ELLIJAY, Georgia Rep. Phil Gingrey has had three professions. He is a success in two of them.
Gingrey was an obstetrician and proudly reports on his website that he has delivered 5,200 babies. He is a politician, representing Georgia's 11th congressional district since 2003 in the House of Representatives, where he's regarded as one of the most conservative lawmakers in the chamber.
He's also a banker, and that career isn't going so well.
In 2005 Gingrey helped found two banks, both near his Georgia district. He invested up to $500,000 in the two lenders - under House rules he's not required to disclose the exact amount - and took a seat on their boards.
One, the Bank of Ellijay, was shut down in 2010 and taken over by federal regulators at a cost of more than $60 million. The other, WestSide Bank, is saddled with a dangerously high burden of bad loans. From the beginning of 2006 through the third quarter of 2011 it has cumulative net losses of $15.7 million, based on records filed with the Federal Depositors Insurance Corporation (FDIC).
"We are struggling," says WestSide chairman David Flint. Gingrey also owns stock in a third small bank, from which he borrowed heavily while the value of the shares dwindled.
Gingrey's botched foray into banking is in some ways typical of the self-dealing rampant in Georgia during the housing boom, when politicians, lobbyists and developers joined up to establish small banks that invested heavily in huge tracts of new homes.
After the housing bubble burst, the FDIC was forced to mop up the failed lenders. Since 2008, the regulator has closed 73 banks in Georgia, more than in any other state.
In another respect, Gingrey's banking career is highly unusual. Robert M. Stern, president of the nonprofit Center for Governmental Studies in California, said that it is extremely rare for a sitting member of Congress to launch one new business, let alone two. By law, serving in Congress is a full-time job, Stern noted, so members should not be "engaging in a new form of employment."
House ethics rules put strict limits on the outside income and business activities of members. Reuters has found evidence that Gingrey may have broken some of these rules and closely skirted others. For example, members are not allowed to serve as paid directors of corporate boards. In his financial disclosure statements Gingrey listed himself as an "unpaid" director of the banks.
None of the board members of either bank have been paid any directors' fees or dividends on their bank stock. But current and former directors of the two banks said that is because neither bank was profitable, and banking regulations prohibit such payments until a new bank is solidly in the black.
Reuters has confirmed, however, that as a director he received stock warrants from both the Bank of Ellijay and WestSide Bank. (Warrants are similar to stock options, in that they give the holder the right to buy stock at a specific price at a future date.) As it turned out, the warrants have never become profitable either. But House ethics experts said that even if ultimately worthless, the warrants still amounted to a form of compensation, which likely means that Gingrey's board memberships broke House rules.
Bernadette Sargeant, a former counsel to the House Ethics Committee, said of the warrants "That's compensation." According to another former House Ethics Committee counsel, who asked not to be named, "if you're given stock options or something that might have a value that is still considered compensation." He said, "You can't accept compensation for serving as a board member."
Orlando Wilson, a former Bank of Ellijay board member who served on the boards of multiple new Georgia banks in the early 2000s, said that before the crash, warrants were the main way directors profited from the new banks. The banks did well, and within a few years sold out to larger banks at well above book value. Directors then exercised their warrants, doubling or tripling their original investments, Wilson said.
In an e-mailed statement, David Sours, Gingrey's chief of staff, disputed the proposition that unused warrants should be considered compensation. He also said that Gingrey would not have exercised the warrants if they had become profitable. Sours said "the Congressman never did, and never intended to, exercise these warrants as compensation for board service or in excess of outside earned income limits."
As a founding director of the two banks, Gingrey was able to buy his stock at the insider price. Jerry Blanchard, a banking lawyer in Atlanta, said that, before the crash, demand for stock in start-up banks was so intense that solicitations for start-up capital were almost always oversubscribed. Once the new banks opened eager investors snapped up the privately traded shares at well above the insider price.
Gingrey's 2006 disclosure statement shows that he invested between $100,000 and $250,000 each in the Ellijay and WestSide banks, but just months later, after the banks had opened, the value of his investment in each had risen to somewhere in the $250,000 to $500,000 range.
A WATCHDOG'S WARNING
In a 2009 order, the FDIC issued a sharp rebuke to Gingrey and fellow Bank of Ellijay directors. It demanded that they begin fulfilling basic fiduciary duties such as hiring competent management and supervising loan approvals to prevent further instances in which, for example, new loans were given to developers who already had defaulted on earlier borrowing.
David Barr, a spokesman for the FDIC, said that the regulator issued 304 consent orders in 2010, with contents that varied radically based on problems at each bank. Gingrey's position on the bank boards has been reported by the Atlanta Journal-Constitution and other media. But to date there has been no look at his role in organizing the two banks or the ethical questions raised by his involvement with these lenders or a broader group of state power brokers involved in numerous Georgia banks that failed.
Gingrey said in an e-mailed response to Reuters that his involvement with the banks was "a personal investment decision." He said, "My service on the boards of these banks has been fully and transparently disclosed for years, in accordance with the law and the Rules of the House of Representatives."
He also said that he had "received no undisclosed benefits as a result of my positions on these boards."
Indeed, his House disclosure records show that Gingrey lost his entire investment in the Bank of Ellijay, and that the value of his investments in WestSide Bank and Community Bank of the South has plummeted.
Gingrey was born and raised in Augusta, Georgia and went to a state college and medical school. He and his wife, Billie Ayers Gingrey, settled in Marietta, where he opened an obstetrics/gynecology practice.
Gingrey entered politics in the early 1990s, serving three terms as chairman of the Marietta school board. In 1998 he was elected to the Georgia State Senate, and in 2002 he won a tough race for Congress in a district that had been redrawn to favor Democrats. In 2010 Gingrey ran unopposed and looks set to do so again in 2012.
Gingrey was proud in 2008 when he was among eight House members who tied for the title of "most conservative" in rankings by the National Journal. When the grassroots tea party movement took off in 2009 he joined the congressional Tea Party caucus.
But his popularity with Tea Party conservatives came under threat the next year, when he had a run-in with Rush Limbaugh. In an interview with Politico, Gingrey took issue with Limbaugh's claim that the Obama administration was more afraid of Limbaugh than he was of Senate Majority Leader Mitch McConnell or House Speak John Boehner.
"I mean, it's easy if you're Sean Hannity or Rush Limbaugh or even sometimes Newt Gingrich to stand back and throw bricks." Rush fans deluged Gingrey's office with calls and email. The next day Gingrey phoned Limbaugh and apologized on the air.
BOOM AND BUST
The results of the real estate crash in Georgia are plainly visible from the air on approach to Atlanta's Hartsfield-Jackson Airport. Scores of unfinished new subdivisions blight the landscape. Locals call them "PVC farms" because of the white poly vinyl chloride waste and water pipers laid out for houses that were never built.
In the early 2000s counties surrounding Atlanta were among the fastest growing in the U.S., according to the U.S. Census Bureau. Founding new banks to fund the new housing developments became hugely popular, especially among a coterie of lobbyists, real estate developers and state politicians, including sitting state legislators.
Christopher Marinac, managing principal of FIG Partners in Atlanta, a bank research firm, says that unlike traditional banks established to serve their communities through ordinary deposits and lending, most of the new entities were little more than get-rich-quick schemes designed to cash in on the boom. They issued loans almost exclusively to real estate developers, including their own board members.
Rather than building up ordinary deposits from local businesses and individuals, they backed these loans with costly "brokered deposits," obtained from Wall Street firms. Often referred to in the industry as "hot money," these deposits required the banks to pay higher interest rates than on ordinary accounts.
In interviews, directors of the now-defunct Georgia banks blame the bank failures since 2008 on the "unforeseeable" collapse of the real estate market. Marinac says "the real reason was stupidity." The investors in new banks, many of whom had no banking experience, thought that they could get by without following fundamental banking principles, such as diversifying their loan portfolios.
"They put all of their eggs in one basket," Marinac says. "You had to have a perfect market for those banks to have sustainable profitability and a perfect market doesn't exist."
Instead, the speculative building these banks encouraged significantly worsened Georgia's housing crisis. When the bubble burst, it left a huge overhang of vacant new houses and residential lots that continue to depress prices, local real estate officials said.
Records also show that these banks loaned money to their own directors, and in many instances the loans weren't repaid. A bank regulator who asked not to be identified said such practices were common among Georgia start-up banks in the early 2000s.
For example, the FDIC has filed two lawsuits against the current chairman of the Georgia Senate's banking committee, Jack S. Murphy. One seeks more than $70 million from Murphy and other former directors and officers of the failed Integrity Bank of Alpharetta, Georgia, accusing them of "implementing policies and procedures void of the most prudent lending controls."
The other FDIC suit accuses Murphy of failing to deliver promised collateral and defaulting on a $247,650 loan from the since-failed Silverton Bank.
Murphy said that he and fellow directors expect to win the lawsuit involving Integrity, and that he is in settlement talks on the Silverton lawsuit.
Murphy noted that he had served for years on both the Georgia General Assembly and Georgia Senate banking committees, and said his involvement with the banks creates no conflict of interest. "Being involved in the banking committees all these years and actually being on the board of the bank really qualifies me to more understand what's happening out there in the banking industry," he said.
EVERYONE'S A BANKER
Gingrey went into banking late in the bubble years. In 2005 he helped line up investors for the Bank of Ellijay, two fellow former directors say. According to his House financial disclosure statements in 2006 he invested between $100,000 and $250,000 in the bank - some or all of which he had borrowed from Silverton Bank of Atlanta, which failed in 2009. Gingrey confirms that he had pledged his stock in Ellijay as collateral for the loan. The collateral is now worthless.
Gingrey disclosure records show that the Silverton loan was still outstanding when the FDIC took over that bank, although he then evidently made significant payments on it. "I have been paying down the loan I took out from in accordance with the terms of the loan since I received it," Gingrey said in e-mailed answers to questions.
Gingrey also noted that he resigned from the board of the Bank of Ellijay a few months before the bank failed.
Ellijay is a small town - population roughly 1,600 - in the foothills of the Blue Ridge Mountains, about 65 miles northeast of Atlanta. Ellijay Mayor Al Hoyle said that until the crash an influx of Atlanta commuters and people seeking vacation homes made the area surrounding Ellijay a hot real estate market.
The Bank of Ellijay made loans almost exclusively to local developers, including its own directors. As of mid-2010, 97 per cent of its loans were in real estate, mainly new housing developments, according to an analysis by Money Economics.
Brent Baker Sr., who was the bank's chairman, confirms that the bank was never profitable. FDIC records show that as developers hit by the crash defaulted on loans, losses skyrocketed. In the fourth quarter of 2009 the bank lost $5 million. By June 2010 roughly half of the bank's loans were non-performing.
Orlando Wilson, who sat on the boards of Ellijay and other banks, remains something of a celebrity for his bass fishing television show in the 1980s and '90s. He then became a developer and borrowed heavily from those same banks. County clerk records show that Wilson-owned companies borrowed at least $1.4 million from the Bank of Ellijay. In a phone interview, Wilson said he didn't know the total he had borrowed from the bank. Asked if he had repaid those loans, Wilson said "I don't know the status of that."
Baker, the bank's chairman, confirmed in an interview that he too had taken out loans that he couldn't repay. Court records show that Baker filed for personal bankruptcy in January 2011, listing liabilities that included $700,000 in loans from the Bank of Ellijay.
Many of the loans to non-directors went to local developers who had scant experience carrying out big projects. Documents on file with the Cherokee County, Georgia clerk's office show that the bank made the most loans - 135 -- to a small, Woodstock, Georgia-based developer, Applegate Developments LLC.
Records from the federal bankruptcy court for Northern Georgia reveal that Applegate filed for bankruptcy and shut down in May 2010, listing zero assets and $4.9 million in debts, including $3.3 million owed to the Bank of Ellijay.
Applegate's owner, Jeffrey Kates (who also filed for personal bankruptcy), said in a phone interview that the loans were for a big, multi-phase new housing development in Ballground, Georgia. Kates confirmed that the bank had approved the loans even though he had no experience with such a large project, and even though Ballground was a dicey place to put a big development. "It was a major mistake to even build in Ballground," Kates said he now realizes. "It's a sleepy little town."
Gingrey still sits on the board of WestSide Bank, the other bank he helped found in 2005. His House disclosure statements did not list him as an "organizer" of Westside, as they did for the Bank of Ellijay. But WestSide's chairman, David Flint, said that Gingrey was heavily involved in recruiting investors and directors.
Although WestSide remains in business, its trajectory has been similar to the Bank of Ellijay's. One common yardstick of a bank's health is the so-called "Texas Ratio," which compares non-performing assets with capital and reserves set aside to cover loan losses.
Any bank with a Texas Ratio above 100 per cent is considered at risk. WestSide had a Texas Ratio of 325.85 per cent as of June 30, 2011, according to BankRegData.com. The national average is 21.06 per cent.
In 2007, its first full year in operation, WestSide made a modest $698,000 profit. But after that it had only losses, totaling $15.4 million from 2008 through September 2011, FDIC records show. In mid-2011, more than 84 percent of the total dollar amount of WestSide's loan portfolio was concentrated in loans for commercial and residential real estate development projects. At the end of 2007, nearly one-third of its loans were to bank insiders, mainly directors. Under pressure from regulators, the bank reduced that to just under six per cent this year.
But in late 2010, while the bank remained under regulatory pressure to reduce insider loans, Gingrey, via a real estate partnership he controls, borrowed $86,000 from the bank, according to records Reuters obtained from the Paulding County, Georgia clerk's office.
Gingrey said in his e-mailed response to questions that WestSide had offered him a lower rate on the loan than other banks. Ethics experts say that giving a member of the House a lower rate than is available to other customers could be considered a banned gift under ethics rules. But Gingrey and WestSide's president both denied that the congressman had received any discount on the loan.
COMMUNITY BANK OF THE SOUTH
Gingrey also owns stock in a third bank, Smyrna, Georgia-based Community Bank of the South. He deposits campaign funds there and has received multiple loans for himself and partnerships he controls or holds shares in, county clerk and campaign finance records show. Under House ethics rules he isn't required to disclose loans made to the partnerships.
Community Bank too has suffered from losses on real estate development loans, and as of June 30, 2011 had a Texas Ratio of 134.23. Gingrey's disclosure statements show that the value of his original investment in the bank of between $50,000 and $100,000 had dwindled to between $1,000 and $15,000 at the end of 2010.
Despite his banking losses, however, Gingrey's most recent financial disclosure, at the end of 2010, indicated a net worth of between $2.8 million and $7.5 million.
Like many other conservative lawmakers, Gingrey opposed the federal bailouts of General Motors and Chrysler in 2009. He voted against the Troubled Asset Relief Program, or TARP, the plan that propped up the nation's largest banks. He also opposed the American Recovery and Reinvestment Act aimed at jump-starting the flagging economy, calling it a "dangerous myth that government spending will fix this economy."
But Gingrey does support one sort of federal bailout. Since 2009 he has urged the federal government to allocate billions of dollars to bail out troubled small, community banks -- banks such as Ellijay and WestSide.
This led to a nationally televised gaffe during President Obama's 2010 State of the Union address. Midway through his speech, the President proposed that the government take $30 billion of repaid TARP funds and "use it to help community banks." Gingrey jumped to his feet and applauded, only to sit down abruptly when he realized that he was the only Republican standing. Gingrey declined to comment on the incident.
He also didn't respond to a question about the apparent inconsistency of supporting aid to small banks while condemning bailouts in general. But he did say that he had voted against TARP because he considered it a mistake to give large amounts of taxpayers' money to the largest financial institutions "while ignoring the rest of our nation's financial system."
(Reporting By Scot J. Paltrow)
Corrects spelling of Jerry Blanchard in 16th paragraph.