U.S. Bank poised to grow bigger, stronger

The boss at the biggest Minnesota-based bank says federal regulators will have to get some pension funds, endowments and other investors who own about three-quarters of the nation's mortgages to accept new terms to stem a wave of foreclosures and thaw the mortgage-backed bond market. Otherwise, the housing crisis will persist a lot longer.

Richard Davis, CEO of Minneapolis-based U.S. Bancorp, refused to underwrite or securitize subprime credit created by mortgage brokers and underwriters that was often packaged with debt and exotic financial instruments. Once the high-yield rage of Wall Street, those loans have proved toxic for institutional investors and hedge funds, for failing banks -- and for homeowners who never should have been underwritten.

To shore up the mortgage-infected financial system, the U.S. Treasury and Federal Reserve have thrown more than a trillion dollars at financial institutions -- including rescuing Citigroup, one of the biggest offenders -- and expanded federal deposit insurance. So far, the Bush administration has resisted the calls of the chairwoman of the Federal Deposit Insurance Corp. for $25 billion to help at least some stretched homeowners refinance into mortgages that will allow them to stay in their homes.

"We've told our regulators that we endorse [FDIC Chairwoman Sheila Bair's] plan," Davis said in an interview Monday. "That plan has a lot of merit.

"But 75 percent of America's mortgages are not in the hands of a bank or S&L. They are held by investors who bought into these large buckets of mortgages."

Davis, as part of a government-assisted deal last month for two failed savings banks in California, has agreed to restructure up to 35,000 mortgages he inherited.

"The outlook for 35,000 loans and those homeowners is better if we go work it out than just let the Darwinian effect take place and let them fail. But until [the government] gets to the loans held outside the banking industry, I don't know that they can make the dent they need. All the banks with good intentions may not move the needle enough. Otherwise, it's going to take a long time."

Bair wants the Bush administration to fund the FDIC proposal out of the $700 billion fund that has mostly been used to bail out big banks or to invest capital to the healthy likes of U.S. Bancorp, Wells Fargo & Co., TCF Financial Corp. and others, whether they wanted it or not.

"You really need to tackle the problem at the loan level," Bair told the Boston Globe last week. "These are back-end efforts to assist the securitization markets without trying to fix the underlying problem. People are still looking for the perfect solution. It is not there. It has been a frustration for me that we haven't been able to come to grips with the underlying problem, which is the mortgages."

Bair and Davis also support the Federal Reserve's announcement last week to buy up mortgage-backed securities.

U.S. Bancorp, criticized a few years ago for its conservatism, is poised to be a consolidator. Davis, the rare bank executive who worked his way up from teller while attending college at night, plans to expand U.S. Bancorp's bread-and-butter corporate trust and electronic-payments businesses that tie up little capital but generate low-risk profit.

Davis is also looking for acquisitions in Minnesota and 23 other states where U.S. Bancorp already runs a diversified portfolio of businesses that add up to one of America's 10 largest banking companies. He's also looking to expand his reach to the fast-growing Southeast.

Davis declined to comment on analyst and industry-insider musings that U.S. Bancorp was a failed bidder last month for wounded National City Corp. of Cleveland, and that it has looked previously at TCF of Wayzata, which would strengthen its retail presence in the Twin Cities, Chicago and Milwaukee.

Ben Crabtree, the veteran regional banking analyst at Stifel Nicolaus Securities, said he believes that Associated Bancorp of Wisconsin or Harris Bank of Chicago would be more likely buyers of TCF Financial, but he wouldn't dismiss a U.S. Bancorp-TCF deal. U.S. Bancorp is a bigger corporate banker, and its retail clients generally are more affluent. TCF is a fee-driven machine that pioneered supermarket banking and Sunday hours in the 1990s to the suburban working and middle classes. At $14 per share, TCF's stock trades at half its 52-week high.

Davis said U.S. Bancorp will consider only friendly acquisitions. And he predicted a spate of industry consolidation that will start in several months.

Boards of directors won't make or approve deals at today's low stock prices as long as investors can compare them to much-higher 52-week highs.

Davis wants to acquire at least one of the nation's 50 largest banks over the next year or so in a friendly deal.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com