The Story of Beal Bank: Why It Still Resonates

In this episode of The Purposeful Banker, we discuss Beal Bank, an unusual bank with an interesting story. It's one that should resonate with banks that are wondering if they’re prepared for a potential downturn.


Helpful Links

The Banker Who Said No (2009 Andy Beal profile in Forbes)

Andrew Beal (Wikipedia entry)

The Professor, the Banker, and the Suicide King (Michael Craig book about Beal's famous poker game)

Bank Strategies for the Next Recession (Podcast w/ Carl Ryden and David Brear)

The Beale Conjecture


Maria Abbe: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. I'm Maria Abby, senior communications manager here at PrecisionLender. Today's show features Dallas Wells, PrecisionLender's EVP of strategic initiatives, and Jim Young, our director of content. Today, they're going to talk about Beal Bank. It's an unusual bank with an interesting story that has relevance for banks that are wondering how they'll handle a future market downturn. We'll have links in the episode notes so you can learn more about Beal Bank and its founder, Andy Beal. Now onto the show. Enjoy.
Jim Young: Dallas, let's start by giving folks the cliff notes version of the Andy Beal/Beal Bank story. I have to admit, in doing my research for this show, I kept kind of envisioning the Christian Bale character from The Big Short in this. Is that anywhere close to the mark for Andy Beal?
Dallas Wells: Intellect-wise, it definitely is. I don't know Andy Beal's personality to know if that part matches up, which I think is the part that really sticks out from that movie. Yeah, not sure about that. But, he is an interesting character, nonetheless.
Beal Bank is the bank that was started by Andy Beal in the, I think late '80s, and he really started it for one purpose, which was to start buying up assets from the government during the S&L crisis. This was the last banking crisis before the 2008 version. A lot of it was really centered in Texas, in bad real estate deals. Some S&Ls that had a combination of bad real estate debt and some really awful interest rate risk. Anyway, you know, a thousand-plus banks failed and S&Ls failed. And so, the FDIC set up a corporation that basically collected up some pools of these assets from failed banks, and then they were trying to find somebody, anybody, please buy these things. Andy Beal started a bank so that he had a charter to pick through some of these things.
It was a tiny little bank when he first started it, not even a lot of capital, but as you can imagine, the feds at the time were pretty lenient on who they sold those things to. If you could write a check, have at it. Right? Good luck. He not only bought those, but bought the right ones of those and did exceptionally well with it. Just made a ton of money and really jumped to a pretty sizable bank, bought things for pennies on the dollar, realized, in the banking world, astronomical gains on those and held those really through the mid '90s. You know, Beal Bank was listed as the most profitable bank in Texas a few times, the most profitable bank in the country a few times. Return on assets, like, north of 10. You know, just unheard of returns for a bank.
But, here's what's interesting. This is where to me the story gets really, because lots of people did that. As you get towards the end of the '90s, he didn't just use this as a platform and jump off and become a banker, or a classic banker, anyway. Beal Bank started to shrink, and it really started to shrink as you got into the early 2000s. '04, '05, '06, the rest of the banking universe is going absolutely insane, grabbing every asset they can, growing like crazy. It's the real estate boom, and Beal Bank is tiny again. Shrank to well less than half of it's peak size. I think it peaked, you know, somewhere around $8, $9 billion in assets somewhere in the '90s and it was back down to somewhere around a billion in assets. I'm ballparking those numbers, but that's close. But, was sitting on like 60% tier one capital and basically just sort of sitting and waiting.
Waiting for the you know what to hit the fan from the financial crisis in 2008. So, similar thing. Banks start failing and the mechanics weren't exactly the same. But once again, there was bids put up for either whole banks or portions of banks, pools of bad assets, and what you would see for a while, every Friday there was at least one failed bank, sometimes as many as three or four, and the winning bidder on a whole bunch of those pools of assets was once again Beal Bank.
Basically, they ran the same play again where they had right timing, had dry powder as you would say, to be able to just swoop in, do these things, and once again making just astronomical returns. Now, Beal Bank has over the last 10 years has shrank. Now, they do have a wholesale bank that operates out of Vegas, but Beal Bank is not your classic institution. There's no checking accounts, there's no consumer loans. They do some online money market and CD kind of accounts, and they basically buy syndicated stuff. But, they're once again sitting with, I don't know, 40, 50% tier one capital waiting for whatever's next.
Then, one side note, Andy Beal, the founder, leader of this bank is also not your classic banker. In fact, if you look at his description on Wikipedia, says Andy Beal is an American banker, businessman, investor and amateur mathematician. He's got a thing called the Beale conjecture. He's got $1 million prize out there for any mathematician who can either prove or disprove it. He's played poker out in Vegas against the likes of Phil Ivey, winning as much as $13 million from some of those poker pros losing as much as $16 million to Phil Ivey over a couple of days. He's a very high stakes poker player, a mathematician, and he does banking completely backwards from the rest of the universe. That's the abridged version of a pretty interesting character.
Jim Young: Yeah, it's hard to know these things because it's not like everybody keeps tabs on it, but it's believed to be he's the winner of the richest single hand in poker history of $11.7 million.
Dallas Wells: Yes. Yes, on one hand, which makes my eyes twitch little bit, but yeah.
Jim Young: Exactly, exactly. From a risk perspective, yeah. Clearly he's a brilliant guy and a fascinating story. Matter of fact, there's a book, it's the something, the banker, and the suicide king and it's the inside story of the richest hand in history. I mean, he's clearly fascinating, but I guess, is that where the story ends? Is this just a podcast talking about an outlier, "Hey, this guy's kind of interesting, and man, gosh, he saw what no one else would saw." Is it sort of like, you know, the financial advisors, "Hey, don't try to time the market," but occasionally some people do and those guys are outliers and freaks. I guess, let me backup. Why are we telling this story right now?
Dallas Wells: Yeah, why are we talking about this?
Jim Young: Yeah, what are we doing here?
Dallas Wells: Here's where this comes from is, for obvious reasons, it's what's happening in the economy with some of the strangeness that's happening with interest rate markets. We're back to that question that bankers have of, how do we prepare ourselves for a recession? What you get is you get a lot of, this happens inside of every bank. This especially happens at the board level of banks, even. You get a lot of armchair economists who love to look at the charts and pontificate on what the latest unemployment claims means and what it really means with an inverted yield curve. Everybody's got a yield forecast and they want to start essentially making bets against that. But, not many of those folks are Andy Beal. Right? Not many people are going to be able to actually pull that off.
I think what we really want to talk about is, if you can't be Andy Beal and you're not the literally one bank in the US that's been able to time and optimize outcomes around two really ugly industry crises, then what do you do? Particularly, because what you can learn from Andy Beal is that these occurrences, and they're not all that rare. Right? These are cyclical things that just sort of happen. In a recent podcast, Carl and David Brear from 11:FS, Carl Ryden from PrecisionLender, David Brear from 11:FS were talking about how these things kind of run in seven-ish year cycles. There's some natural reasons for that. But, this is a cyclical thing where these things come around.
I think what you can learn from Andy Beal is there's opportunity there, and bankers have a tendency to let fear rule their day. Here's a, maybe a more concrete example. We're having lots of conversations with banks right now about what the heck do we do with interest rates doing what they've done. Specifically, what they've done. They've gotten really low. So, 30 year treasury now yields somewhere around 1.9 as we are recording this. The curve is inverted from about the three month point all the way out. Right? A kind of full in version of the treasury yield curve.
In addition to that, US debt markets are becoming rarer and rarer in that, hey, at least rates are positive. There's negative yields across the full curve in Germany, through much of Europe and Asia there are negative interest rates. Some odd things happening, and so banks are coming to us and here's what they're saying. "Hey, the yield curve is inverted. How do we fix that? As we negotiate deals and decide what to do with our customers, how do we compete in the marketplace with an inverted curve?" And, "I'm uncomfortable with how low these rates are, so how do I kind of put a floor under what I'm willing to do?" Here's what they're saying, is they're saying rates are really low, and that scares me.
But remember, banks have both sides of their balance sheet. Here's a legitimate question that Andy Beal might ask. If rates are really that low, and you think that that's something to be scared of on the asset side, isn't that an opportunity on the other side? Go load the boat, lock in as much of this cheap funding as you can, and go steal market share with it. Right? Go lend into it with this. If you really think it's that cheap that you should be scared of it, turn that against your competitors. Go take their best customers with this, instead of waiting for them to do that to you.
It's these little things of, for everything that you're scared of, what's the opportunity on the other side? Every banker is scared of a recession, they're scared of a financial crisis, they're scared of banks failing. Andy Beal looks at that and kind of, you know, rubs his hands together, like, "All right, here we go. I'm ready." You can't be Andy Beal. Right? You're probably not sitting there with half your banking capital ready to deploy. But, you can say, what are the opportunities? What can we use to our advantage to where as other banks are backpedaling and reacting to this, what can we do to improve our lot?
Jim Young: Interesting. So, I'm going to maybe in the spirit of Andy Beal and also because sort of the way I tend to comprehend a lot of things when it comes to math and banking and that sort of thing, go with a poker analogy here. There is these really big tournaments, there's what they call the bubble, the money bubble. It's this cutoff where, and only a certain number of people in a tournament, a no limit type tournament are going to finish high enough to make money. There is a brutal cutoff at some point, and if you've ever watched World Series of Poker, you know, it's a $10,000 buy in and then making the money typically means you're going to make back your investment and maybe you know, $10,000 more if you just make that cutoff.
The person who finishes on the wrong side of it, they call them the bubble boy or heard of the bubble boy, and you get zero. What happens during that moment is up in the, you'll see people and they're drag hands on in their table because they're just doing desperately just trying to hold on until they finally find out that the last person's been eliminated and everybody else has made the money. It's a time of extreme caution, at which point the best players will tell you that is absolutely the time to be aggressive, because you can clean out hands because everybody's-
Dallas Wells: Everyone else is playing cautious, yeah.
Jim Young: Yeah. Is that a decent analogy on this sort of thing?
Dallas Wells: That's exactly right. It's when, and so for the concrete example in banking. Right now, everyone's scared of the five, seven year part of the curve. They don't want to bring in fixed assets at that point because that's where the yields get the lowest, and so they feel like, gosh, that's painful down there. If everyone in the marketplace is doing that and they're saying, "Hey, we want out of there. Put your thumb on the scale there and make it look to our bankers like we are not willing to book business there."
Somewhere, there is a banker who's saying, "I'll tell you what, I'm going to go lock in some cheap funding in that part of the curve and I'm going to go cherry pick some customers that I've been after for years, and this is my chance to get them. Here's your five year fixed rate aggressively priced deal, and bring me all your business." Right? That's the, everyone else is playing super cautious, super scared, they don't know what this means. Go take some market share. Right? Of course, do it in a smart, thoughtful way, but turn the tables on them and kind of zig when everyone else is zagging.
Jim Young: All right, so this is usually the portion of our show in which I play devil's advocate on this sort of thing. That sounds all well and good. I guess with the poker analogy, I can be aggressive and a lot of times that'll work, but they'll definitely be times where it doesn't and I'll be left with zero. That's okay if I'm an individual poker player because it's my money and I go home and that's it.
If I'm a banker and I make these decisions, and it sounds to me like what you're talking about, you're saying getting share, but it's a long game, because you're talking about booking some stuff in an aggressive price, which is maybe not so great for in terms of a return for that deal, but you're banking on, okay, but now I've got this customer and when things turn, the chances of getting the next deal with them would be right. Am I reading that right? I guess what I'm wondering is, is how well do you sell that, particularly for the publicly traded banks, how well do you sort of sell that strategy of, "Hey, just kind of bear with me here while I'm going to do some stuff that's going to look weird to you because, trust me, in a few years it's going to really pay off."
Dallas Wells: Yeah, so let me go on a slight side story. There's banks in Denmark that have been facing negative rates for I think six, seven years now. They have held the line so far and said, "We will not have negative rates on our deposit customers." Right? In essence, we are just going to eat this for awhile because this feels like a temporary problem, that we're not going to bring the customers into this weird mess. A year goes by, two years go by and it's a little painful, because what that means is depositors park a ton of money with you because you're the only investment option they have that is paying above zero or at zero. Then, the bank has to do something with that money. You can't literally just pile it in the vault. You have to sit it somewhere, even if it's just parked at the central bank. Well, it has a negative yield on it there. You're literally writing a check to let somebody park their money with you.
By the time you get to year six or seven, that becomes no longer sustainable. Right? At some point, you crumble under the weight of it. Now, there are some of those banks that are starting to do things like, okay, for institutional money or for above a certain account balance, it's a negative rate. Basically, we will charge you to hold your money. They're trying to not yet bring average Joe retail customers into that issue, but that's sort of the way it's trending. There were similar things that happened in Japan when their yields went as low as they did for the first time, where banks just tried to be like, look, this is a temporary thing. We're just going to wait. That temporary thing, decades later is still in place.
All that's a long way to say, if the yield curve says what it says about the, you know, five, six, seven year part of the curve that's based in some reality. You look around at the alternatives, you look at the rates on either side of that spot in the yield curve, this is not necessarily a temporary bet that you're making and you're saying, "I'm going to make less money." It's a structural thing where you can do swaps on that stuff. You can do some matched funding with that stuff, where you can still make reasonable returns. It's just that there's a lot of banks that are saying, "I know the math says that I'm still making like a 16% risk adjusted return, but it feels weird. I don't like it, and so maybe I should bump that up and say I will only accept a 20% return."
Right, those are the sorts of decisions they're making where it just looks odd and the nominal rates on it are really low and it's uncomfortable and it feels like they're taking a risk when really the math says, look, this is the reality. This is the market place, this is what we expect rates to be like for the coming years. Act accordingly. Right? Invest like you've always invested. Look at what rates are, and your job is to earn a spread between the two and you can still do that, but don't try to game where you make that money in the yield curve. Right? Instead, follow the sort of fundamentals and do what you've always done.
Jim Young: I'm curious. You know, Carl touched on this again and David touched on this a bit in their's, but you know, we're talking about changing in strategy and that's step one. Then step two is changing in behaviors, because it doesn't matter if you change the strategies if the people that have to execute it just say uh huh, and they keep doing what they're doing. I'm wondering with this, it sounds sort of like you're kind of talking about changing behaviors of back of the bank sort of people here, but is there an aspect of changing behaviors of the front of the bank people? With this sort of, if you have, again, for a future downturn, whenever that is, if you say, 'All right, we're going to do something like this. We're going to zig when everyone else zags." How difficult or how much do you have to go and have this, explain this or work through this with the frontline people, the people that are actually the ones structuring and negotiating the deals?
Dallas Wells: Yeah, I think this is the big problem that the banks should be trying to solve with technology. The bank's tendency is to use technology to sort of wring efficiency out of things, and by the way, that's not a bad strategy. It's worked for them. Right? If you look at the assets per employee from the industry, it's up like two and a half times over the last 20 years. They've done a really good job of that and it's helped maintain profitability through strange rate environments and lots of competition, et cetera.
But, this will be a test of how much effectiveness they've built in on top of efficiency. Meaning, with better technology, you're removing some of the like, okay, the back of the bank, folks have to update their models and then they have to communicate that to the management team, and the management team has to talk about what their strategy is, and then they tell the sales leaders, and then they go on their road show and they tell all of their actual producers, and then they change what they do day to day and that takes six months. In the meantime, you should have flipped strategy two or three different times within there. Right? Markets move fast. That's the sort of analog way of doing that.
In building in efficiency, they should also be figuring out, how do we shorten that cycle? That can't take six months, that should take a matter of days so that we can see opportunities. Right? Hey, no one else in the marketplace is willing to do business there and we are. How do we quickly get our frontline people to know that? That's where you have to be able to, first of all, have systems in place to be able to see that. You have to be able to sort of measure and monitor what you're doing, what you're willing to do, and make quick strategy changes. Then, here's the tricky part, communicate that to the front line. Do you have a means by which to do that? To change your strategy kind of on the fly so that your bankers know, hey, aggressively go after five year deals. How do you communicate that?
That's what the technology should do and that's what banks should be thinking about, is shortening that cycle. That also means, one of the things that we talk about a lot on this podcast is, your relationship managers, your bankers have to have some authority to actually make those things happen. Right? If you tell them that, they need to be able to go out and communicate that to the customers and quickly get to agreed upon deals instead of, well, I mean, you know, the old, "let me check with my manager" routine to see what that really looks like.
It's about actually making ... So much of banking is about rear view mirror processes. Right? All the reporting and analytics and stuff looks backwards. What just happened? What are the trends over time? Banks are really good at measuring those things and they put together pretty charts and reports. But, the next step, the one that they're not as comfortable doing is turning it around and saying, okay, what does that tell us about what's coming and how do we actually steer the ship through that? How do we actually make adjustments based on what's coming at us instead of just fighting yesterday's battle all the time? I think that's a slight change in the way of thinking.
That's why we wanted to tell the Andy Beal story, is he's sort of, if there's a spectrum, he's at one extreme far end of it, but too many bankers are at the other end of the spectrum and need to move towards Andy Beal. They won't get to that end, but they need to move that direction. Look at what's coming, what opportunities are there, and how do we quickly make an adjustment? How does he decide, okay now is the time, and then do it? It's a little easier for him. You have some infrastructure and some salespeople to do, but shorten that cycle. That's what this will be about, and there is a cycle coming. I don't know when it's going to come, but rather than worrying about forecasting it, worry about shortening that time frame in which you can react and make quick adjustments day to day if necessary, to really optimize how your bank handles whatever comes next.
Jim Young: One more question on this, and again, sort of as you mentioned, Beal is on one end of the spectrum and it is an example, which again, if you do like I do and you say, "Well, what about this, what about that?" You can poke holes in it, but it's still the overall message is what's important. But, again, Andy Beal's incentive for doing this is it's his bank, and if it does well he's going to make a lot of money.
Dallas Wells: He's worth $9 billion by the way, so he's pretty good at it.
Jim Young: Yeah, he's doing very well, doing very well.
Dallas Wells: Yeah.
Jim Young: But, for the front-line people, I guess what I'm asking is, is it possible to create a incentive sort of system that is maybe broad ranging enough, and what you're talking about with changing behaviors and that sort of thing with technology, but trying to change incentive systems on the fly, seems to me it would be difficult.
Dallas Wells: Yeah, that's never going to work, yeah.
Jim Young: Right, so how do you sort of set up something that says, look, it's going to be in your interest. Go with us on this, not just because it's good for the bank, but it's good for you because our incentive plan is set up such that, we talk about it right now with with cross-selling, you having to tell people who've been all about loan growth, loan growth, loan growth, loan growth, that's super, but make sure you're now tacking on these other things. Okay, well what's my incentive to do that? Right?
Dallas Wells: Yeah. The short answer is, you're going to have to get more sophisticated than rewarding volume growth. No matter how fancy the matrices are, you also have to, the actions have to follow. In other words, you may have a bonus plan that has all sorts of different metrics in there that rewards cross sell and has some risk components and all that stuff, but if people get promoted and raises based on, hey, you booked a whole bunch of business last year, people will follow the true incentives. You have to incorporate risk and profitability. It can't just be about growth, because these inflection points are when it could actually be fatal. Right? When the business will actually not survive it if you don't get out in front of that.
Really, your RMs are smart, capable people. Right? You run the bank in a certain way to be prepared for this stuff, which means you have to incorporate profitability and risk. Ask them to do the same thing. Let them run a little mini bank with their customer base and measure them the same way you measure the bank. There should be a sort of risk adjusted net income is the one key metric. Right? Something like that, where you're incorporating as many of those factors as you can and their job is go out and grow the business but in a smart profitable way, so that they don't just grow, grow, grow, grow and then if it all goes bad, oh well, I'll go work at a different bank and we'll start over again, it's not my money.
Jim Young: Right.
Maria Abbe: That'll do it for this week's show. Now, for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit, or you can just head over to our homepage to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play, or Stitcher, and we would love to get ratings and feedback on any of those platforms. Until next time, this has been Maria Abby for Jim Young and Dallas Wells, and you've been listening to The Purposeful Banker.

About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

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