THE LOCAL AREA WATCH

LOCAL BOY HITS JACKPOT AT SINKING FIFTH THIRD

Kevin Kabat rose through the ranks of that venerable West Michigan institution, Old Kent Bank & Trust, and played a key role in suppressing a shareholder revolt when the big bank from Cincinnati, Fifth Third Bancorp, gobbled it up in April 2001.  Two years later, after Fifth Third reduced Old Kent to its Michigan subsidiary and then ousted its discredited mole, David Wagner, from the top spot there, Kabat took the reins of Fifth Third-Michigan.  Then last April, Kabat was rewarded for keeping the Fifth Third-Old Kent merger skeleton in the closet with promotion to chief executive officer of the entire bank.  So he packed his bags and moved to Cincinnati.

Now we learn from the Securities & Exchange Commission that after less than a year running the show at Fifth Third Bancorp, the board of directors paid him $10 million in 2007.  That includes a base salary of $866,534, perks and benefits totaling $140,400 such as $28,682 in country club dues, a $3,000,0000 performance bonus, and $6,000,000 in Fifth Third stock and options.  So Kabat bagged $10 million while his shareholders got what in 2007?  Well, Fifth Third's stock (ticker symbol: FITB) plummeted from a high of $43.32 a share in 2007 to $22.13 a share this morning.  That wiped out about $10 or $12 billion in shareholder value since Kabat took over.

Well, maybe Kabat deserved his big payday, because in a tough market, he had managed Fifth Third better than its competitors.  Sounds good.  However, there's the inconvenient fact that Fifth Third's performance ranking has been at or near the bottom of the top fifty largest banks in the U.S.  The big bank from Cincinnati continues to sink after the Federal Reserve put the kibosh on ex-CEO George Schaefer's running-on-water strategy designed to outpace the discovery of irregularities in Fifth Third's acquisitions of competitors, especially Old Kent.

And do not doubt that Kabat won a jackpot from the directors.  Even Jeffrey Immelt, chairman and CEO of General Electric did not make as much as Kabat.  GE's directors paid him only $9.1 million for running a company with a shareholder value thirty times the size of Fifth Third.  If Kabat had been paid accordingly, he would not have even earned half of his base salary.  It appears that our local boy is still collecting from grateful Fifth Third's directors for keeping shareholders in the dark about the crooked deals surrounding the Fifth Third-Old Kent merger, such as Toxic Towers.

KABAT NEW TOP DOG AT FIFTH THIRD; NO WORD OF THANKS TO DISCREDITED WAGNER

As heirs apparent to Fifth Third Bancorp bigwig George Schaefer fell by the wayside as his go-go strategy of gobbling up smaller banks stalled exposing managerial and financial problems at the big bank from Cincinnati (click here for links to these stories), opportunity beckoned for Kevin Kabat.  This past week he got the nod and is now the chief executive officer of the Fifth Third empire.

Kabat was a top executive at Old Kent Bank who helped his boss David Wagner, the CEO and chairman of that venerable Grand Rapids institution, deliver the bank to Fifth Third at the climax of Schaefer's acquisition campaign during 2000-2002.  One important job Kabat did for Wagner and Fifth Third was quelling a pre-merger shareholder suit threatened by key directors of Old Kent who were disgusted with Wagner's performance, especially his mismanagement of the bank's mortgage business, that had made Old Kent weak enough to be bought out.  That suit would have aired out all the dirty laundry during Wagner's regime, including irregular lending practices to Grand Rapids "players", and probably would have also put the spotlight on Fifth Third's dubious due diligence in buying up smaller banks.

No small thing what Kabat did.  One of the directors was furious enough with Wagner to call him a "crook".  By pacifying discontent, Kabat prevented a lawsuit that could have put the kibosh on Fifth Third's acquisition of Old Kent.  So it went through.  However, Schaefer's go-go strategy caught up with him after that.  Old Kent was too big for Fifth Third to digest easily, and loose management of the merger finally caught the attention of the feds.  The Federal Reserve investigated the merger starting in September 2002 and gave Fifth Third its verdict in March 2003.  The feds only slapped Schaefer on the wrist, but they also stopped the Fifth Third merger steamroller -- but only after Schaefer got his big prize, Old Kent Bank.  (Wagner, however, paid a big penalty when Schaefer ousted him from Fifth Third in April 2003 under the pretext of early retirement.)

The stock market analysts also took a closer look at Fifth Third as a consequence, and they found problems that sent the Cincinnati bank's shares into a nosedive.  By October 2005 the crash in Fifth Third's stock sliced the share price in half (from its peak in 2002), destroying almost $20 billion in shareholder value.  Schaefer was in hot water, and his lieutenants fell on their swords for him.  By this time Kabat had made his way to Fifth Third headquarters in Cincinnati.  With no clear successor to Schaefer left, and other banks looking to exploit the weakness at the top of Fifth Third to acquire it, in June 2006 Schaefer tapped Kabat to be his second-in-command and heir apparent.  After all, if it hadn't been for Kabat keeping all the dirt swept under the rug until after the merger was completed, Schaefer may have never gotten his hands on Old Kent Bank.

In accepting his rise to the top spot last week, Kabat thanked all those who had made that possible, with one curious exception -- David Wagner.

HOW A SHARK BECOMES SHARKBAIT

A bit of information from the Wall Street Journal that probably won't make it into the Grand Rapids Press:  Institutional Shareholder Services, a preeminent advisory firm, urged shareholders of Fifth Third Bancorp to withhold support of embattled CEO George Schaeffer and other directors who are up for election this year.*

As reported here, Schaeffer led the big bank from Cincinnati through its go-go years until a declaration of bank fraud from your friendly neighborhood watchdog, the Local Area Watch, triggered a federal investigation of Fifth Third in the wake of its botched acquisition of Old Kent Bank in 2001.

That stopped Schaeffer's running-on-water strategy of buying up smaller banks quicker than the financial irregularities of these mergers (think of the financing of the Boardwalk project) could catch up with Fifth Third.  Dead in the water, the bank sank losing over 40% of shareholder value during the next three years.  With a bit of poetic justice, Schaeffer's crash and burn turned the tables on Fifth Third and now made the shark sharkbait.  Wells Fargo and US Bank have both looked into buying out Fifth  Third.

Click here for a list of past articles about Schaeffer and his bank.

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* However, most shareholders ignored the advice, as they too often do regarding mismanaged public corporations.  Think Enron.  So Schaeffer and his cronies were voted back in today, though with considerably less support than before.

FIFTH THIRD SCRAPING BOTTOM

Yesterday the Wall Street Journal reported Fifth Third Bancorp of Cincinnati ranked at the bottom of the pack in comparison to other publicly-traded banks.  Of the twenty-seven members of the banking sector that the Journal rated, Fifth Third posted the worst one-year total return to shareholders at minus 17.3%.  It was the bank to post a negative three-year total return at minus 11.3%, and only two other banks had a worse five-year total return.

Clearly once the Feds put the ki-bosh in 2002 on Fifth Third's strategy of hiding its loosey-goosey corporate governance behind a cloud of dust of acquisitions, the financial problems inherent its style of management caught up with the bank.  Apparently reality has finally intruded upon the top management of the bank.  Last year CEO George Schaeffer shamelessly passed out big bonuses despite the abysmal performance of his top executives.  This year, with the threat of takeover looming, there were no bonuses -- just big raises, some topping 15%.  Well, I suppose it costs a few bucks to keep people around to fall on their swords later on.

Here are some links to past articles about the big bank from Cincinnati, its acquisition of Old Kent Bank, and the corruption that flowed from that deal:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

FIFTH THIRD'S CROWN PRINCE RESIGNS

Fifth Third Bancorp of Cincinnati, Ohio, has lost another top executive.  Following the "resignation" of Chief Financial Officer Mark Graf last month, Executive Vice President Neal Arnold has left the bank.  Fifth Third quietly announced Arnold's resignation on Monday in a routine regulatory filing.  No explanation has been offered for his departure, which has raised eyebrows because Arnold was thought to be embattled CEO George Schaeffer's likely successor.

Well, as regular readers here know, the big bank from Cincinnati has problems, which the Local Area Watch has been documenting for a number of years now.  For those who want to catch up on the story of Fifth Third and its decline over the past few years, here are links to key articles we have run about the bank:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

POT CALLS THE KETTLE BLACK

Mitch Stapley has a rather grand title.  He is the Chief Fixed Income Officer for Fifth Third Bank of Michigan.  Like Punxsatawney Phil, he pops his head out of his hole every so often to pronounce a forecast -- except that Mitch forecasts the financial markets, not the weather.  Last week Mitch told General Motors shareholders to drop their stock like a hot potato.  Whatever the merits of that advice, I must wonder what Mitch told Fifth Third shareholders over the past three years as CEO George Schaeffer and the gang destroyed half the bank's stock value.

GET YOUR FIFTH THIRD NEWS HERE!

A rumor broke yesterday that Fifth Third Bancorp of Cincinnati (ticker symbol: FITB) has become a takeover target after CEO George Schaeffer has managed to halve its stock value over the past three years since the trouble-plagued acquisition of our very own Old Kent Bank & Trust.  Scuttlebutt has it that U.S. Bancorp of Minneapolis and Wells Fargo & Co. of San Francisco are in the market.  On the news Fifth Third's stock bounced up a couple of bucks.  Who knows, with good management the big bank from Cincinnati may very well be a bargain.

For those visiting about website for the first time looking for news behind all of the takeover speculation, here are links to some previous articles we ran on Fifth Third:

FIFTH THIRD CFO TAKES THE FALL - Why Fifth Third's new CFO isn't responsible for Schaeffer's mismanagement of the bank.

A BANK JOB, INDEED - The chain of events that followed from our report to the feds on the shenanigans involved in Fifth Third's acquisition of Old Kent.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME? - How Fifth Third/Old Kent cooperated with its development company to facilitate the illegal removal of contaminated soil from an urban brownfield.

THE FIXER, PART IV (PYRAMID DUST) - The background on how Old Kent got sold out to Fifth Third on the cheap.

All of our stories on Fifth Third can be found under the category "Banks".  If you have any news for us regarding Fifth Third, feel free to post comments to the relevant article or e-mail us at info@localareawatch.org.  Thanks.

BILLIONS DESTROYED

This past week Fifth Third Bancorp's stock (ticker symbol: FITB) hit a new low of $35.05 per share.  Fifth Third's long unrelenting slide began in April 2002, after month after we had turned over to the U.S. Justice Department evidence of federal offenses committed in the course of Fifth Third's acquisition of Old Kent Bank.  From its peak at that time of almost seventy bucks a share, shareholder value has been sliced in half.  (No wonder Fifth Third hates us.)  That represents the destruction of $19.6 billion of value, and the big bank from Cincinnati still isn't a bargain as it struggles to churn out profits.  Trust me, folks, the recent ouster of Fifth Third's CFO as the fall guy for this disaster won't turn anything around.  CEO George Schaeffer has operated the bank on the go-go principles (or should I say "lack of principles") of the '90s.  But it's tough for any public corporation, let alone a bank, to play that game anymore, and looks like running Fifth Third the honest way isn't easy.

FIFTH THIRD CFO TAKES THE FALL

After peaking at nearly $70 a share three years ago, the once high-flying stock of Fifth Third Bancorp (FITB) has fallen to under $37 a share, its lowest level in five years.  The slide has destroyed almost half the shareholder value of Fifth Third in the wake of its acquisition of our homegrown Old Kent Bank.  Of course, financial carnage like that means someone has to go.

On Friday the Wall Street Journal reported that the fall guy was the newbie to the Fifth Third executive suite, Chief Financial Officer R. Mark Graf.  The 40-year-old Graf was hired in only a year ago, but he’s been fingered for the collapse of Fifth Third’s stock.  Well, the official story is that he’s quitting to pursue other opportunities.  Yeah, right.  But then the unofficial story is also a howler:  Graf has to go because he downplayed to shareholders the bank’s recent bungling of the flattening yield curve.  (That’s when short-term interest rates rise as long-term rates fall.  This squeezes a bank’s profit margin because the cost of money goes up while the interest rates it charges on loans go down.)

The idea that Graf is responsible for the Fifth Third troubles is absurd.  He’s been onboard only for a year, but the bank’s stock has been falling like a rock for three years.  It’s no coincidence that the collapse began in April 2002 after we had reported to the U.S. Justice Department federal offenses that were committed during Fifth Third’s acquisition of Old Kent.  By September 2002 the Federal Reserve Bank of Cleveland opened an investigation of Fifth Third.  As a consequence the Fed imposed controls upon Fifth Third that stopped its merger mania strategy dead in its tracks.

Once Fifth Third was forced to grow through good management rather than buying up smaller banks with inflated stock, reality caught up with it.  No longer able to run on water, its stock sunk while banks as a group outperformed the market.  It is CEO George Schaeffer’s merger strategy that is a bust.  He got greedy trying to get Old Kent on the cheap.  (See Part IV of “The Fixer” series for more on this.)  Instead he got a pile of overvalued and impaired assets that’s been an albatross around his neck ever since.

Graf’s resignation will only give Schaeffer a temporary respite, because nothing’s changed.  Fifth Third’s fundamental problems remain, and it still has a potential $40 billion environmental liability hanging over it for concealing the Boardwalk’s contamination from regulators, shareholders, and its partner in financing the project, National City Community Development Corporation.  Expect the Fifth Third stock to go even lower as its profits continue to slip and its liabilities catch up with Schaeffer and his team.

FIFTH THIRD TANKING

The stock of Fifth Third Bancorp (ticker symbol: FITB) is dropping like a rock today on the NASDAQ exchange.  It's down two bucks this morning at around $38 per share.  That puts the bank's stock at nearly half of its $75 per share peak in 1999 when it began the process of acquiring Old Kent Bank.  Since closing the Old Kent deal in April 2001, there's been nothing but bad news for the big bank from Cincinnati, which has been dogged with a federal investigation, a class-action shareholder suit, and the prospect of a $40 billion environmental liability, all stemming from that transaction.

The collapse of Fifth Third's stock price is worse news for it than it would be for other banks, because Fifth Third has depended upon an inflated stock value to grow by using its shares like currency to buy other banks.  Cheaper stock sinks that growth strategy, which had helped to mask problems with Fifth Third's loosey-goosey controls over assets it took over from acquired banks.

The immediate cause of Fifth Third's freefall today was its downgrading as an investment by the five top financial advisors on Wall Street.  Even at its recent trading range in the low forties, Fifth Third was still an expensive stock on a P/E basis compared to other banks.  So the word from the advisors set off wave after wave of institutional selling of Fifth Third's stock.  As for a more fundamental cause of Fifth Third's demise, in August its shareholders motioned the U.S. district court in Dayton, Ohio, to approve the settlement of the class-action suit mentioned above.  On Tuesday the presiding judge convened a closed meeting between Fifth Third and the shareholders' attorneys.  No news has come out of that meeting, but it is likely that the details of the payment by Fifth Third to shareholders was hammered out in it.

Meanwhile, Fifth Third's development company for the Boardwalk project at the north end of downtown, 940 Monroe L.L.C., remains on the hook for huge environmental liabilities for dumping 26,000 tons of hazardous waste in the middle of the city.  Moreover, state and federal law enforcement has not closed the books on the bank's role in that dumping - and all this is just the tip of the iceberg of the foulness arising from Fifth Third's snatching of Old Kent three years ago.  The big bank is now beginning to reap the whirlwind for its profligacy.

A BANK JOB, INDEED

The September 5th edition of Forbes magazine ran an article about the continuing troubles of Cincinnati-based Fifth Third Bancorp, which acquired local business icon Old Kent Bank four years ago.  The magazine titled the article “Bank Job”, but I’m not sure it knew now close to the mark that title was.  The article summarized the financial difficulties of Fifth Third in the wake of crackdown by the feds in 2002, but it didn’t describe what provoked the feds to investigate in the first place.  It was L.A.W.’s complaint to the U.S. Justice Department that a real bank job took place when Fifth Third acquired Old Kent Bank.

As reported in the last installment of “The Fixer”, former Fifth Third executive David Wagner became chairman and CEO of Old Kent Bank.  During his tenure there he took this once-solid bank and ran it into the ground.  The most serious problem Wagner got Old Kent into was letting the failing Amway become far too much in hock with it.  To solve that problem Wagner used his chairmanship of Blodgett hospital to clear the way for Amway founder Rich DeVos to merge Blodgett with Butterworth, of which DeVos was chairman, to create Spectrum Health Corporation.  DeVos would then have control over nearly a one billion dollars in combined hospital reserves which could be diverted into projects and property he owned to help pay back Amway’s debts to Old Kent.

The hospital scam didn’t work out for Wagner and DeVos as planned, so Old Kent needed a bail-out.  (Of course, all of us healthcare rate-payers in River City are still stuck with the bill for their destruction of competition between Butterworth and Blodgett.)  So Wagner put a for-sale sign on Old Kent.  But, he did not intend to sell off the bank to the highest bidder.  Instead Wagner wanted to deliver Old Kent into friendly hands who would overlook the problems with Amway and other fiascos he caused in exchange for getting Old Kent on the cheap.  (In other words, at the expense of Old Kent shareholders.)  To this end, Wagner had an ace up his sleeve, his former employer Fifth Third.  Whether by design or circumstance, he had Old Kent ready to serve up to Fifth Third by 1999.

Fifth Third promised Wagner a huge bounty of more than $30 million for bagging Old Kent.  Meanwhile, the looting of Old Kent by insiders began ahead of the formal merger of the two banks.  One crooked deal was the financing of the Boardwalk project (evidence of which Assistant City Attorney Daniel Ophoff possesses but refuses to release, despite a Freedom of Information Act lawsuit filed by yours truly against the City), which the bank took an ownership stake in.  The biggest fallout from that bank fraud was the illegal dumping of 26,000 tons of toxic waste at the Monroe Avenue Water Filtration Plant and other locations northeast of Grand Rapids.  That alone has tied Fifth Third to a potential $40 billion liability in environmental penalties and clean-up costs.

Because of Wagner’s shenanigans at Old Kent, many of the assets Fifth Third acquired from Old Kent upon completion of the merger in April 2001, like the Boardwalk project, were significantly overvalued.  That gave Fifth Third shareholders the misimpression that the bank was more valuable than it actually was.  By March 2002, L.A.W. filed a declaration of bank fraud with the U.S. Justice Department reporting these problems.  By September 2002, the Federal Reserve Bank of Cleveland launched an investigation of Fifth Third, which found that the bank’s financial controls during its devouring of Old Kent were scandalously loose and allowed a lot of crappy and even illicit Old Kent deals get buried by the merger.  The feds forced Fifth Third to take a relatively modest write-off of $82 million for impaired assets.  What hurt more was forcing regulatory controls upon Fifth Third which stopped its buy-it-and-bury-it merger strategy dead in its tracks.  The continuing inflation of Fifth Third’s stock price depended upon the bank gobbling other banks faster than the problems of loose financial controls could catch up with it.

Consequently Fifth Third’s stock price has tumbled by about a third, destroying billions in shareholder value.  Little wonder, the class-action hyenas have a big shareholder liability suit pending against Fifth Third in the U.S district court down in Cincinnati.  Also, little wonder about how angry Fifth Third is with us – especially with us still hanging that $40 billion in environmental liability over it and its Boardwalk development company.  The bottom line, folks, is that Fifth Third is disreputable corporation still operating on the screw-the-shareholders mentality that sunk the executives of Enron, Adelphia, Tyco, and the other crooked enterprises of the go-go years of the late bull market.

FEDERAL RESERVE SEEKS COMPLAINTS AGAINST FIFTH THIRD

I should have given everyone a heads up on this sooner.  The Federal Reserve Bank of Cleveland has received an application from Fifth Third Bank of Michigan to open a new office in Marco Island, Florida.  If you have any serious complaints about Fifth Third, the Federal Reserve will review them to determine whether or not grant Fifth Third permission to proceed.

Send your remarks to:  Ms. Cindy C. West / Banking Supervisor / The Federal Reserve Bank of Cleveland / P.O. Box 6387 / Cleveland, Ohio 44101.  Note that they are related to the "Fifth Third application for a new office in Marco Island, Florida".  The Federal Reserve needs your remarks by August 25th to consider them.

FIFTH THIRD STILL FLOUNDERING

The big Cincinnati bank that gobbled up Old Kent for a song, funded the biggest toxic dumping scandal in River City's history, eliminated over three thousand jobs locally, and alienated thousands of customers has appeared to have lost its groove.  Fifth Third Bancorp, which had run up its stock price through a running-on-water strategy of continually buying up smaller banks so that the dust would never settle look enough for anyone to see how well the organization was really doing, now seems stuck in decline since the feds nailed it two years ago for improprieties in the acquisition of Old Kent.

This was confirmed by Fifth Third's announcement that second-quarters profits have declined by seven percent.  CEO George Schaefer that the bank face some serious challenges that are not ameliorated by the difficult interest rate market.  Well, it all of Fifth Third's troubles really were Greenspan's fault, don't you think all the banks would be in the same soup?  It's past time for Schaefer to acknowledge that Fifth Third's go-go days are over and that bank needs to become a responsible company.

DID FIFTH THIRD ABET ILLEGAL DUMPING SCHEME?

I read this morning a snippet in the National Law Journal about Enron, the notorious energy trading company, settling with one of ten banks alleged to have abetted the company's collapse in the wake of its schemes to fleece shareholders by falsely inflating profits.  This brought to mind the biggest stain in River City's banking market, Fifth Third.

As you may know from the Toxic Towers dumping scandal, Fifth Third Bank is actually one of the owners of the Boardwalk project.  In fact, in consortium with National City Community Development Corporation (NCCDC) control 99% of 940 Monroe L.L.C., the company that developed and now manages the Boardwalk.  Fifth Third's consortium controls all of that company's assets and cashflow to ensure that it receives the full benefit of $5-6 million in state and federal historic tax credits along with repayment of $26.5 million in loans secured by the Boardwalk property.

In fact, all the other partners are required to guarantee, out of their own pockets if necessary, the Fifth Third consortium a 20% annual return on their investment in 940 Monroe L.L.C. before they receive one dime from the company.

To put together this sweetheart deal, Fifth Third* did an extremely strange thing.  Although its consortium agreed to invest about $31.5 million into the Boardwalk project, the bank took none of the prudent and customary measures to eliminate the project's environmental liability.  Because the Boardwalk site was heavily contaminated with toxic concentrations of chemical wastes and heavy metals, that liability was huge.  (In fact, because the Boardwalk's developers did release that contamination into the environment and public areas, the potential fines alone exceed forty billion dollars!  That's more than one thousand times the amount Fifth Third and NCCDC invested in the project.)

Michigan state law, passed a decade ago, allows banks like Fifth Third to reduce and even eliminate liability for existing environmental contamination of brownfield site by inviting the Michigan Department of Environmental Quality (MDEQ) to vet the bank's environmental due diligence.  For example, a bank can curtail liability for old contamination at a site by taking the following steps:

[1] A bank as a condition of a loan always requires a developer to assess a brownfield for environmental contamination.

[2] The developer in turn hires an environmental consultant to do this assessment, the purpose of which is to find out what levels of hazardous waste exist at the site.

[3] The developer files the consultant's report with the MDEQ.

[4] The bank then requires the developer to request that the MDEQ make a "determination" as to the accuracy and sufficiency of the consultant's report.

[5] If the MDEQ determines that the consultant's report is adequate, it will not hold the developer or the bank liable for cleaning up the contamination identified in the consultant's report.

Against its own interest in protecting $31.5 million in loans and investments in the Boardwalk project, Fifth Third never took Step #4.  The bank has admitted to this fact in briefs it has filed with the Kent County Circuit Court.  Fifth Third's failure to protect its investment as now permitted under Michigan state law is unprecedented.

Why didn't Fifth Third protect itself?

We know this.  The environmental consultant's report for 940 Monroe L.L.C. concealed a huge area of environmental contamination at the Boardwalk site.  This area coincided with the location of the new parking ramp, which 940 Monroe L.L.C. had to have excavated down to bedrock to accommodate the ramp's foundation.  This meant the very costly removal of about 13,000 tons of "urban fill", or contaminated waste, if that section of the site were to be properly examined and tested.  Instead, the report falsely stated that this area had been filled in with clean sand and so required no testing.

By falsely passing off the parking ramp dirt as clean, Dykema Excavators Inc. (whose owner is one of Fifth Third's partners in 940 Monroe L.L.C.) proceeded to cheaply remove it without any controls to prevent the release of the dirt into the environment.  As reported elsewhere, Dykema Excavators dumped all of this contaminated dirt at the nearby Monroe Avenue Water Filtration Plant, which it had bought from the City of Grand Rapids for this purpose.

If Fifth Third had required 940 Monroe L.L.C. to get a determination from the MDEQ as to the accuracy and sufficiency of the consultant's report, the MDEQ would have likely discovered the attempt to pass off the parking ramp's soil as clean.  If that happened, the costs of cleaning up that parking ramp area would have increased the project's costs probably beyond the profit the Fifth Third consortium expect to glean from its investment.

This wasn't the only safeguard Fifth Third failed to obtain from the MDEQ.  Similary, the bank could have had the MDEQ determine the adequacy of 940 Monroe L.L.C.'s "due care" plan (i.e., the procedures for preventing a site's contamination from coming into contact with people and the environment) and the completion by 940 Monroe L.L.C. of any remediation (i.e., clean-up or containment of contamination) directed by the due care plan.  But Fifth Third never directed 940 Monroe L.L.C to obtain these determinations either.

In light of these facts, it hard not to conclude that Fifth Third abetted 940 Monroe L.L.C. and its contractors in their scheme to illegally dump the Boardwalk's contaminated soil at the Filtration Plant and other locations around Grand Rapids.

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* The reference to Fifth Third includes Old Kent Bank.  Fifth Third has tried to deny any responsibility for Old Kent's actions prior to its acquisition of the bank in April 2001.  However, Fifth Third is legally Old Kent's successor and is responsible for it.

ENCORE: FIFTH THIRD STILL ON THE SKIDS

[This article was originally published on April 15, 2005.]

Fifth Third Bancorp of Cincinnati, the 800-hundred-pound gorilla of banking in Grand Rapids is still on the downward slide, in the wake of gobbling up Old Kent Bank four years ago.  After announcing fat bonuses for top executives, Fifth Third revealed that profits for the bank collapsed 5.8% during the past quarter.  The decline has been officially attributed to expenses Fifth Third incurred from its recent purchase of a Florida bank.  However, Fifth Third CEO George Schaefer indicated that this is part of longer term troubles the bank has yet to correct when he admitted to shareholders this week, "Revenue growth continues to be below our expectations.  It's safe to say this won't be turned around overnight."

We know from Fifth Third's botched acquisition of Old Kent that it continues to hemorrhage small business and retail customers with its obnoxious fees on everything and lackluster customer service.  We also know that Fifth Third has has trouble penetrating the Detroit area, the crown jewel of the Michigan market, which its acquisition of Old Kent was supposed to help capture but has failed to so far.  Is this symptomatic of broader problems within the big bank?

Maybe, because Schaefer insists the solution to Fifth Third troubles is to open more branches and hire better people.  Of course, there could be deeper dysfunction in the bank.  Fifth Third was recently investigated and punished by the Federal Reserve for the way it booked the assets it acquired from Old Kent and later was forced to divest itself of its trust division.  All that put a real crimp in Fifth Third's running-on-water strategy of devouring other banks quicker than its structural and management problems could surface.  (Click here and here for related stories.)

Meanwhile, Fifth Third continues to reveal its dread over a potential $30-40 billion in penalties for violations of state environmental laws by its development company 940 Monroe L.L.C., the developer of the Boardwalk project in downtown Grand Rapids, which Fifth Third inherited from Old Kent.  On March 28, 2005, Fifth Third intervened in a motion before the Michigan of Court Appeals to argue on behalf of the developer and its contractors that they should not be held liable for their violations.

One must wonder if other Fifth Third acquisitions are not similarly plagued.

ENCORE: THE AMBASSADOR SEZ “HANG ‘EM HIGH!”

[This article first appeared on April 21, 2002.]

Commenting on the unfolding disgrace of boardroom thievery in Corporate America, former Ambassador Peter Secchia wants us to know that he thinks these crooks should be thrown in jail. Criminal prosecution may well be in order for those corporate directors and officers who broke faith the shareholders they were hired to serve in order to line their pockets with ill-gotten gain.

Contrary to the shared misconception of both the bien pensant compassion-mongers and the “greed is good” masters of the universe, the free market is sustained not by the law of the jungle but by the rule of law. It is our trust that the law stands behind the bargains we strike, the contracts we make, and the obligations we incur that lubricates the machinery of the free market. Without the law we would have nothing more than the “caveat emptor” of the bazaar rather than the sophisticated capital markets that fuel the businesses that deliver a wealth of goods and services to us.

So, yes, those corporate malfeasors who breached our trust must reckon with the law. Let us hope that the Ambassador, who was a director of Old Kent Bank [now Fifth Third Bank], is just as demanding when the role played by bank insiders in the 25-million-dollar Toxic Towers fiasco comes to light.

FIFTH THIRD STILL ON THE SKIDS

Fifth Third Bancorp of Cincinnati, the 800-hundred-pound gorilla of banking in Grand Rapids is still on the downward slide, in the wake of gobbling up Old Kent Bank four years ago.  After announcing fat bonuses for top executives, Fifth Third revealed that profits for the bank collapsed 5.8% during the past quarter.  The decline has been officially attributed to expenses Fifth Third incurred from its recent purchase of a Florida bank.  However, Fifth Third CEO George Schaefer indicated that this is part of longer term troubles the bank has yet to correct when he admitted to shareholders this week, "Revenue growth continues to be below our expectations.  It's safe to say this won't be turned around overnight."

We know from Fifth Third's botched acquisition of Old Kent that it continues to hemorrhage small business and retail customers with its obnoxious fees on everything and lackluster customer service.  We also know that Fifth Third has has trouble penetrating the Detroit area, the crown jewel of the Michigan market, which its acquisition of Old Kent was supposed to help capture but has failed to so far.  Is this symptomatic of broader problems within the big bank?

Maybe, because Schaefer insists the solution to Fifth Third troubles is to open more branches and hire better people.  Of course, there could be deeper dysfunction in the bank.  Fifth Third was recently investigated and punished by the Federal Reserve for the way it booked the assets it acquired from Old Kent and later was forced to divest itself of its trust division.  All that put a real crimp in Fifth Third's running-on-water strategy of devouring other banks quicker than its structural and management problems could surface.  (Click here and here for related stories.)

Meanwhile, Fifth Third continues to reveal its dread over a potential $30-40 billion in penalties for violations of state environmental laws by its development company 940 Monroe L.L.C., the developer of the Boardwalk project in downtown Grand Rapids, which Fifth Third inherited from Old Kent.  On March 28, 2005, Fifth Third intervened in a motion before the Michigan of Court Appeals to argue on behalf of the developer and its contractors that they should not be held liable for their violations.

One must wonder if other Fifth Third acquisitions are not similarly plagued.

FIFTH THIRD BRIBES - AHEM! - BONUSES REPORTED

The board of Cincinnati-based Fifth Third Bancorp -- you know these fellas, the ones who gulped down Old Kent Bank four years ago -- have lavished their top executives with big bonuses for their performance in 2004.  Other than the facts that Fifth Third:

1. Is at the bottom of the pack of publicly-owned banks,
2. Has lost shareholders 17% in return on investment over the past year,
3. Is facing a bevy of shareholder lawsuits in federal court,
4. Stuck itself with The Boardwalk project and its potential $30 billion in penalties for environmental violations, and
5. Its insiders may have abetted a bank fraud,

... why not reward key officers with six-figure bonuses?

We're talking big money here.  The Fifth Third board gave President George Schafer Jr. an $825,000 bonus.  Even local piker Kevin Kabat, until recently the CEO of Fifth Third Bank-West Michigan, got a $200,000 bonus.  One has to wonder what the bank's board is thinking to hand out such rich rewards for objectively poor performance.

One thought is that Fifth Third needs to keep these guys on the reservation.  They cannot risk a breach where these executives move on and then speak out of school about the bank's shenanigans over recent years.  That could reveal Sarbanes-Oxley violations that would be particular damaging in the wake of the recent Federal Reserve Board investigation of the bank.  (Note to those of you have who have better things to do than study arcane federal laws, the Sarbanes-Oxley Act was passed by Congress after Enron went belly up to require managers of publicly-traded corporations to disclose information of possible wrong-doing within company.)

More on this problem later ...

FIFTH THIRD EVADES SOX

This week's edition of MiBizWest had an article on the reaction of local bankers to Sarbanes-Oxley regulations.

First a little history.  The U.S. Congress passed the Sarbanes-Oxley Act (known as "SOX" for short) three years ago in the wake of the Enron, Adelphia, and other corporate scandals.  The purpose of SOX was to encourage reporting of illicit activity within publicly traded corporations and a substantive response to those reports from corporate managers and directors.  The idea was to ensure that managers run public corporations for the benefit of shareholders, not their own bank accounts.

SOX is an ambitious statute.  It tries to counter all of the tricks miscreant corporate managers, directors, lawyers, and accountants use to feign ignorance of the improper conduct of their colleagues to evade taking action against them.  Therefore, compliance with its reporting and certification mandates can be a complex and even onerous task, especially for smaller public corporations.

This is the complaint of Gerald Johnson, the chairman of a small local bank, Mercantile Bank Corporation.  No doubt federal regulations have their unintended effects, but Johnson is dead wrong when he states Sarbanes-Oxley is "a needless expense" because "not all of us who run public companies are out to cheat our shareholders".  No, not all corporate bosses are cheats.  However, publicly traded companies have engaged across the board in opaque financial reporting that allowed the cheats to loot they companies they led.  So, the U.S. Congress stepped in after the implosion of several public corporations with the SOX sledgehammer.

Michelle VanDyke, president of Fifth Third Bank West Michigan, expresses sympathy for the burdens SOX imposes upon small bankers like Johnson.  That's rich.  Fifth Third has abused its big-bank clout to ignore its SOX obligations to shareholders in a way Johnson and Mercantile could never get away with.  Specifically, Fifth Third has refused to disclose to shareholders the huge contingent environmental liabilities attached to The Boardwalk Project, the false statements its officers and attorneys have made to conceal those liabilities, and its retaliation against the people who reported Fifth Third's misdeeds to federal law enforcement.  All serious SOX violations.

In light of Fifth Third's unethical conduct, no surprise that its return to shareholders has tanked and shareholder lawsuits have piled up against it.  But this isn't even the worst of it.  Stayed tuned for a tale of greed, bank fraud, and the destruction of a local institution. 

FIFTH THIRD IN THE GUTTER

[Ed.: This article has been edited to reflect new information we have received since its original publication.]

The Wall Street Journal reported yesterday that Cincinnati-based Fifth Third Bancorp ranks nearly at the bottom of sixty-eight publicly traded U.S. banks in terms of return to shareholders.  It appears that Fifth Third's high flying days of pumping up its stock as a cheap currency to buy competitors are over.

That was how four years ago Fifth Third became the largest bank in the Grand Rapids market.  In April 2001 it gobbled up Old Kent Financial Corporation in a cozy deal that destroyed 1,300 local jobs while rewarding insiders by brushing a number of dubious transactions under the rug.  But the party came to an end.  Your intrepid executive director reported some of these insider shenanigans to the feds in March 2002.  Six months later the Federal Reserve stopped the Fifth Third steamroller, opened an investigation of the bank's acquisition of Old Kent, and then ordered it to re-balance its books to account for $82 million in unreported losses.

These losses were the result of inflated values placed upon Old Kent assets that Fifth Third acquired.  Immediately after the conclusion of the Federal Reserve's investigation in March 2003, Old Kent's former head honcho -- who had proposed, promoted, and executed the sale of Old Kent to Fifth Third and was richly rewarded upon the consummation of that deal -- disappeared from public life.

David Wagner, who rose to the top of the food-chain at Old Kent as its CEO and chairman and delivered Old Kent to Fifth Third, was rewarded with a lucrative sinecure at Fifth Third, where -- believe it or not -- he began his banking career.  In the wake of the Federal Reserve's investigation he surrendered his posh post and later his seat on the Federal Reserve Board of Cleveland.  He then retired to Florida.  (What is it with all these dethroned Grand Rapids grandees making their way to Florida?)

As Fifth Third now tries to clean up the mess, the class-action hyenas -- ahem, I mean, lawyers -- have inundated the bank with several shareholder suits filed in the U.S. District Court in Cincinnati.  One wonders when former Old Kent shareholders will pursue similar action alleging that Old Kent was sold on the cheap to Fifth Third.  There also remains the nagging problem for Fifth Third that it has a major investment in The Boardwalk project, to which a huge environmental liability could attach totaling in the billions of dollars in response costs and penalties.

Whatever the future holds for Fifth Third, stock analysts remain less than impressed.  It returned a loss to shareholders (based upon share price, distributions, and dividends) of -17.9% last year when banks as a group returned a +16.8% on average.  The one-time shark is now a dog.

WHY NATIONAL CITY WAS THE PIGEON

Rod Kackley of the West Michigan Business News had an article in the August 23rd edition that explains why National City's community development corporation was roped into the Berkey & Gay redevelopment scam. Kackley reports that National City, unlike most other banks, actively markets its community development corporation across the country looking for deals to liquidate historic, low-income housing, and other urban development tax credits. That made National City the mark as the source of cash to over-fund the costs of redeveloping the Berkey & Gay furniture factory site into The Boardwalk residential-commercial complex.

I realize I am talking more to myself here than to readers of this website, who are not familiar with all the references and connections I am making. I assure you this is a very serious matter involving the abuse of publicly chartered banks. Keep Kackley's article in mind as this story develops and connects to the Berkey & Gay hazardous waste complaint.