank that were in Basel III, but are just being implemented in the United States now.” The big question, he said, is internationally. “Will there be uniform implementation? It’s about competitiveness,” he said. “When your competitor doesn’t have the same capital restrictions as you, that will be a disadvantage in the marketplace. It will slow down business. Holding capital means you can’t make as much money in other places. There will be more stringent capital requirements. This all requires resources, and that means costs.”

loan holding companies, and non-bank financial companies supervised by the Federal Reserve. “I know at our bank it’s taken a lot of resources,” said Loo. “Regulators have asked us to create a dedicated group as opposed to just having volunteers from the bank create the CCAR results. Mortgages are a good example. You had a 50 percent riskweighted asset. Now it can be up to 200 percent, and that’s on a secured asset. That’s the bread and butter of many smaller banks. If you’re asking a smaller bank to hold a lot of capital versus their bread and butter, they might say, ‘Hey, we’re not making enough money for this.’” Indeed, Dodd-Frank is in a state of flux after a recent court ruling. A federal judge heard a challenge to a rule that requires mutual funds that invest in certain financial instruments to register with the Commodity Futures Trading Commission (CFTC). The CFTC said that the financial overhaul bill gave it authority to set the new rules for mutual funds. But the plaintiffs said the rule is unrelated to the Dodd-Frank law, and that the agency is using that law “to change

INTERSECTING RESTRICTIONS Although Basel III and the DoddFrank Act have similar objectives, there are differences in the capital requirements imposed by Dodd-Frank and the standards proposed under Basel III. There are also important differences in the implementation schedules. These differences will lead to uncertainties for U.S. institutions until the federal financial regulatory agencies work out how to resolve them in the implementation process. There is significant uncertainty as to how Basel III will interact with the Collins Amendment, which requires that U.S. federal banking agencies prescribe minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis for insured depository institutions, bank holding companies, savings and

the subject” because the regulation is neither necessary nor justified by economic analysis. In the decision, U.S. District Judge Robert L. Wilkins told the CFTC it needed to justify the need for a regulation that would limit how many contracts a trader can obtain for the future delivery of 28 commodities, including natural gas and oil. The rule also would have applied to certain financial instruments known as swaps, a form of derivative. The agency said it was acting under a Dodd-Frank mandate designed to reduce excessive speculation in the commodities market so that no one trader could control such a large percentage of the market that it skews prices. Writing for The National Review, Peter J. Wallison, a senior fellow at the American Enterprise Institute, said the following: “Title II of Dodd-Frank gives the secretary of the Treasury the authority to seize any financial firm he believes is likely to fail in the future and hand it over to the FDIC for liquidation. If the firm objects, the secretary can apply to a court for a continued on page 11  November/December 2012 | 9

NEWS

Tax Break’s End Could Add to State’s Foreclosure Woes By Scott Van Voorhis

ew York’s worst-in-the-nation foreclosure mess could get even more tangled in 2013, with the looming expiration of a tax break key to helping distressed homeowners unload their properties. Federal legislation has shielded homeowners who avoid foreclosure through a short sale from having to shell out potentially thousands in additional taxes. But that tax break is set to expire on Jan. 1, with potentially disastrous results on foreclosure prevention efforts in New York and across the country, industry observers say. If not reenacted, the prospect of a major tax hit could put the brakes on short sales, further adding to the considerable foreclosure backlog in the Empire State. New York holds the nation’s highest average of 1,072 days for a lender to complete a foreclosure, from initial filing to auction. That’s well above even New Jersey, number two at 931 days. “The national average is 382 days,” noted Daren Blomquist, RealtyTrac vice 10 | Banking New York

president. “It’s almost unbelievable,” he said, referring to New York’s dramatically slower rate. Passed by Congress in 2007, the Mortgage Debt Relief Act has shielded millions of homeowners from a rather nasty tax hit that typically accompanies a short sale, a principal reduction on a loan, or even a foreclosure. The key issue is the amount of debt a lender forgives on the mortgage, which in a short sale is the difference between the total on what the home sells for and what is still owed on the mortgage. If, for example, a homeowner sells for $300,000 but still owes $350,000 on the mortgage, the IRS, barring an extension of the 2007 federal legislation, would count that as $50,000 in extra, taxable income. Homeowners who get the bank to write down part of their loan would have to pay taxes on the difference, notes Salvatore Prividera Jr., director of communications for the New York State Association of Realtors. Of course, while it may be considered income by the IRS, homeowners facing

serious mortgage problems are not exactly seeing the money, Prividera said. In fact, the tax hit will likely affect the most vulnerable homeowners at what may be one of the lowest point of their financial lives. Many underwater homeowners may be scrambling to make payments after a loss of a job or a cut in income. For homeowners on the fence about doing a short sale, the prospect of a big federal income tax hit could take away the most promising escape route out of trouble. “With the tax piece expiring at the end of the year, it is a quality of life issue for the individuals involved,” Prividera said. “They are not seeing the money they are having to report as income. It makes a difficult situation even more untenable for those trying to deal with the situation.” In fact, real estate agents in New York state are already recognizing the reality. Prividera said he is hearing anecdotal reports about agents pushing homeowners to move ahead with short sales before the year ends.

FROM BAD TO WORSE? The big question is what the uptick in homes falling into arrears and becoming unsaleable will do to New York’s already broken foreclosure processing system. New York’s total foreclosure backlog totals just under 40,000. That’s enough to put it the top 10, though behind California, with its 175,000 foreclosures, or Illinois, with its 85,000 distressed properties, RealtyTrac reports. If short sales are suddenly hit with crushing federal taxes in early 2013, it could jam New York’s already clogged foreclosure pipeline with thousands of new homes, based on current sales numbers. As it stands now, short

FRANK TALK ABOUT DODD-FRANK sales make up 14 percent of all sales nationwide and a smaller, but still significant percentage of the New York market, Bloomquist said. More than 27,000 homes were sold in the Empire State during the third quarter alone, according to the New York State Association of Realtors. “Short sales have been an important escape valve for the banks,” Bloomquist said. “But if that escape valve is taken away, or homeowners are just not as willing, they may have to resort back to foreclosures again.” Given the state’s extraordinarily cumbersome system for dealing with foreclosures, just about any increase in volume could have a detrimental impact. For starters, New York requires that foreclosure cases go before judges, generally a more cumbersome process. But long before the lender can bring its foreclosure petition to the judge, it has to take part in mandated mediation sessions with the homeowner aimed at trying to hammer out a deal. New York is one of a handful of states that mandates such negotiations between banks and homeowners before court officials will allow lenders to move ahead with foreclosures, Bloomquist said. New York’s courts and Legislature have also made it tougher for lenders to move ahead with foreclosures. Suffolk County Supreme Court Justice Jeffrey A. Spinner made headlines in 2010 when he cancelled the mortgage of a Long Island couple, wiping out, with a stroke of a pen, $292,500 in debt. Spinner based his decision on what he declared to be the “shocking and repulsive” acts by the mortgage servicer in dealing with the couple’s efforts to get their loan modified. State lawmakers have also added a legal twist for New York lenders seeking to foreclose on a homeowner no longer making payments. The Legislature last year passed a bill enabling homeowners who successfully contest foreclosures to recoup legal fees from their lenders.

“The Legislature, in its infinite wisdom, has made the foreclosure process almost impossible,” said Joshua Stein, chairman of the education committee of the Mortgage Bankers Association of New York. “There seems to be an underlying policy goal of preventing lenders from foreclosing. Every session they come up with a new burden.” “It’s out of control,” he said.

CLOCK TICKING DOWN When this article was written earlier in the fall, a couple of key local lawmakers were lobbying hard for an extension of federal Mortgage Debt Relief Act. Two New York congressmen, Tom Reed, a Republican, and Charles Rangel, a Democrat, both pushed separate bills to extend the tax relief for short sales. The National Association of Realtors pushed hard for an extension as well. But in late October, attempts to extend the debt relief act were stalled in committee in both the House and Senate, with no sign of any movement. While the presidential election was a major distraction, Congress will soon have other bigger fish to fry as well. All eyes right now on are the looming fiscal cliff. That’s the series of draconian tax increases and spending cuts are set to go into effect next year unless Congress can craft a sweeping, deficit reduction bill. Given the high stakes involved, it’s anyone’s guess how quickly Congress will get around to extending the tax break on short sales, set to expire Dec. 31. “Things could get worse before they get better,” said Ed Mermelstein, a real estate attorney and co-founder of international real estate law firm Rheem Bell & Mermelstein in New York. Speaking in late October, he said, “There are lots of question marks and you have lots of very nervous people sitting on sidelines, wondering what is going to happen.” ■

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ruling, but the court has one day to decide whether the secretary has acted unreasonably. Stays and appeals are prohibited. If the court does not act in that one day, the firm is remitted to the FDIC “by operation of law.” Again, it will be a bold firm that challenges the administration in power if the Treasury secretary has this authority. But Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at The Ohio State University, believes Dodd-Frank is better than the alternatives. Writing in The New York Times, Davidoff said, “The fundamental issue is that a few banks have grown to be enormous over the last two decades.” According to SNL Financial, four banks each had more than a trillion dollars in assets at the beginning of the year. So, Dodd-Frank didn’t create “too big to fail” institutions. The banks themselves did because it made them money. The financial reform law takes two tacks in dealing with these institutions. First, Dodd-Frank tries to figure out who they are and charge them for being too big. This is done by raising their regulatory costs through more oversight and supervision. It means more governmental red tape for these banks, but also ostensibly fewer problems because of it. Regardless, one purpose of this increased regulation is to impose a regulatory tax on big banks to push them to be smaller. Second, Dodd-Frank addresses the “Lehman” problem – that bankruptcy may not work for a huge financial failure. Instead, a new regime is created to put big institutions into what is hoped to be an orderly receivership that avoids a general financial panic, something that unfortunately happened when Lehman Brothers filed for bankruptcy in September 2008. ■ November/December 2012 | 11

A VIK-TORY

FOR THE

A VIK-TORY BOARD? FOR THE

BOARD? How History Will View THE OUSTING of Citiâ&#x20AC;&#x2122;s CEO

The Citibank Building is shown, Tuesday, Oct. 16, 2012 in New York. Citigroup CEO Vikram Pandit resigned on Tuesday, surprising Wall Street. (AP Photo/Mark Lennihan)

By Steve Viuker

nd then there were two. With the resignation/firing of Vikram Pandit on Oct. 15, only two of the nine CEOs of the major banks from the 2008 financial meltdown are left: Lloyd Blankfein of Goldman Sachs, and Jamie Dimon of JPMorganChase. Writing on the SNL Financial site, veteran bank analyst Nancy Bush said she believed that two events played a part in Pandit’s departure: “[his] abortive promise of a dividend increase to the Citi shareholders (which was reportedly nixed by the Fed) and the rejection of his pay package by shareholders last spring. Chairman O’Neill, a famously activist manager, apparently sought feedback from large institutional shareholders after the non-binding vote and got an earful on Citi’s lagging share price, the perceived slow pace of the shrinkage of Citi Holdings (the resting place of the company’s junky crisis-era assets), the cost structure of the company (including executive compensation) and on and on.” On Oct. 26, The New York Times reported that “Pandit strode into the office of the chairman at day’s end on Oct. 15 for what he considered just another of their frequent meetings on his calendar.” The Times reported that he was told three news releases were ready: One stated that Pandit had resigned, effective immediately; another said that he would resign, effective at the end of the year; and the third release stated Pandit had been fired without cause. Pandit chose to resign immediately. Even though Pandit and the board have publicly characterized his exit as his decision, interviews with people close to the board describe how the chairman maneuvered behind the scenes for months ahead of that day to force Pandit out and replace him with Michael L. Corbat, the board’s chosen successor. On his website, Business Insider CEO and former Wall Street analyst Henry Blodget said: “The shareholders of Citi absolutely did not know the truth about why Vikram Pandit quit. The statements that were issued were technically correct, but they contained a huge lie by omission. Citi shareholders have every reason to feel misled and angry about that. And more broadly, given that this sort of statement is apparently what passes for forthrightness and transparency at a major global corporation, it’s no wonder that everyone thinks that companies are totally full of crap.”

Charles Wendel, president of New York-based Financial Institutions Consulting, told Banking New York that “Citibank needs to set priorities. Where will it focus geographically and on what segments? For example, it has not focused effectively on the U.S. marketplace, which should be a source of stable earnings. It could be a major player in small business and the middle market, if it focused there.” Wendel praised Citi chairman Mike O’Neill. “He is a very smart banker who has already turned around and refaced a bank [Bank of Hawaii in 2000], albeit a smaller one. I expect him to bring increased discipline to Citi and push it to make decisions about where it is heading and what it should avoid.” Current CEO Corbat has spent 29 years at Citi, including stints running its corporate lending and wealth management division. Pandit was a hedge fund manager when he joined Citigroup. His predecessor, Charles Prince, was a lawyer. Simon Johnson, who teaches at the MIT Sloan School of Management and is a Bloomberg View columnist, told Bloomberg Business Week on Oct. 18 that Corbat’s familiarity with “the banking side of banking is good.” Johnson went on to say, “A lot of these firms have got themselves tangled up in securities businesses that the CEOs don’t know how to manage. And if he can return them to basics, and making money on those basics, that would be a very good thing.” Agreeing was Vinod Gupta, General Partner at Everest Capital Partners, Inc. He told Banking New York Pandit “was the wrong guy for Citi. He was a hedge fund manager, not an operating manager. He should have cut costs faster. Michael O’Neill, the new chairman, is a Marine. He is the best manager there is. He turned around Bank of Hawaii in a short time; he will be good for Citi.” Michael Kaufman, managing partner at Kaufman Dolowich Voluck & Gonzo, said: “When you want people to leave a company, you give them an offer of severance – that is in exchange for them walking away. And this was all about timing. From a timing perspective, Citi could have done a better job. Sometimes you need to [make] a change quickly. While it might not look good, it can be best for the company.” The timing issue Kaufman alluded to was Citi announcing Pandit’s departure only hours after the bank’s earnings call, as opposed to continued on page 14 

November/December 2012 | 13

A VIK-TORY FOR THE BOARD 

continued from page 18

waiting perhaps a month. And there is a difference with CEOs of public companies and their boards, due to shareholders. Summed up 5WPR CEO Ronn Torossian: “The ouster at Citi was initially shocking, amidst a decent earning report, and it did shake some of the stockholders. Yet Citi is a giant organization that is bigger than its people. If it keeps looking better, and climbing out of the hole it had been in, this will be a blip on its radar. If it falls and returns quickly to the red side of the ledgers, this incident will be trumpeted as a possible reason, giving more fuel to the issue and to Vikram Pandit’s angst.” Reaction to the appointment of Tom Corbat as the new Citi CEO has been positive. The Wall Street Journal had this comment from Wells Fargo analyst Matthew H. Burnell: “Corbat’s elevation

strikes us as a positive for Citi, as it brings an experienced banker into the CEO’s role. He is a Citi veteran, with 29 years of experience at the company. In combination with board chairman O’Neill (also a traditional commercial banker) we believe investors – and possibly regulators – will benefit in the intermediate term from their background as traditional bankers.” In her recent book, Sheila Bair wrote: “The selection of Pandit simply reaffirmed that Citi was no longer a bread-and-butter commercial bank. It had been hijacked by an investment banking culture that made profits through high-stakes betting on the direction of the markets” as opposed to making prudent loans, she writes. She thought Citi needed a more traditional banker to fix the mess it had gotten itself into, but Pandit “wouldn’t have known how to underwrite a loan if his life depended on it.”

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Editor's Note: As this issue went to press, Citigroup Inc. announced it would cut 11,000 jobs companywide, shutter 44 U.S. branches, and withdraw from some emerging markets to concentrate on 150 cities with the highest growth potential. The bank took a $1.1 billion fourth quarter pretax charge in connection with the cuts.

The WSJ quoted Bair as saying the “move was good for shareholders, adding that there had been problems with execution at Citi under Pandit, citing the write-down the bank had to take on its valuation of Smith Barney. Bair said that Citi was a “hodge podge of businesses” lacking in strategic direction, and noted that despite a bounceback since the financial crisis it is underperforming its peers. Said Meredith Whitney: “Vikram Pandit has stepped down as CEO at Citi along with COO Havens. Pandit reportedly referred to himself at the new king at Citi after he replaced former CEO Charles Prince back in 2007. Now it seems, any seat in C’s court should come with a warning label.” ■

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Q&A

Larry McDonald On the State of the Industry, and Where We Go from Here

t the height of the 2008 financial crisis, Larry McDonald wrote a book on the fall of Lehman Brothers. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers details his experience working as vice president at Lehman Brothers and provides a behind-thescenes look on why one of the most prominent investment banks failed. Published in 2009 by Random House, Colossal Failure hit The New York Times bestseller list in its first five days, and is now considered one of the bestselling business books in the world. McDonald is a frequent guest contributor on Bloomberg, CNBC, Fox Business and the Huffington Post. He was a special advisor to the Financial Crisis Inquiry Commission (FCIC), created by Congress in 2009 to investigate the causes, domestic and global, of the economic and financial crisis in the United States. Additionally, McDonald has participated in three major financial crisis documentaries: Sony Pictures’ Academy Award-winning documentary The Inside Job, the BBC’s The Love of Money and CNBC’s House of Cards. He recently spoke with Banking New York on a number of topics pertaining to the financial industry.

BNY: What do you think about the state of the industry today? Larry McDonald: Something fascinating is going on, from both a historical and a risk perspective. Twenty-first century financial products have evolved so fast with such power and risk, but the regulatory regimes are back in the 1980s. If we had a spreadsheet and tracked where the FDIC and SEC are 16 | Banking New York

spending most of their time, it would be on arcane Ivan Boesky-type cases. We live in a post-Lehman world of much systemic risk.

Is there a place for academics in the financial industry? McDonald: After I wrote my book, I worked with numerous academic types. There is nothing wrong with being an academic, but society gets a false sense of security around academics. Elizabeth Warren is a perfect example. She is highly respected and highly regarding, but she has never been in the game, and never taken risks. We don’t have anyone who has been risk taker on the regulatory side. The regulatory regimes are chock-full of academics. Society embraces their academic backgrounds. It’s very impressive, but it means less when you look at what happened.

Have regulators fallen down on the job in recent years? McDonald: One bizarre aspect about the 2008 crisis is that Hank Paulson was calling all the shots. The New York Times did a study of his phone records and found he was devoting a ton of time with both Lloyd Blankfein and Jamie Dimon. Chris Cox, [Ben] Bernanke and Geithner were not making decisions. And Sheila Bair was left out of important discussions. I believe they negotiated part of the [Washington Mutual] deal without her.

Was there a bit of a “not my problem” attitude? McDonald: When you say “Lehman” or “Bear,” it is clear that the SEC thought the New York Fed had certain

Larry McDonald

responsibilities and the New York Fed thought the FDIC had certain responsibilities. The grey lines were part of danger. The problem is we have come so far from Glass-Steagall. You can’t quickly create Glass-Steagall again. We should create a five- to 10-step process that would get these [major] banks closer to where they used to be. It will take a long time to accomplish getting totally back to Glass-Steagall without our risking our system.

What’s your opinion on Jamie Dimon? McDonald: I think the whole Jamie Dimon thing is a shame. He is a hell of fame risk-taker. It’s like Arnold Palmer losing a tournament by making one big mistake. Dimon was one of the best risk managers during the financial crisis.

What do you see as the Consumer Financial Protection Bureau’s role? McDonald: The CFPB should be focused on mortgage brokers. Instead, they’re regulating local banks. It’s nuts. And the reason it’s nuts is that this isn’t the 1980s or 1990s. We have a colossal systemic problem in Europe. But we are focusing on local banks and their credit card fees.

In hindsight, what do you think about the Troubled Asset Relief Program (TARP)? McDonald: TARP was a defibrillator. When a person is having heart attack, you need to shock the heart. We needed a massive injection of capital into the system. There was a ton of poorly

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spent money in the TARP plan. But the intent and what it accomplished went a long way to reviving the system in a relatively fast period of time. If you look at Europe and what is happening, our system is systemically safer. The TARP plan and our ability to handle a systemic problem in a collective way was very important.

If you could, what would you tell President Obama? McDonald: Why is your administration using the financial crisis to spray gun rules and regulations into corners of American finance that had nothing to do with the crisis? Why aren’t you laser-focused on the problems that could really damage our country and the banking system? Take the top five most systemic problems and address them one by one, in order of priority. ■

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November/December 2012 | 17

SOCIAL MEDIA

Banks and Financial Institutions Must Embrace the Changed Customer Dynamic Social Media’s Time is Now By Binesh Nambiar in 2012, yet 60 percent of those firms still consider themselves to be social media novices. With customers spending more time and attention on social networks like Facebook and Twitter, banks, financial institutions and regulatory agencies are finally paying attention and incorporating social media into their communications mix. To that end, regulatory agencies are laying out social media best practices to guide banks and financial institutions on how to tap into social networks, while complying with regulations. Some of these benefits include:

CREATING BRAND AFFINITY AND IMPROVING CUSTOMER RETENTION

ue to the current economic climate, banks and financial institutions are struggling to bolster their bottom line, retain customers and stay competitive in the marketplace. Financial institutions – specifically banks – are leaving no stone unturned to ensure that they provide the highest quality of service to their valued customers. Unlike the old days, when a bank could wait until a customer came onboard to learn about his wants and needs, today customers expect their banking institution to know them inside out before they become a customer. Thanks to the advent of social media and the advances in technology, customers are now driving the sales process. Customers are getting savvier and taking a more active role in ascertaining whether a product offered by a particular bank is the best fit for

them before they make any purchases. For example, customers can conduct their own research over social media networks to easily evaluate and compare other similar offerings on the market, and find out whether existing customers are happy with that product, before they commit to buying anything. As a result, customers are increasingly purchasing products and services from non-traditional providers who provide the best value to them. They are also getting more comfortable with alternative methods of delivery, including electronic channels. On the flip side, communicating via electronic channels is also weakening the personal bonds between customers and institutions, as customers no longer want to remain loyal to any particular organization. An estimated 90 percent of financial services firms were expected to dedicate funds for social media initiatives

Social media can play an active role in in shaping brand identity and influencing customers. By providing customers with an avenue for conversation, social media provides a great opportunity to create strong relationships. For example, banks are using social media channels to seek feedback on advertising campaigns, new promotions and changes to existing policies. They are gauging customer reaction before rolling out new services and correcting course if necessary. The reaction around the debit card fees brought in by the Bank of America is a case in point. The issue was well handled before the situation could go out of control.

EFFECTIVE CUSTOMER SERVICE Using Twitter, Facebook and LinkedIn, banks can respond to customer issues and questions in real time. Issues resolved over social media channels provide a

Binesh Nambiar is solutions lead for banking and capital markets at MphasiS, a business advisory firm. 18 | Banking New York

continued on page 22 

THE POWER OF AN ADVANCE

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Preventing Cross-Channel Fraud Thinking Beyond the Guidance By Christopher Robert

t’s easy to marvel at the conveniences that technology has afforded the experience of banking. Online banking, financial management tools, bill pay, person-to-person payments, account opening and transfers, and even imageenabled ATMs – the list goes on. No one would argue that these advancements have dramatically simplified our lives, but many would agree that they are a blessing and a curse Christopher Robert when considering the doors they open for fraud. As banking evolves and shifts more from the branch experience into the online channel, so does the focus of fraudsters. After all, if bank customers no longer need to go to the branch to complete most transactions, fraudsters can access everything without leaving the comforts of home, too. The focus of fraud today is customer information. Account takeovers are a primary fear for most banks, and a fraudster’s pot of gold. The consequences of this type of fraud can be detrimental to customers and sever a bank’s good reputation in the community. The fear of this fraud was the catalyst for the recent FFIEC updates. Prior to January’s FFIEC Authentication Guidance deadline, banks nationwide spent months assessing risks, devising plans, and investing in enhanced, layered online security methods to protect consumers and businesses from fraud threats originating in the online channel. For many banks, adopting layered security meant investing in multiple solutions from multiple vendors. While great

efforts are being made to create a greater peace-of-mind regarding fraud originating on the online channel, the fact is many banks remain vulnerable to fraud in other areas of their operations such as their mobile and ATM channels. They lack a concise way to monitor and correlate fraud across multiple touch points. Cross-channel fraud remains an elusive threat to many banks nationwide, and security and compliance experts continue to remind banks about the importance of safeguarding customer and bank assets at every susceptible channel. For banks to help ensure customer confidence and secure the integrity of online banking security, they must think beyond the FFIEC regulations and invest in long-term solutions that address cross-channel fraud. What’s at stake if banks don’t take cross-channel fraud seriously? Financial losses are the obvious answer, and it is safe to say that everyone is well aware of the hard losses. But it’s more difficult to pin an actual number to the soft losses, such as the damage to banks’ reputations, although numerous studies have analyzed them and discovered that they can have a significant impact. Reports consistently show that when a customer falls victim to fraud, the chances of the customer leaving the bank where the fraud occurred increase exponentially. Considering 20 percent of a business’ customers typically make up 100 percent of its revenue, banks certainly wouldn’t want fraud touching that top 20 percent. Banks can reduce the risks associated with cross-channel fraud with the following tips.

Know your threats – Despite the common stereotype, criminals are no longer shady characters nestled in clandestine hideaways. Today’s fraudsters are college educated businessmen who have access to advanced technology that is capable of manipulating and altering information more easily and tactically. Account

The focus of fraud today is customer information. Account takeovers are a primary fear for most banks, and a fraudster’s pot of gold. takeovers have become all-too-common because such criminals have access to several facets of a customer’s account such as on-us, ACH, ATM, debit, and wire transactions – and they stand to benefit from fraud using each pot of gold in the end. Know your customers – To thwart fraud at the most susceptible sources, banks must develop a comprehensive understanding of their customers’ accounts and behavior in order to ensure each vulnerable channel has appropriate fraud prevention measures and technology in place to protect it. Technology that trends behavior and then flags deviations offers strong analytics that can help prevent assaults before any damage is done. Trust integrated fraud technology – Banks that use multiple fraud prevention products from a variety of vendors often

Christopher Robert is a risk specialist for Jack Henry Banking, a division of Jack Henry & Associates. 20 | Banking New York

find it difficult to detect and prevent cross-channel fraud. Smaller banks are better positioned to implement an enterprise transaction monitoring plan and technology, because they typically operate with more core integration and less vendors, which makes the fraud waters less muddy and prevention a bit easier. Education – At the end of the day, education still reigns as the number one preventative measure a bank can take. Fraud is a moving target and requires continuous education for bank employees, and more importantly, customers. In the wake of the new FFIEC guidance and with all the media surrounding commercial account takeovers, it’s safe to say that consumers are paying attention. If your customers aren’t asking what you’re doing to protect them yet, they will be soon. This presents a perfect opportunity to bring your fraud prevention efforts to light and position your bank as a thought-leader and proactive protector of customer information. Should your bank fall victim to fraud, it’s important to address the event immediately and attempt to turn the negative to a positive. A phone call to an important customer in the wake of a fraud scheme can earn your bank customers for life – and the power of word-of-mouth could potentially help you win that customer’s closest friends as customers as well. With the enhanced FFIEC guidance deadline behind us, now is the time for banks to develop their forward-looking focus on enterprise fraud and secure the growing number of available banking channels. Meeting the guidance doesn’t necessarily solidify comprehensive fraud protection. Banks need to assess their enterprise fraud and legacy core systems, and consider the technology investments required to best position them for a future of fraudfree banking. ■

November/December 2012 | 21

EMBRACING THE CHANGED CUSTOMER DYNAMIC 

continued from page 18

great opportunity to assure prospects and customers that a bank is committed to keeping its customers happy. A positive tweet, mention or post from a happy or satisfied customer goes a long way. Studies have shown that quickly resolving issues related to checking and savings accounts have led to better conversion on successfully cross selling other banking products. These channels also reduce the cost of maintaining expensive call centers by identifying dissatisfied customers quickly and empowering banks to deliver more personalized services to them.

ANALYZING CUSTOMER DEMANDS Social media enables banks to capture customer suggestions and then analyze them to develop more tailored products and services. For example, establishing and nurturing customer communities to share insights on topics like retirement products to gain invaluable insight into customer behavior and develop future products as well as fine-tune products to

22 | Banking New York

align them with customer requirements. Many large banks seek inputs via these channels before launching new card products.

IMPROVING TOPLINE More and more banks are tapping into their customers’ preferred social networking channels to deliver targeted offers and promotions. They are also encouraging customers to rate products over social media. Access to data about customers’ shopping patterns, spending preferences and demographics can provide great insight into opportunities to sell additional products. For example, through social networking channels, banks can easily find out when a customer gets engaged or married, opening the doors for targeted sales pitches for mortgages, lines of credit or family insurance. In short, social media helps banks remain in touch with their customers and provide a more personalized service.

IT’S NOT GOING AWAY Social media is already driving dramatic changes in the way customers interact with their banks. The banks and financial institutions that recognize this opportunity and invest in social media can reap great rewards. However, the success of social media will largely depend on a bank’s ability to harness their existing IT systems’ for customer information and make the connection with their customers’ social networks. Also, instead of a siloed approach, the banks need to unify disparate systems that store customer information to gain an enterprise view of the relationship. Given the swift pace of social media channels, banks will need to adapt quickly to develop appropriate frameworks that not only comply with existing regulations, but also provide a level of flexibility to accommodate the evolving nature of social media. In the long run, being prepared and ready for the customer will determine the success of social media projects. ■

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