Former Signature CRE Head: Government Is Mucking Up the Rescue

In October 2007, I brought a group of about a dozen people to Signature Bank (SBNY) and created a commercial real estate lending department. The business plan was essentially the same as what I implemented at North Fork Bank and previously at M&T Bank.

The model was to establish client relationships with the best real estate investors in the New York area. My group and I were experts in New York City real estate. During my 10-plus years at Signature, we originated over 7,000 CRE loans totaling over $35 billion. We had zero losses. During my 12-plus years at North Fork Bank, we also had zero losses on CRE loans. 

I have been in the real estate business in New York City for almost 50 years as a broker, owner and mostly as the head of a CRE department for banks. I believe I have originated more loans on New York City properties than any other person — from single-family homes to the Empire State Building and every type of property in between. I have dealt with government regulators my entire banking career and had no problems until 2016 and 2017. 

When the regulators came in to perform their audit, there was a change in attitude. They had an arrogance that was only exceeded by their incompetence and lack of knowledge of real estate lending. At the initial meetings in both years, they introduced themselves as being there to “fix” all the mistakes the bankers were making.

We were told that we were heavily concentrated in CRE loans and that that was extremely risky. The fact that we had zero losses didn’t matter. When I pointed out to the head auditor that he was trying to force us to pull back on lending, he denied that, instead stating that his job was not to dictate what businesses the bank should be involved in. However, by downgrading the risk rating on loans based on false assumptions, loan loss reserves had to be increased, which made the business less profitable.

To give you one example of how absurd it became: On the last audit in 2017 (before I decided to retire from Signature in January 2018), the auditors said we had five violations involving third-party appraisals. In each case, they were wrong and I detailed their mistakes in a memo to them and to the executive management of Signature Bank. In the most blatant case, the auditor stated that the appraisal report did not contain an analysis of the market (or sales) approach, a comparative method of estimating asset prices. I pointed out that it did and showed them Page 48 of the appraisal, which contained the market approach. 

At the end of the audit, their report still contained the five violations even though in each case they were wrong. If the violations were removed from the audit, there would be no violations and, consequently, no justification to criticize the CRE lending business. The regulators insisted that Signature must diversify into other businesses. The majority of the auditors had no background in operating a business, underwriting a loan, performing an appraisal or operating a real property. However, they had the power. It was very apparent that they did not appreciate the compensation that executives were given despite the fact that it was based on profitability. The more money my business made, the more I made. If there was a loss because of a bad loan (which there wasn’t), then my compensation would be negatively affected.

I decided to retire because I could not continue to run the successful business that I and my group created. It would affect my reputation and not allow me to continue to deliver to my clients.

As Signature decided to diversify its business, I became concerned. When they opened offices in California and other states, and began accepting deposits from crypto companies, I sold all of my remaining SBNY stock. 

On March 12, the regulators took over Signature Bank. It was wrong and not necessary. The crypto companies withdrew their deposits as their business suffered, creating a significant drop in liquidity for Signature. Signature could have pledged its CRE loan portfolio and received a loan from the Federal Home Loan Bank Board. The liquidity problem would have been resolved. Instead, by taking over the bank, it sent a message of concern to depositors. The FDIC then guaranteed all deposits, which effectively created more of a concern for bank clients. 

When I would speak to clients, I would tell them that banking is a simple business. You deposit your money with the bank and then we lend it out at a higher interest rate. The FDIC has shut down CRE lending. Most Signature Bank clients have substantial deposits. If those clients aren’t able to get a loan, do you think that they will keep the deposits with Signature Bank? 

The tremendous increase in interest rates is going to have a disastrous effect on all types of loans. It is absolutely amazing that the Fed could raise rates 475 basis points in such a short period of time without regard for the catastrophic consequences. Here comes the recession because the Fed tried to control inflation instead of insisting that the current administration stop spending like drunken sailors. The politicians’ slogan is, “Vote for me and everything will be free.” 

It is very sad that thousands of hard-working employees of Signature Bank are going to be without a job just because the regulators want an example to show other banks they have the power. They didn’t want Signature to take deposits from crypto companies. However, they wanted them to diversify into businesses in which they had no experience. The ramifications of their actions are going to result in commercial and residential real estate values falling off a cliff and cause unemployment to increase.

More banking regulations are not the solution. The solution is less regulation and to let the bankers run their businesses. Absolutely, the auditors should check for “safety and soundness,” but they are not business managers.

New York Community Bank has bought the deposits and some loans (not CRE) of Signature. The CRE loan portfolio is for sale. It was an excellent quality portfolio until the FDIC stepped in and the Fed raised interest rates without considering common sense. The FDIC wouldn’t sell the portfolio to a Chinese institution or group. Or would it? 

All the banks that I have worked for during my banking career have been “portfolio lenders.” They kept all the loans they originated. They did not sell them or securitize them. It was relationship lending. In the mid-2000s, I complained to the regulators that the CMBS market, as well as Fannie and Freddie, were unfair competition to portfolio lenders because they were over-lending at interest rates 50 to 100 basis points less than us. The regulators said it wasn’t their responsibility.

They allowed the crash to happen. This time they are causing the crash.

George Klett is the president of New York Real Estate Capital Corporation and was chairman of the commercial real estate committee of Signature Bank.