I have an idea for Arianna Huffington. Over the holidays, the liberal blog-maven and media pundit took up a populist cause to have ordinary Jacks and Jills move their money from Big Bad Banks to community banks because, she says, she likes the little guys and doesn't like Wall Streeters or Big Bankers. More recently, her Huffington Post brought to light the fact that Sheila Bair got over $1 million in loans from Bank of America under some circumstances that raised a few eyebrows and launched a pissy little response from an FDIC toady or two. In my opinion, that last dog wont hunt. Sheila has too many friends in high places to take a bullet from anything other than a smoking gun of a caliber that even Dirty Harry would have trouble lifting, much less firing
Here's a better campaign, Arianna: save community banks not by loading them up with consumer deposits (although they'll take them, thank you very much) because they can't put them to good use. One reason that they can't put them to good use is because the bank regulators are (as my good friend and partner John Walker puts it) "laying waste to community bank capital like Sherman marching to the sea." They're doing it by aggressively writing down the collateral values of individual commercial real estate loans and by requiring community banks to make assumptions concerning future losses that are often "worst case." Talk to community bankers, Arianna. They'll tell you the horror stories.
Community and small regional banks have traditionally provided the lion's share of financing to small business. Small businesses are the source of well over half (some "experts" allege "almost all") of the new job growth in this country (other than federal government jobs, of course, which are growing at a nice clip). The commercial real estate meltdown that has flowed from the current recession is killing many community banks. Federal banking regulators appear to be in a competition to see who's the "weak sister" and who's the "hard guy" and every one of them is trying to outdo the others in "hardness."
Sheila Bair is setting the tone, Arianna. Two weeks ago she made it clear in a speech that she wants community banks to take their losses on CRE loans and she wants them to do it NOW! She understands that means hundreds of community banks (maybe over a thousand) will fail, but that's alright with her because, you see, we need to clear out the bad loans (modify them, of course, “if you can”) or take the property into foreclosure and then get the CRE back into private hands at depressed current market rates so the system can recover more quickly. According to the FDIC (and other federal banking agencies), we also need to stop using historical loss experience longer than the past twelve-to-eighteen months when setting general loss allowances, because to do otherwise wouldn't be "prudent." Of course, doing that increases the bank's losses and its hits to capital, and ultimately, its chance to fail. What happens to small businesses who lose their lenders and try to get loans from survivors hanging on by a thread and who are desperately trying to build capital and loss reserve levels, which, of course, constrains their ability to lend, is not being discussed.
On the other hand, Ms. Bair is all for preventing banks from facing reality on the residential loan side as long as that means more loan modifications for borrowers, many of whom will never be able to afford the homes they bought because they’re unemployed or underemployed, a condition that won’t be remedied until small businesses have access to financing to support their business needs, financing which community banks have traditionally provided, but which they won’t be able to provide because Sheila and her minions are killing them in droves and hamstringing many of the survivors through mark-to-market CRE valuations and Armageddon-like levels of general loss reserves.
We've heard from more than one source that the FDIC believes that there are too many insured banks in the country, and that taking the number from 8,000 down to 6,000 would be "a good thing." Yep, consolidation and the lessening of competition is a good thing, right? I guess it is when you're engaged in a government-planned economy. Some of us who favor just a wee bit freer economy (or, if we're going to have a "philosopher king," that it be someone who's actually run a bank) might disagree, but, then, we're not in charge.
So, Arianna, if you wish every American used a community bank, then how about insuring that more of them survive the devatation of their capital? By all means, if you're determined to save residential mortgage borrowers by kicking the can down the road through loan modifications, please do so. Nothing's stopped that freight train yet and nothing we can think of will stop it in the future, other than the cold, hard fact that ultimately, it won't work. However, while you're at it, how about urging Congress to come up with something more useful than a drop-in-the-bucket $30 billion TARP program that won't address the real problems? We've got ideas on how to address the real problems, and so do community bankers. If regulators are hot to have all banks "face up to their CRE problems," write down those bad CRE collateral values, and get aggressive about loss reserves, then how about amending current law to allow banks to amortize the resulting capital hits over an extended period of time, say ten years? There's precedent for it this, and these are, after all, extraordinary times that call for extraordinary measures. Yes, we know that we're proposing kicking the can down the road, just like we're already doing on the residential mortgage side (albeit we're doing it poorly).
If that's too controversial at the moment, Arianna, how about we at least start with leashing the examination hounds so we can talk about the alternatives without being drowned out by all the baying and barking and the agonized screams of the victims? Whatever bright ideas reasonable people can concoct to save the community banking industry, there must be something preferable to the slash-and-burn tactics employed thus far. That is, there must be if you're not hell-bent on taking down twenty-five percent of the existing community banks.
If you love those community banks like you say you do, Arianna, show the George Baileys of the world that love by taking up the cause of something more critical than "Move Your Money."
In the meantime, we'll be feeding the homeless at soup kitchens and helping old ladies cross the street.
