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Warning this will be a long post. I am not sure anyone will actually read it, much less comment on it.
This post is my weak attempt at creating an RJ Mythbusters - The Banking Version.
These are my opinions and incoherent ramblings, they are by no means given as gospel, but I did stay at a Holiday Inn Express last night. These opinions come from 30 years of experience in the industry, having experienced the absolute highs and rock bottom lows along the way. Simply put and in no particular order, I have started a bank, acquired a bank, sold bank, and had a bank that failed (that one hurts the most!). I was the guy in charge in three of the four instances, with the exception being the acquisition. But was one of the key decision makers, but I didn’t make the final call. I think this gives me some platform on which to base my opinions and attempt to myth bust!
Anyway, in another thread, I was having a back and forth with Hornsby regarding the current state of political discourse in this country. In one of our more lucid posts, he mentioned that to get the country back on track several things needed to occur. I agreed with everything he listed. But, I suspect, and I may be wrong, I agreed with one comment but for far different reasons. Hornsby posted “Banks have to start lending again”. They do, on that we agree. But I think where we may disagree is on the whys. The most important why being, “Why aren’t banks’ lending?”
I believe that most people in the country, and maybe Hornsby, think banks have made a strategic choice not to lend and as a result, most people think the economy is slow to turn around because of the lack of credit flow. The result of these decisions is that manufacturing levels remain historically low, companies can’t finance expansion, noting new is being built so nobody gets called back to work, job creation and growth are seriously impacted, housing values aren’t rebounding, and that banks are being overly aggressive in foreclosing on good people who are only victims of the cycle, as they are the unemployed or underemployed.
The common misconceptions (hereafter known as the Myths) are:
1. “If only the banks would feel some compassion and work with people, then we could all get through this”.
2. “It’s the ‘Banks’ that caused this crisis in the first place, therefore all bankers are immoral, greedy, untrustworthy and inherently evil.”
3. “The Federal Government should not be in the bailout business, therefore should not have created TARP because it’s a huge money loser with all the bank failures”.
Main stream media beats these points like dead horses, takes great pleasure in reporting banking industry wrongs, like failures and screw ups because it drives viewership and ratings. With few exceptions, main stream media is too lazy to dig for the “real story”. The Federal Reserve kicks those same dogs over and over, as well. So does the FDIC. As a result, of course their constituents, readers, listeners or watchers believe this and take it as FACT. Simply put, they have spun that banks are bad and it’s their fault that we are in the mess we’re in.
Well there is some truth in the above myths, but for the most of the banks in the country they far from reality and blatantly false.
First, the Federal Reserve and FDIC have unlimited spin control over what is expressed to the public. Neither agency wants to accept their role in the systemic failure of the industry, or at least distance themselves from it as much as possible. They couldn’t regulate the Too Big to Fails (they still can’t so nothing has changed) and the reaction once the ****storm occurred was to aggressively over-regulate the little guys.
The Little Guys?
The vast majority of banks in this country are under one billion in total assets. There approximately 7,200 financial institutions left in the country, from a high of 8,300 a few short years ago and nearly 10,000 at the peak before the Savings and Loan crisis of the mid to late 1980s. Of those 7,200 still left, approximately 6,800 are less than one billion ($1,000,000,000.00) in total assets. My rough estimate is that 4,500 of those are less than $250 million and half of those (or 2,000) are under $100 million. These are small businesses themselves, by any stretch of the imagination. Approximately, 7,150 of the total institutions are the ones felling most of the burden of the brave new world of banking regulation. These are not the Banks that caused the problem! Approximately 1,100 banks have vanished during this downturn. Slightly less than 500 have failed and were taken over by the FDIC as receiver (I know this group all too well). The other 600 were the result of collapsed charters of multiple bank holding companies or acquisitions by healthier banks before failure.
Now about that myth about banks not lending: Banks were founded to lend, they want to lend, they need to lend to become healthier, but the Regulators have made it extremely difficult for banks to lend. How that? Well one of the new regulatory overreactions was because of so many failures of smaller banks the regulators forced banks to increase capital well beyond necessary and at a time when the capital markets were nearly inaccessible. The Fed mandates banks to lend to small businesses but the FDIC says you don’t have enough capital to lend. The FDIC would never say that, of course, because that would be counter to the Feds edict. But their actions have forced Banks to either shrink back into its current capital or to reduce loan concentrations to minimal percentages of capital. Loans are assets to a bank. The only way to shrink assets is to stop making loans or get rid of bad ones. Banks can’t get rid of bad ones because the market is flooded with foreclosure properties for sale, by the big guys, and to sell those loans, the little banks have to liquidate at prices much lower than what it’s owed. Once a bank decides to takes a loss on a loan, the result is a depletion of its reserve of loan losses, which depletes it’s depletes capital, incrementally, when capital is already too low by new standards.
More later.
This post is my weak attempt at creating an RJ Mythbusters - The Banking Version.
These are my opinions and incoherent ramblings, they are by no means given as gospel, but I did stay at a Holiday Inn Express last night. These opinions come from 30 years of experience in the industry, having experienced the absolute highs and rock bottom lows along the way. Simply put and in no particular order, I have started a bank, acquired a bank, sold bank, and had a bank that failed (that one hurts the most!). I was the guy in charge in three of the four instances, with the exception being the acquisition. But was one of the key decision makers, but I didn’t make the final call. I think this gives me some platform on which to base my opinions and attempt to myth bust!
Anyway, in another thread, I was having a back and forth with Hornsby regarding the current state of political discourse in this country. In one of our more lucid posts, he mentioned that to get the country back on track several things needed to occur. I agreed with everything he listed. But, I suspect, and I may be wrong, I agreed with one comment but for far different reasons. Hornsby posted “Banks have to start lending again”. They do, on that we agree. But I think where we may disagree is on the whys. The most important why being, “Why aren’t banks’ lending?”
I believe that most people in the country, and maybe Hornsby, think banks have made a strategic choice not to lend and as a result, most people think the economy is slow to turn around because of the lack of credit flow. The result of these decisions is that manufacturing levels remain historically low, companies can’t finance expansion, noting new is being built so nobody gets called back to work, job creation and growth are seriously impacted, housing values aren’t rebounding, and that banks are being overly aggressive in foreclosing on good people who are only victims of the cycle, as they are the unemployed or underemployed.
The common misconceptions (hereafter known as the Myths) are:
1. “If only the banks would feel some compassion and work with people, then we could all get through this”.
2. “It’s the ‘Banks’ that caused this crisis in the first place, therefore all bankers are immoral, greedy, untrustworthy and inherently evil.”
3. “The Federal Government should not be in the bailout business, therefore should not have created TARP because it’s a huge money loser with all the bank failures”.
Main stream media beats these points like dead horses, takes great pleasure in reporting banking industry wrongs, like failures and screw ups because it drives viewership and ratings. With few exceptions, main stream media is too lazy to dig for the “real story”. The Federal Reserve kicks those same dogs over and over, as well. So does the FDIC. As a result, of course their constituents, readers, listeners or watchers believe this and take it as FACT. Simply put, they have spun that banks are bad and it’s their fault that we are in the mess we’re in.
Well there is some truth in the above myths, but for the most of the banks in the country they far from reality and blatantly false.
First, the Federal Reserve and FDIC have unlimited spin control over what is expressed to the public. Neither agency wants to accept their role in the systemic failure of the industry, or at least distance themselves from it as much as possible. They couldn’t regulate the Too Big to Fails (they still can’t so nothing has changed) and the reaction once the ****storm occurred was to aggressively over-regulate the little guys.
The Little Guys?
The vast majority of banks in this country are under one billion in total assets. There approximately 7,200 financial institutions left in the country, from a high of 8,300 a few short years ago and nearly 10,000 at the peak before the Savings and Loan crisis of the mid to late 1980s. Of those 7,200 still left, approximately 6,800 are less than one billion ($1,000,000,000.00) in total assets. My rough estimate is that 4,500 of those are less than $250 million and half of those (or 2,000) are under $100 million. These are small businesses themselves, by any stretch of the imagination. Approximately, 7,150 of the total institutions are the ones felling most of the burden of the brave new world of banking regulation. These are not the Banks that caused the problem! Approximately 1,100 banks have vanished during this downturn. Slightly less than 500 have failed and were taken over by the FDIC as receiver (I know this group all too well). The other 600 were the result of collapsed charters of multiple bank holding companies or acquisitions by healthier banks before failure.
Now about that myth about banks not lending: Banks were founded to lend, they want to lend, they need to lend to become healthier, but the Regulators have made it extremely difficult for banks to lend. How that? Well one of the new regulatory overreactions was because of so many failures of smaller banks the regulators forced banks to increase capital well beyond necessary and at a time when the capital markets were nearly inaccessible. The Fed mandates banks to lend to small businesses but the FDIC says you don’t have enough capital to lend. The FDIC would never say that, of course, because that would be counter to the Feds edict. But their actions have forced Banks to either shrink back into its current capital or to reduce loan concentrations to minimal percentages of capital. Loans are assets to a bank. The only way to shrink assets is to stop making loans or get rid of bad ones. Banks can’t get rid of bad ones because the market is flooded with foreclosure properties for sale, by the big guys, and to sell those loans, the little banks have to liquidate at prices much lower than what it’s owed. Once a bank decides to takes a loss on a loan, the result is a depletion of its reserve of loan losses, which depletes it’s depletes capital, incrementally, when capital is already too low by new standards.
More later.
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