What were they thinking? Post Script
The Los Angeles Times reported this morning that Wells Fargo Bank had terminated Cheronda Guyton yesterday following a thorough and what appears to be a remarkably quick investigation. Guyton had been a senior vice president at Wells Fargo where she was in charge of a unit that was responsible for disposing of the bank’s foreclosed properties.
The front paper and not buried in the business section article seemed to conclude that the bank wanted to quickly put this unauthorized use of the foreclosed property behind them and move forward. The article concluded that the use of the property was an aberrant act of only one employee.
I somehow feel there will be other personnel actions in the next week or so taken against employees who knew or should have known something was wrong and failed to act. Obviously, these actions will never reach the front page of the newspaper; sort of like when you cut a cancerous tumor out of a body, you take the tumor and the surrounding tissue out to prevent its regrowth and harm.
Be well and stay happy.
Tuesday, September 15, 2009
Monday, September 14, 2009
Consequences of a bank failure
Consequences of a bank failure
I noted last week that credit unions generally have local senior management and decision makers and that this may be a benefit to a small business owner. Let me explain what I mean.
On Friday, Venture Bank of Lacey, Washington failed and was acquired by a bank that is headquartered in North Carolina. How will a bank that is more or less 3,000 miles away understand the local Lacey market?
I don’t have any idea how it will.
What happens when a problem develops late in Washington and everyone has gone home in North Carolina? I wouldn’t want to be the small business owner who has to ask for help at a time like that.
Full and Fair Disclosure: There are many large credit unions that have multi-state operations. I have worked at one but at least our decision makers where usually in the office until 8:30 PM eastern time. Most credit unions, even very large ones, tend to be local. I am eligible to join, two, billion dollar plus credit unions; both have their head offices no more than six miles from my home and both offer business services.
Be well and stay happy.
I noted last week that credit unions generally have local senior management and decision makers and that this may be a benefit to a small business owner. Let me explain what I mean.
On Friday, Venture Bank of Lacey, Washington failed and was acquired by a bank that is headquartered in North Carolina. How will a bank that is more or less 3,000 miles away understand the local Lacey market?
I don’t have any idea how it will.
What happens when a problem develops late in Washington and everyone has gone home in North Carolina? I wouldn’t want to be the small business owner who has to ask for help at a time like that.
Full and Fair Disclosure: There are many large credit unions that have multi-state operations. I have worked at one but at least our decision makers where usually in the office until 8:30 PM eastern time. Most credit unions, even very large ones, tend to be local. I am eligible to join, two, billion dollar plus credit unions; both have their head offices no more than six miles from my home and both offer business services.
Be well and stay happy.
What were they thinking?
What were they thinking?
Last week, the Los Angeles Times, my local newspaper, reported that a Wells Fargo bank senior vice president had spent the Summer living in a super luxury foreclosed home in the exclusive Malibu Colony.
The Times story identified the senior vice president as Cheronda Guyton whose job it was to manage the disposition of foreclosed Wells Fargo Bank property in Southern California. As you might expect, Ms Guyton has been unavailable for comment.
Wells Fargo Bank has promised a vigorous investigation. The Times reported that it was well established bank policy that employees could not use foreclosed property for their own use. Additionally, the bank policy prohibits conduct that will create a conflict of interest.
The Times story valued the home at about USD$12 million and quoted local real estate agents who stated it was available for rent for $60,000 a month. It does have direct access to the beach and the property includes an ownership interest in sixty feet of sandy beach; how much beach depends on where the high tide line.
For those of you who are unfamiliar with Southern California real estate, Malibu is a section of the coast that is usually populated by entertainment industry celebrities and executives. The Malibu Colony is a more exclusive section of Malibu and is surrounded by a wall and has limited gated access; you need a pass to get in, even if you own property there.
Malibu is our version of the Hamptons I guess only without the New Yorkers.
Wells Fargo acquired the property as a debt settlement with one of the Madoff victims. This much is clear cut and agreed upon. I recall the transaction between the borrower and Wells Fargo as being stated to have occurred in March.
Here is where things start to get murky.
The Times reported that Wells Fargo had agreed to delay the marketing and sale of the property for several months. The newspaper stated over the weekend that Wells Fargo was getting ready to sell the property
Why?
Delaying the sale of property seems to be on the less than bright side of things. It is a prime beachfront property. Fall and the coming Winter are just not good times to show a beach front property especially if a storm is eating away at the beach. Spring time would be an excellent time to advertise the property for sale.
With a probable $12 million price tag, it doesn’t seem like the property is going to attract the average Joe and Jane. Properties in the Malibu Colony go on sale all of the time; agents know how to properly market the property to obtain maximum value.
Banks do not want to be in the property management business; it is expensive and generates no direct income. Maintaining property costs money for things like electricity, water, gas, insurance, property taxes, gardening, security, and the list goes on.
Our local television stations, apparently hot for an interesting weekend story, jumped on the newspaper report. The local television news reports featured quotes about large, lavish, and loud weekend parties at the house with one party having the guests arriving on a yacht and then being ferried to the house in the yacht’s dingy.
Wells Fargo Bank is in a major public relations disaster. While one of its employees was partying at a foreclosed luxury home in the Malibu Colony, the bank was evicting hundreds of low and moderate income renters in the San Fernando Valley so the bank could quickly sell the foreclosed properties.
If the bank wanted to quickly sell rental properties in the San Fernando Valley, why wouldn’t it want to do the same for a luxury home in the Malibu Colony?
This story is being to smell like a week old fish that has been baking on the Malibu pier.
It seems to me that Wells Fargo is going to have heads roll and one or more soon to be former employees who will be branded or identified as rogue employees who will be terminated.
As Dr. Phil might say, “What were you thinkin’?”
I would love to be an electronic listening device on the wall when the bank employee explains his or her rationale for their conduct in the face of clearly stated bank policy.
After reflecting, I like Forrest Gump’s line better; “stupid is as stupid does.”
Be well and stay happy.
Last week, the Los Angeles Times, my local newspaper, reported that a Wells Fargo bank senior vice president had spent the Summer living in a super luxury foreclosed home in the exclusive Malibu Colony.
The Times story identified the senior vice president as Cheronda Guyton whose job it was to manage the disposition of foreclosed Wells Fargo Bank property in Southern California. As you might expect, Ms Guyton has been unavailable for comment.
Wells Fargo Bank has promised a vigorous investigation. The Times reported that it was well established bank policy that employees could not use foreclosed property for their own use. Additionally, the bank policy prohibits conduct that will create a conflict of interest.
The Times story valued the home at about USD$12 million and quoted local real estate agents who stated it was available for rent for $60,000 a month. It does have direct access to the beach and the property includes an ownership interest in sixty feet of sandy beach; how much beach depends on where the high tide line.
For those of you who are unfamiliar with Southern California real estate, Malibu is a section of the coast that is usually populated by entertainment industry celebrities and executives. The Malibu Colony is a more exclusive section of Malibu and is surrounded by a wall and has limited gated access; you need a pass to get in, even if you own property there.
Malibu is our version of the Hamptons I guess only without the New Yorkers.
Wells Fargo acquired the property as a debt settlement with one of the Madoff victims. This much is clear cut and agreed upon. I recall the transaction between the borrower and Wells Fargo as being stated to have occurred in March.
Here is where things start to get murky.
The Times reported that Wells Fargo had agreed to delay the marketing and sale of the property for several months. The newspaper stated over the weekend that Wells Fargo was getting ready to sell the property
Why?
Delaying the sale of property seems to be on the less than bright side of things. It is a prime beachfront property. Fall and the coming Winter are just not good times to show a beach front property especially if a storm is eating away at the beach. Spring time would be an excellent time to advertise the property for sale.
With a probable $12 million price tag, it doesn’t seem like the property is going to attract the average Joe and Jane. Properties in the Malibu Colony go on sale all of the time; agents know how to properly market the property to obtain maximum value.
Banks do not want to be in the property management business; it is expensive and generates no direct income. Maintaining property costs money for things like electricity, water, gas, insurance, property taxes, gardening, security, and the list goes on.
Our local television stations, apparently hot for an interesting weekend story, jumped on the newspaper report. The local television news reports featured quotes about large, lavish, and loud weekend parties at the house with one party having the guests arriving on a yacht and then being ferried to the house in the yacht’s dingy.
Wells Fargo Bank is in a major public relations disaster. While one of its employees was partying at a foreclosed luxury home in the Malibu Colony, the bank was evicting hundreds of low and moderate income renters in the San Fernando Valley so the bank could quickly sell the foreclosed properties.
If the bank wanted to quickly sell rental properties in the San Fernando Valley, why wouldn’t it want to do the same for a luxury home in the Malibu Colony?
This story is being to smell like a week old fish that has been baking on the Malibu pier.
It seems to me that Wells Fargo is going to have heads roll and one or more soon to be former employees who will be branded or identified as rogue employees who will be terminated.
As Dr. Phil might say, “What were you thinkin’?”
I would love to be an electronic listening device on the wall when the bank employee explains his or her rationale for their conduct in the face of clearly stated bank policy.
After reflecting, I like Forrest Gump’s line better; “stupid is as stupid does.”
Be well and stay happy.
Worse than I thought
Worse than I thought
I mentioned last week that I thought FDIC deposit insurance premiums would have to go up in the future to cover all of the losses the fund has incurred and will incur in the future as the financial system and its mess sorts itself out in the coming years. I think I understated the scope of the problem.
It was worst than I thought it was.
The Associated Press reported last week that the deposit insurance fund account balance was down to about USD$10.4 billion at the end of June. The FDIC is forecasting continuing costs of up to an additional USD$70 billion through 2013 resulting from the failures of the nation’s banks.
Last Friday’s three closures are estimated to cost the FDIC an additional $2 billion.
You don’t need Wall Street quant to tell you that this is not good. I can do the math in my head and see this is one of “woe shit” epiphany moments.
On the not so dull an bleak side of the picture, the FDIC does have a very large line of credit at the US Treasury and the Federal Reserve will not allow the FDIC to fail.
My small change in my local regional bank is safe unless the Government falls. I don’t think that will happen.
For those of you who might be conspiracy theorists, rent the film, SEVEN DAYS IN MAY, and then buy gold before you dive into your survival bunker somewhere in southern Utah or western Colorado.
Be well and stay happy.
I mentioned last week that I thought FDIC deposit insurance premiums would have to go up in the future to cover all of the losses the fund has incurred and will incur in the future as the financial system and its mess sorts itself out in the coming years. I think I understated the scope of the problem.
It was worst than I thought it was.
The Associated Press reported last week that the deposit insurance fund account balance was down to about USD$10.4 billion at the end of June. The FDIC is forecasting continuing costs of up to an additional USD$70 billion through 2013 resulting from the failures of the nation’s banks.
Last Friday’s three closures are estimated to cost the FDIC an additional $2 billion.
You don’t need Wall Street quant to tell you that this is not good. I can do the math in my head and see this is one of “woe shit” epiphany moments.
On the not so dull an bleak side of the picture, the FDIC does have a very large line of credit at the US Treasury and the Federal Reserve will not allow the FDIC to fail.
My small change in my local regional bank is safe unless the Government falls. I don’t think that will happen.
For those of you who might be conspiracy theorists, rent the film, SEVEN DAYS IN MAY, and then buy gold before you dive into your survival bunker somewhere in southern Utah or western Colorado.
Be well and stay happy.
Friday, September 11, 2009
416 and Rising
416 and Rising
The Federal Deposit Insurance Corporation recently released the aggregate number of troubled banks. The new total is 416, the highest level in 15 years.
Not very comforting news.
The problem is growing instead of shrinking. Last week, the regulators closed five banks. These closures are likely to cost the FDIC’s deposit insurance fund just under USD$400 million. There will be more closures this weekend I think.
The costs to the FDIC insurance fund should concern you. The fund, by law, has to maintain certain capital levels. Banks provide all of the money in the insurance fund. The money the banks pay in comes from their profits.
If any insurance company has a bad string of losses or if you have a couple of automobile accidents, the premiums will go up to cover the losses. The policyholders will pay the increased premiums.
The FDIC will increase its premiums, if you will, that banks have to pay. Unlike consumers who can shop around for the best deal on insurance or decide to have the minimum coverage, banks have no choice. They have to have FDIC insurance to stay in business.
Period, end of discussion, send your check to the FDIC on time.
Banks then will pass this added cost of doing business on to you and me, gentle readers, in the form of higher interest rates and higher fees and elimination of free and low costs services and reduced rates on deposits.
If I were a betting man, I would bet that probably close to 400 of those troubled institutions will fail. Failure is defined as ceasing to be an independent financial institution. This possible number of failures doesn’t include other banks that haven’t reached the troubled banks list yet.
How long could a regime of higher interest and fees last?
It all depends on how long the FDIC decides to take to rebuild the insurance fund capital base. My guess is that it might last as long as five years. But, after five years, customers will be so used to the higher rates and fees there will be no incentive to reduce them.
I think I’ll stop for now. I don’t want to scare you that much; it is still too soon for Halloween.
Be well and stay happy.
The Federal Deposit Insurance Corporation recently released the aggregate number of troubled banks. The new total is 416, the highest level in 15 years.
Not very comforting news.
The problem is growing instead of shrinking. Last week, the regulators closed five banks. These closures are likely to cost the FDIC’s deposit insurance fund just under USD$400 million. There will be more closures this weekend I think.
The costs to the FDIC insurance fund should concern you. The fund, by law, has to maintain certain capital levels. Banks provide all of the money in the insurance fund. The money the banks pay in comes from their profits.
If any insurance company has a bad string of losses or if you have a couple of automobile accidents, the premiums will go up to cover the losses. The policyholders will pay the increased premiums.
The FDIC will increase its premiums, if you will, that banks have to pay. Unlike consumers who can shop around for the best deal on insurance or decide to have the minimum coverage, banks have no choice. They have to have FDIC insurance to stay in business.
Period, end of discussion, send your check to the FDIC on time.
Banks then will pass this added cost of doing business on to you and me, gentle readers, in the form of higher interest rates and higher fees and elimination of free and low costs services and reduced rates on deposits.
If I were a betting man, I would bet that probably close to 400 of those troubled institutions will fail. Failure is defined as ceasing to be an independent financial institution. This possible number of failures doesn’t include other banks that haven’t reached the troubled banks list yet.
How long could a regime of higher interest and fees last?
It all depends on how long the FDIC decides to take to rebuild the insurance fund capital base. My guess is that it might last as long as five years. But, after five years, customers will be so used to the higher rates and fees there will be no incentive to reduce them.
I think I’ll stop for now. I don’t want to scare you that much; it is still too soon for Halloween.
Be well and stay happy.
Where would I bank?
Where would I bank if I were a small business owner?
If I were a small business owner, I would certainly consider my local community bank but only after checking its financial condition. But, a community bank probably would not be my first choice.
I would go to a local credit union. Many credit unions now offer a full range of small business banking services like credit card merchant accounts, remote deposit capture, term loans, and lines of credit in addition to a full set of consumer banking products and services.
Full and fair disclosure: I have a checking account and line of credit with a local regional bank. I have three credit union accounts and one credit card account. My primary financial institution is a credit union.
Here’s why I like using a credit union.
First, my credit union deposits are insured by an agency of the federal government to USD$250,000, just like banks. My credit union is examined annually by federal examiners, just like banks. My credit union has its financial statements audited by an independent certified public accounting firm, just like banks.
My credit union is a member of a credit union shared branch cooperative that allows me to transact business at any one of over 2,500 credit union branches across the country. I have to drive by four shared branch offices, where I could conduct the transaction, when I visit my credit union’s office. My credit union is a member a free, no fee ATM network that has over 26,000 machines worldwide.
I don’t think banks can offer all of these services.
For those of you who have seen your interest rates rise on a credit card or loan from a bank, this next difference might make you blink.
Federal credit unions, they have the word “federal” in their name, have a maximum interest rate on any loan or credit account of only 18.0% APR. It is set by the federal agency that regulates them and has been at this limit for maybe 25 years or more.
No 9.0% interest today and 29.9% tomorrow with a federal credit union. Federal credit unions can increase interest rates; just not to such onerous levels as some banks have done recently.
I can’t speak about state chartered credit unions because each state has its own laws. In California, for example, there is no limit on much interest a credit union may charge.
Credit unions are nonprofit financial institutions. They are owned by the depositors, no out of state shareholders or Wall Street investors to answer to. To date, there has never been a hostile takeover of one credit union by another credit union.
Credit union typically charge less interest on loans and pay higher on deposits. Although with interest rates on deposits as low as they are now, the deposit interest difference may not be all that significant.
Not all credit unions offer business services. The larger credit unions that have a community charter usually offer some range of business services. A community charter means anyone who lives, works, goes to school, or worships in a specific geographic area may join the credit union.
In my case, I am eligible to join three, very large, community based credit unions. These credit unions have offices within less than five miles of my home and they some form of business services. These credit unions all have assets over USD$1 billion which puts them in the category of a regional bank.
One of the nice things about a credit union is that its decisions makers are usually local as well. That may be nice when you have a problem and you do not have the time to deal with an automated phone center.
Just think how convenient it would be, you could speak with the President and Chief Executive Officer or other decision maker about your problem instead of being ignored. You may not receive the answer you want but at least you will have had a prompt face-to-face hearing by a live person.
Finding a credit union is fairly easy. You can do it from the comfort of your home. This is a low tech solution. Open the local Yellow Pages to credit unions; this will give you a list of credit unions in your immediate area. Then, you can go to the Internet and search the list for a credit union that offers the business services you need and want.
I do not want to paint a picture that shows credit unions are near perfect and that banks are not small business friendly. There are probably many fine community banks out there that out small business friendly; I may not have met them yet.
Some credit unions, like banks, are suffering with the current financial crisis. For the most part, credit unions were not involved with sub-prime mortgages and they are not involved with commercial real estate which will be the next big financial mess for banks.
All federal and most state licensed credit unions have to post their financial condition in their offices or make it available to the public on a monthly basis. Take a look at the information; it can be very informative.
Here are some simple calculations that will give you an idea of how healthy the credit union may be. Divide total reserves by total assets; if the number is 7% or greater, this is a good indication of financial health. Divide delinquent loans by total loans, if the number is less than 2%, this is a good indication also.
Good luck on your search and analysis.
Be well and stay happy.
If I were a small business owner, I would certainly consider my local community bank but only after checking its financial condition. But, a community bank probably would not be my first choice.
I would go to a local credit union. Many credit unions now offer a full range of small business banking services like credit card merchant accounts, remote deposit capture, term loans, and lines of credit in addition to a full set of consumer banking products and services.
Full and fair disclosure: I have a checking account and line of credit with a local regional bank. I have three credit union accounts and one credit card account. My primary financial institution is a credit union.
Here’s why I like using a credit union.
First, my credit union deposits are insured by an agency of the federal government to USD$250,000, just like banks. My credit union is examined annually by federal examiners, just like banks. My credit union has its financial statements audited by an independent certified public accounting firm, just like banks.
My credit union is a member of a credit union shared branch cooperative that allows me to transact business at any one of over 2,500 credit union branches across the country. I have to drive by four shared branch offices, where I could conduct the transaction, when I visit my credit union’s office. My credit union is a member a free, no fee ATM network that has over 26,000 machines worldwide.
I don’t think banks can offer all of these services.
For those of you who have seen your interest rates rise on a credit card or loan from a bank, this next difference might make you blink.
Federal credit unions, they have the word “federal” in their name, have a maximum interest rate on any loan or credit account of only 18.0% APR. It is set by the federal agency that regulates them and has been at this limit for maybe 25 years or more.
No 9.0% interest today and 29.9% tomorrow with a federal credit union. Federal credit unions can increase interest rates; just not to such onerous levels as some banks have done recently.
I can’t speak about state chartered credit unions because each state has its own laws. In California, for example, there is no limit on much interest a credit union may charge.
Credit unions are nonprofit financial institutions. They are owned by the depositors, no out of state shareholders or Wall Street investors to answer to. To date, there has never been a hostile takeover of one credit union by another credit union.
Credit union typically charge less interest on loans and pay higher on deposits. Although with interest rates on deposits as low as they are now, the deposit interest difference may not be all that significant.
Not all credit unions offer business services. The larger credit unions that have a community charter usually offer some range of business services. A community charter means anyone who lives, works, goes to school, or worships in a specific geographic area may join the credit union.
In my case, I am eligible to join three, very large, community based credit unions. These credit unions have offices within less than five miles of my home and they some form of business services. These credit unions all have assets over USD$1 billion which puts them in the category of a regional bank.
One of the nice things about a credit union is that its decisions makers are usually local as well. That may be nice when you have a problem and you do not have the time to deal with an automated phone center.
Just think how convenient it would be, you could speak with the President and Chief Executive Officer or other decision maker about your problem instead of being ignored. You may not receive the answer you want but at least you will have had a prompt face-to-face hearing by a live person.
Finding a credit union is fairly easy. You can do it from the comfort of your home. This is a low tech solution. Open the local Yellow Pages to credit unions; this will give you a list of credit unions in your immediate area. Then, you can go to the Internet and search the list for a credit union that offers the business services you need and want.
I do not want to paint a picture that shows credit unions are near perfect and that banks are not small business friendly. There are probably many fine community banks out there that out small business friendly; I may not have met them yet.
Some credit unions, like banks, are suffering with the current financial crisis. For the most part, credit unions were not involved with sub-prime mortgages and they are not involved with commercial real estate which will be the next big financial mess for banks.
All federal and most state licensed credit unions have to post their financial condition in their offices or make it available to the public on a monthly basis. Take a look at the information; it can be very informative.
Here are some simple calculations that will give you an idea of how healthy the credit union may be. Divide total reserves by total assets; if the number is 7% or greater, this is a good indication of financial health. Divide delinquent loans by total loans, if the number is less than 2%, this is a good indication also.
Good luck on your search and analysis.
Be well and stay happy.
Saturday, August 29, 2009
Too Big to Fail Made Easy
Too Big to Fail Made Easy
The best and simplest explanation of the concept of a bank or savings and loan being too big to fail that I have found comes from the Federal Reserve Bank of Cleveland. It can be found on the Economix blog at [ http://economix.blogs.nytimes.com/2009/08/20/defining-too-big-to-fail/?dbk ].
Yes, I know that I should learn to embed links in my blog. I’m not the most technically astute individual and I am waiting for my son to show me how to do this. This is one of things children are supposed to do; help their technologically backward parents.
Be well and stay happy.
The best and simplest explanation of the concept of a bank or savings and loan being too big to fail that I have found comes from the Federal Reserve Bank of Cleveland. It can be found on the Economix blog at [ http://economix.blogs.nytimes.com/2009/08/20/defining-too-big-to-fail/?dbk ].
Yes, I know that I should learn to embed links in my blog. I’m not the most technically astute individual and I am waiting for my son to show me how to do this. This is one of things children are supposed to do; help their technologically backward parents.
Be well and stay happy.
Closing Banks
Closing Banks
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
Sunday, August 9, 2009
Closing Consumer Credit Card Limits
Closing Consumer Credit Card Limits
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
Monday, July 27, 2009
$23,700,000,000,000
$23,700,000,000,000
That number, gentle readers, is the current estimated maximum total liability for our Government’s exposure to TARP. Neil Barofsky, the Special Inspector General of TARP, said “the total potential federal government support could reach $23.7 trillion.” [BBC Business News July 20, 2009, http://news.bbc.co.uk/2/hi/business/8160282.stm].
Full and fair disclosure, this amount is the estimated maximum amount. Actual results could be less. No one knows what the final exposure will be. Judging and testing my memory, I do not recall any government program that was funded for less than the maximum amount.
$23,700,000,000,000 is a staggering number to me. It’s real money.
I did some math with my Microsoft Calculator program because it will let me go into the trillions for calculations and my old HP 12C won’t. Assuming there are 300,000,000 people in the United States, the federal government support works out to about $80,000 for every man, woman, and child in America.
I try to watch the television news on a regular basis. I am fairly certain that I watched the news last Monday or Tuesday. I wonder how I missed that. I also read my local newspaper, the Los Angeles Times. Both news sources I think missed the number. It should have been the basis for some sort of news story I would think.
All of you gentle readers who tend to favor the conspiracy theorists’ point of view are free to mull that possibility over as you see fit.
Another way to look at the total potential federal government exposure number is by comparing it to our current national debt level. At the end of June 2009, the national debt was just over $11.5 trillion: you can Bing or Google “national debt” if you want to. Again using Microsoft Calculator, the exposure is just over twice our total national debt.
I also decided to compare the federal government support number to the nation’s Gross Domestic Product. The most recent number for GDP is $14.1 trillion. Doing the math again, the exposure is not quite twice our GDP.
Anyway you care to do the math, it is a truly staggering number.
Why should you, gentle reader, be worried about the size of the number?
You should be worried because I think this amount is completely unmanageable and could wreck our economy and therefore way and quality of life. The first obstacle is how we pay for it. I don’t know how and I have my doubts that anyone else does. Financing is not much of an option. I am fairly certain that the Chinese and the rest of the world are not going to continue to blindly purchase our debt at the rate we have been issuing it.
As the value of our debt declines, we will have to pay a higher interest rate. This is basic, classic economics, as the risk of loss increases so does the interest rate. Higher interest rates led to inflation.
And so, the economy slowly and inexorable begins a death spiral from which it will be almost impossible to extricate itself. That thought makes Freddy Krueger and Jason look like Tweedle Dee and Tweedle Dum.
I’ve scared myself enough today. I don’t want to think about any of the subsequent obstacles today or tomorrow. You can ponder them on your own gentle readers.
Be well and stay happy.
That number, gentle readers, is the current estimated maximum total liability for our Government’s exposure to TARP. Neil Barofsky, the Special Inspector General of TARP, said “the total potential federal government support could reach $23.7 trillion.” [BBC Business News July 20, 2009, http://news.bbc.co.uk/2/hi/business/8160282.stm].
Full and fair disclosure, this amount is the estimated maximum amount. Actual results could be less. No one knows what the final exposure will be. Judging and testing my memory, I do not recall any government program that was funded for less than the maximum amount.
$23,700,000,000,000 is a staggering number to me. It’s real money.
I did some math with my Microsoft Calculator program because it will let me go into the trillions for calculations and my old HP 12C won’t. Assuming there are 300,000,000 people in the United States, the federal government support works out to about $80,000 for every man, woman, and child in America.
I try to watch the television news on a regular basis. I am fairly certain that I watched the news last Monday or Tuesday. I wonder how I missed that. I also read my local newspaper, the Los Angeles Times. Both news sources I think missed the number. It should have been the basis for some sort of news story I would think.
All of you gentle readers who tend to favor the conspiracy theorists’ point of view are free to mull that possibility over as you see fit.
Another way to look at the total potential federal government exposure number is by comparing it to our current national debt level. At the end of June 2009, the national debt was just over $11.5 trillion: you can Bing or Google “national debt” if you want to. Again using Microsoft Calculator, the exposure is just over twice our total national debt.
I also decided to compare the federal government support number to the nation’s Gross Domestic Product. The most recent number for GDP is $14.1 trillion. Doing the math again, the exposure is not quite twice our GDP.
Anyway you care to do the math, it is a truly staggering number.
Why should you, gentle reader, be worried about the size of the number?
You should be worried because I think this amount is completely unmanageable and could wreck our economy and therefore way and quality of life. The first obstacle is how we pay for it. I don’t know how and I have my doubts that anyone else does. Financing is not much of an option. I am fairly certain that the Chinese and the rest of the world are not going to continue to blindly purchase our debt at the rate we have been issuing it.
As the value of our debt declines, we will have to pay a higher interest rate. This is basic, classic economics, as the risk of loss increases so does the interest rate. Higher interest rates led to inflation.
And so, the economy slowly and inexorable begins a death spiral from which it will be almost impossible to extricate itself. That thought makes Freddy Krueger and Jason look like Tweedle Dee and Tweedle Dum.
I’ve scared myself enough today. I don’t want to think about any of the subsequent obstacles today or tomorrow. You can ponder them on your own gentle readers.
Be well and stay happy.
Tuesday, July 14, 2009
"...with a book of business."
“…with a book of business.”
I’ve been seeing a number of advertisements for commercial loan officers – relationship managers in places like Monster.com that are specifying the candidates have a book of business of so many million dollars. A book of business is usually thought of a portfolio of customers’ loans and deposits with the candidate’s current bank with amount to some preset value. One of the common values that has been floating around is $20 million.
It makes sense for the bank that wants to hire a new commercial lender. The new employee brings with him or her new business to support the compensation, grow the new bank, and generate more profits for the new bank.
It is “Jack and the Beanstalk” growth in my mind.
The first year, the new employee produces roughly $20 million in new growth. What happens in year two? Replicating the first year is a difficult but not altogether impossible task. Year two success requires a number of pieces to fall into their proper places at the proper times. Year two may make the task of herding cats look incredibly simple.
Is this a risky strategy?
Maybe yes and maybe no, it all depends on the quality of the new business the new employee has brought to the new bank. The whole key to the success of this type of program for growth is that the growth must come from quality assets.
How do you define quality assets?
Quality, like beauty, is in the eyes of the beholder.
To the new employee, these assets are all high quality, solid assets. To the former bank and its examiners, the assets may be substandard or dubious or very questionable.
We are, after all, human and we generally fail to see flaws where they are obvious. The borrower who never seems to be able to reduce his debts as he said he would is perhaps viewed as a good businessman who is facing unreasonable competition and deserves another chance to fix things because the new employee plays golf with the borrower regularly at the borrower’s golf club.
If the business was facing unreasonable competition, shouldn’t the borrower be at the business, thinking up new strategies and markets to enter, instead of spending almost an entire day on the golf course?
I certainly hope that he or she would be at the business.
I once worked with a credit executive whose idea of having a low loan delinquency rate was to grant more new loans so that the total of new loans grew faster than the total of loans with delinquent payments. It sounded so nice to hear him explain it. I knew it wouldn’t work and his plan did not. I helped clean up the mess.
In my career as a commercial loan officer, I have seen other commercial lenders be hired with the idea they will bring their book of business with them. The borrowers had followed the lenders from bank to bank with their weak businesses that had been kept on financial life support by the lender. The amount of the debts had increased with each new bank, the old loans were paid off and new money was needed for working capital purposes.
To prevent the bank from taking action against the new borrowers, the lender moves on to a new bank and takes the borrowers with him or her. The resolution is postponed for another day
Eventually, the judgment day comes and the borrower is unable to pay the bills.
Then, the loan becomes the problem of the bank’s collections department where the staff liquidates the collateral in an attempt to pay all of the outstanding indebtedness. The liquidation will almost never pay the amount due; the bank takes a loss which reduces income for the period and possibly capital if the loss is large and income is limited.
If the loan losses are too great, the bank staff will have an opportunity to work with the FDIC’s Division of Liquidation. The DOL are not your friends; they are a cross between best aspects of morticians and Huns.
Fascinating image, morticians and Huns.
This is not to say that all commercial lenders have weak and poorly performing book of business. Some are very competent, intelligent, and morally strong. They resist the temptation to nurse weak credits.
The root of the problem is with the bank’s board of directors and senior management. Instead of following a deliberate plan to grow organically and prudently, they adopt a policy of buying growth at almost any price and turning a blind eye at the signs of danger. These banks eschew the simple and embrace the risk.
For example, I know of one medium sized bank that decided to enter the commercial equipment leasing market. On paper, it looked like a good idea. In reality, it was a road to losses. The bank was competing in a market against industry giants who were offering better terms and conditions to the lessees. The industry giants took all of the best customers, leaving the bank with the weaker ones. The end result was the leasing business was closed within a few years at a loss.
Entering a new market where one does not know the business is risky. Generally speaking, it is far safer to stick with what you know how to do successfully and practice diversification of risk and assets.
The final reason why I think this is a risky and downright silly or maybe even a stupid strategy is that banks don’t have to follow this practice to grow. Unless you have been a hermit, living out in the great Mojave Desert, you should be aware that there is a lack of credit available for businesses. All bank has to do to grow is say something like “we’re making loans” and business will almost automatically flow to the bank. The bank can then select the best credit risks from the large pool of credit seeking businesses and grow.
Gee, looking for customers the old fashioned way, what a strategy.
Doing business the old fashioned way is simple, not very exciting, and almost boring. It is a very successful strategy nevertheless and one that will usually generate growth and revenue for long periods of time.
Be well and stay happy.
I’ve been seeing a number of advertisements for commercial loan officers – relationship managers in places like Monster.com that are specifying the candidates have a book of business of so many million dollars. A book of business is usually thought of a portfolio of customers’ loans and deposits with the candidate’s current bank with amount to some preset value. One of the common values that has been floating around is $20 million.
It makes sense for the bank that wants to hire a new commercial lender. The new employee brings with him or her new business to support the compensation, grow the new bank, and generate more profits for the new bank.
It is “Jack and the Beanstalk” growth in my mind.
The first year, the new employee produces roughly $20 million in new growth. What happens in year two? Replicating the first year is a difficult but not altogether impossible task. Year two success requires a number of pieces to fall into their proper places at the proper times. Year two may make the task of herding cats look incredibly simple.
Is this a risky strategy?
Maybe yes and maybe no, it all depends on the quality of the new business the new employee has brought to the new bank. The whole key to the success of this type of program for growth is that the growth must come from quality assets.
How do you define quality assets?
Quality, like beauty, is in the eyes of the beholder.
To the new employee, these assets are all high quality, solid assets. To the former bank and its examiners, the assets may be substandard or dubious or very questionable.
We are, after all, human and we generally fail to see flaws where they are obvious. The borrower who never seems to be able to reduce his debts as he said he would is perhaps viewed as a good businessman who is facing unreasonable competition and deserves another chance to fix things because the new employee plays golf with the borrower regularly at the borrower’s golf club.
If the business was facing unreasonable competition, shouldn’t the borrower be at the business, thinking up new strategies and markets to enter, instead of spending almost an entire day on the golf course?
I certainly hope that he or she would be at the business.
I once worked with a credit executive whose idea of having a low loan delinquency rate was to grant more new loans so that the total of new loans grew faster than the total of loans with delinquent payments. It sounded so nice to hear him explain it. I knew it wouldn’t work and his plan did not. I helped clean up the mess.
In my career as a commercial loan officer, I have seen other commercial lenders be hired with the idea they will bring their book of business with them. The borrowers had followed the lenders from bank to bank with their weak businesses that had been kept on financial life support by the lender. The amount of the debts had increased with each new bank, the old loans were paid off and new money was needed for working capital purposes.
To prevent the bank from taking action against the new borrowers, the lender moves on to a new bank and takes the borrowers with him or her. The resolution is postponed for another day
Eventually, the judgment day comes and the borrower is unable to pay the bills.
Then, the loan becomes the problem of the bank’s collections department where the staff liquidates the collateral in an attempt to pay all of the outstanding indebtedness. The liquidation will almost never pay the amount due; the bank takes a loss which reduces income for the period and possibly capital if the loss is large and income is limited.
If the loan losses are too great, the bank staff will have an opportunity to work with the FDIC’s Division of Liquidation. The DOL are not your friends; they are a cross between best aspects of morticians and Huns.
Fascinating image, morticians and Huns.
This is not to say that all commercial lenders have weak and poorly performing book of business. Some are very competent, intelligent, and morally strong. They resist the temptation to nurse weak credits.
The root of the problem is with the bank’s board of directors and senior management. Instead of following a deliberate plan to grow organically and prudently, they adopt a policy of buying growth at almost any price and turning a blind eye at the signs of danger. These banks eschew the simple and embrace the risk.
For example, I know of one medium sized bank that decided to enter the commercial equipment leasing market. On paper, it looked like a good idea. In reality, it was a road to losses. The bank was competing in a market against industry giants who were offering better terms and conditions to the lessees. The industry giants took all of the best customers, leaving the bank with the weaker ones. The end result was the leasing business was closed within a few years at a loss.
Entering a new market where one does not know the business is risky. Generally speaking, it is far safer to stick with what you know how to do successfully and practice diversification of risk and assets.
The final reason why I think this is a risky and downright silly or maybe even a stupid strategy is that banks don’t have to follow this practice to grow. Unless you have been a hermit, living out in the great Mojave Desert, you should be aware that there is a lack of credit available for businesses. All bank has to do to grow is say something like “we’re making loans” and business will almost automatically flow to the bank. The bank can then select the best credit risks from the large pool of credit seeking businesses and grow.
Gee, looking for customers the old fashioned way, what a strategy.
Doing business the old fashioned way is simple, not very exciting, and almost boring. It is a very successful strategy nevertheless and one that will usually generate growth and revenue for long periods of time.
Be well and stay happy.
Saturday, July 11, 2009
The Easter Bunny, the Tooth Fairy, and P-PIP
The Easter Bunny, the Tooth fairy, and P-PIP
Most adults recognize the Easter Bunny and the Tooth Fairy as childhood fantasies that they are. On the other hand, most adult Americans have no idea what P-PIP even stands for or what it is supposed to do.
P-PIP stands for Public Private Investment Program. In case you haven’t figured it, P-PIP is a federal government program. It is one element of the federal government’s vision to lead the financial system out of the current mess.
Here’s how it is supposed to work. Nine or ten private investment companies will contribute about $10 billion in total. The federal government, on behalf of taxpayers like you and me, will contribute $30 billion. The money will be used to purchase toxic loans and assets that are being carried on the books of the nation’s banks. Once the toxic assets are sold off, the banks, in theory, will be able to make more loans and the increased volume of lending will help the economy to recover quicker.
Doesn’t that sound swell?
Or, are you more nervous now and worried about the future?
I, for one, am worried about the future because I think this plan is not going to work.
Here’s why I don’t think P-PIP will work. The total capital of P-PIP will be $40 billion. If we assume the program uses leverage [borrowing money from someone else to increase toxic asset purchasing capacity] and we use a 10 to 1 leverage factor, we have about $400 billion to purchase toxic assets.
Sounds good so far, right?
Unfortunately, the $400 billion will not even come close to covering the total amount of toxic assets in the banking system. The Treasury Department’s press release from last week said the total amount of toxic assets was around $1 trillion. The New York Times stated the total amount of toxic assets was in “the trillions.”
Anyway you do the math; you end up with not enough money to do the job.
There are other reasons why this program is unlikely to work. I don’t think anyone really knows how many toxic assets there are out in the financial system. In the December 17, 2008 issue of the New York Times, it reported that there was at least $107 billion in commercial real estate loans that were in default or headed towards a default.
Today, that number is probably much higher. The $107 billion amount was determined only three months after the financial meltdown began in earnest. I know that it takes time for an asset to go from being a good, solid asset for a bank to becoming a toxic asset that no one wants to have anything to do with.
The next trouble area for me is that I wonder how much experience these investment companies have in managing troubled, toxic assets. Having spent a year working for the FDIC’s Division of Liquidation in the mid-1980s, I know how difficult it is manage commercial properties, even for highly trained experts. I suppose that the investment companies could hire property managers to look after things but that will cost money that they probably don’t have.
How do you value a toxic asset?
How do you determine what its true worth is?
Those are simple questions that are extremely difficult to answer. There is no readily available data on values or prices for toxic assets like we have with the stock markets that have a precise closing price at the end of the day for each security that is listed on that exchange. Many of the toxic assets are a one of a kind project that makes comparison difficult. If we wanted to invest in Intel or AMD, for example, we could find precise price information in addition to substantial amounts of other useful data.
Where will the P-PIP find lenders who are willing to make a loan to purchase a known toxic asset, even at a steep discount? I think that most bankers who will still have jobs in 2010 will be only willing to consider lending on gold plated, rock solid assets.
So, gentle readers, this is why I have my doubts with P-PIP to accomplish its stated mission.
Regrettably, I don’t have any solutions of my own to offer except to suggest that failure is not such a bad idea. Failure cleans the debris and financial cancer from the economy, leaving it healthier and more robust that before. Historically, our nation has experienced financial panics and depressions and survived. The survivors of any cleansing of the financial system will be stronger and more viable and this is a natural process where the strongest survive, grow, and prosper.
Now, if the federal government wants to get the economy moving, I’d settle for my share of the $30 billion P-PIP contribution. I think that would work out to $100 or so; math has never been a strong skill for me. I would promise that I would go out and spend that money on all sorts of useful things such as lunch at Morton’s The Steakhouse with my son.
Be well and stay happy.
Most adults recognize the Easter Bunny and the Tooth Fairy as childhood fantasies that they are. On the other hand, most adult Americans have no idea what P-PIP even stands for or what it is supposed to do.
P-PIP stands for Public Private Investment Program. In case you haven’t figured it, P-PIP is a federal government program. It is one element of the federal government’s vision to lead the financial system out of the current mess.
Here’s how it is supposed to work. Nine or ten private investment companies will contribute about $10 billion in total. The federal government, on behalf of taxpayers like you and me, will contribute $30 billion. The money will be used to purchase toxic loans and assets that are being carried on the books of the nation’s banks. Once the toxic assets are sold off, the banks, in theory, will be able to make more loans and the increased volume of lending will help the economy to recover quicker.
Doesn’t that sound swell?
Or, are you more nervous now and worried about the future?
I, for one, am worried about the future because I think this plan is not going to work.
Here’s why I don’t think P-PIP will work. The total capital of P-PIP will be $40 billion. If we assume the program uses leverage [borrowing money from someone else to increase toxic asset purchasing capacity] and we use a 10 to 1 leverage factor, we have about $400 billion to purchase toxic assets.
Sounds good so far, right?
Unfortunately, the $400 billion will not even come close to covering the total amount of toxic assets in the banking system. The Treasury Department’s press release from last week said the total amount of toxic assets was around $1 trillion. The New York Times stated the total amount of toxic assets was in “the trillions.”
Anyway you do the math; you end up with not enough money to do the job.
There are other reasons why this program is unlikely to work. I don’t think anyone really knows how many toxic assets there are out in the financial system. In the December 17, 2008 issue of the New York Times, it reported that there was at least $107 billion in commercial real estate loans that were in default or headed towards a default.
Today, that number is probably much higher. The $107 billion amount was determined only three months after the financial meltdown began in earnest. I know that it takes time for an asset to go from being a good, solid asset for a bank to becoming a toxic asset that no one wants to have anything to do with.
The next trouble area for me is that I wonder how much experience these investment companies have in managing troubled, toxic assets. Having spent a year working for the FDIC’s Division of Liquidation in the mid-1980s, I know how difficult it is manage commercial properties, even for highly trained experts. I suppose that the investment companies could hire property managers to look after things but that will cost money that they probably don’t have.
How do you value a toxic asset?
How do you determine what its true worth is?
Those are simple questions that are extremely difficult to answer. There is no readily available data on values or prices for toxic assets like we have with the stock markets that have a precise closing price at the end of the day for each security that is listed on that exchange. Many of the toxic assets are a one of a kind project that makes comparison difficult. If we wanted to invest in Intel or AMD, for example, we could find precise price information in addition to substantial amounts of other useful data.
Where will the P-PIP find lenders who are willing to make a loan to purchase a known toxic asset, even at a steep discount? I think that most bankers who will still have jobs in 2010 will be only willing to consider lending on gold plated, rock solid assets.
So, gentle readers, this is why I have my doubts with P-PIP to accomplish its stated mission.
Regrettably, I don’t have any solutions of my own to offer except to suggest that failure is not such a bad idea. Failure cleans the debris and financial cancer from the economy, leaving it healthier and more robust that before. Historically, our nation has experienced financial panics and depressions and survived. The survivors of any cleansing of the financial system will be stronger and more viable and this is a natural process where the strongest survive, grow, and prosper.
Now, if the federal government wants to get the economy moving, I’d settle for my share of the $30 billion P-PIP contribution. I think that would work out to $100 or so; math has never been a strong skill for me. I would promise that I would go out and spend that money on all sorts of useful things such as lunch at Morton’s The Steakhouse with my son.
Be well and stay happy.
Wednesday, July 1, 2009
Feeling Nervous
Feeling Nervous
Do you remember those old Western films where one settler turns to another at nightfall and says something like, “It’s too quiet out there. Something is going to happen.”
I’m beginning to feel that way about TARP, the Troubled Asset Relief Program. The government plan to help the financially strong banks survive the current financial mess seems to be coming apart at the seams.
I read an article in the New York Times’ Deal Book that reported that four banks who received TARP money from you and me by way of Congress were not able to pay the preferred stock dividends at the end of June. The banks suspended payment of all dividends to help raise capital.
But, wasn’t TARP supposed to provide capital for these stronger banks?
I sure thought that it was.
What troubles me is the TARP appears to change from day to day, from week to week. This program looks as if it was written on an Etch-a-Sketch. Don’t like the conditions today, change them tomorrow.
If the financially stronger of the nation’s banks are not able to pay their required preferred stock dividends, that make our investment, our being you and me and all of the other taxpayers who didn’t vote for the program, much more shaky. Remember these banks were all scrutinized by government experts before they got any money.
All of which leads me to wonder how qualified these experts were.
As I recall, some 300 or so banks received TARP money. A few have repaid the TARP funds. That’s good. But, how many are going to end up like the four banks who have defaulted? I don’t know and I could easily be convinced that no one else knows for sure. That should trouble you because TARP amounted to almost $800 billion of our money, you and me and all of the other taxpayers.
I will admit that the term “default” may be a bit on the harsh side. I think it is very close to the truth. When you have a written obligation to do something like pay a preferred stock dividend and you do not make the payment on time and you say you don’t know when you will be able to make the payment that sure sounds like a good definition of the word default to me.
What worries me most and makes the hair on the back of neck stand up is our Congress. TARP is something that was created by our Congress. Having created it, Congress somehow feels it has the ability to interject its views on which banks should receive money and intervene if a bank in their home district doesn’t qualify for the funds. Remember, the funds were supposed to be given to financially strong banks.
The Wall Street Journal reported last year that Congressman Barney Frank of Massachusetts inquired about why OneUnited Bank had not been given any TARP money. The bank had some serious capital issues because its investments in Fannie Mae and Freddie Mac stock went to zero after the companies were nationalized, or insert your word of choice, by the government. A few weeks later, OneUnited received TARP funds.
This morning as I was driving to work, the local news radio station reported that Senator Daniel Inouye of Hawaii asked about TARP money for Central Pacific Bank. The station claimed that the Senator had owned stock in the bank at the time of the inquiry. A few weeks later, Central Pacific received some TARP funds.
Bothe Senator Inouye and Congressman Frank have stated that we not trying to influence and decision or place any pressure on the government.
Uh huh.
If you believe that, then maybe we can get together over a large ice blended drink or two from Coffee Bean & Tea Leaf and talk about a sale of a bridge in Los Angeles Harbor that comes with full naming rights.
Side Bars
Two more community banks in Southern California failed last Friday. Normally, this would not be significant since over forty banks have failed so far this year.
I took a small note of their passings. I am writing my doctoral dissertation on the impact of credit scoring small business loans on California community banks. This means there will be two less surveys to send out later this year.
One community bank had assets of just under $100 million and the other had assets of almost $500 million. Both seemed to have made the same bad lending decision; they were deeply involved with commercial real estate loans. They believed the same false logic that real estate prices were always going to go up and the properties would be fully rented out at all times.
We know that never happens even in California.
Grey heads like me know that every twelve to fifteen years California goes through a real estate shake out. This is not as predictable as the sun rising in the east and setting in the west. But, it still happens.
Both of the banks operated in highly competitive markets. I believe they took on more risk than they normally would have in order to keeping growing. As a bank chases loan opportunities, it may weaken its underwriting standards a bit here and then a bit there until the credit culture has become so weak that it only exists in some lenders’ memories.
I won’t bother to speculate to what degree the bank’s incentive compensation program played any part of their demise.
Be well and stay happy.
Do you remember those old Western films where one settler turns to another at nightfall and says something like, “It’s too quiet out there. Something is going to happen.”
I’m beginning to feel that way about TARP, the Troubled Asset Relief Program. The government plan to help the financially strong banks survive the current financial mess seems to be coming apart at the seams.
I read an article in the New York Times’ Deal Book that reported that four banks who received TARP money from you and me by way of Congress were not able to pay the preferred stock dividends at the end of June. The banks suspended payment of all dividends to help raise capital.
But, wasn’t TARP supposed to provide capital for these stronger banks?
I sure thought that it was.
What troubles me is the TARP appears to change from day to day, from week to week. This program looks as if it was written on an Etch-a-Sketch. Don’t like the conditions today, change them tomorrow.
If the financially stronger of the nation’s banks are not able to pay their required preferred stock dividends, that make our investment, our being you and me and all of the other taxpayers who didn’t vote for the program, much more shaky. Remember these banks were all scrutinized by government experts before they got any money.
All of which leads me to wonder how qualified these experts were.
As I recall, some 300 or so banks received TARP money. A few have repaid the TARP funds. That’s good. But, how many are going to end up like the four banks who have defaulted? I don’t know and I could easily be convinced that no one else knows for sure. That should trouble you because TARP amounted to almost $800 billion of our money, you and me and all of the other taxpayers.
I will admit that the term “default” may be a bit on the harsh side. I think it is very close to the truth. When you have a written obligation to do something like pay a preferred stock dividend and you do not make the payment on time and you say you don’t know when you will be able to make the payment that sure sounds like a good definition of the word default to me.
What worries me most and makes the hair on the back of neck stand up is our Congress. TARP is something that was created by our Congress. Having created it, Congress somehow feels it has the ability to interject its views on which banks should receive money and intervene if a bank in their home district doesn’t qualify for the funds. Remember, the funds were supposed to be given to financially strong banks.
The Wall Street Journal reported last year that Congressman Barney Frank of Massachusetts inquired about why OneUnited Bank had not been given any TARP money. The bank had some serious capital issues because its investments in Fannie Mae and Freddie Mac stock went to zero after the companies were nationalized, or insert your word of choice, by the government. A few weeks later, OneUnited received TARP funds.
This morning as I was driving to work, the local news radio station reported that Senator Daniel Inouye of Hawaii asked about TARP money for Central Pacific Bank. The station claimed that the Senator had owned stock in the bank at the time of the inquiry. A few weeks later, Central Pacific received some TARP funds.
Bothe Senator Inouye and Congressman Frank have stated that we not trying to influence and decision or place any pressure on the government.
Uh huh.
If you believe that, then maybe we can get together over a large ice blended drink or two from Coffee Bean & Tea Leaf and talk about a sale of a bridge in Los Angeles Harbor that comes with full naming rights.
Side Bars
Two more community banks in Southern California failed last Friday. Normally, this would not be significant since over forty banks have failed so far this year.
I took a small note of their passings. I am writing my doctoral dissertation on the impact of credit scoring small business loans on California community banks. This means there will be two less surveys to send out later this year.
One community bank had assets of just under $100 million and the other had assets of almost $500 million. Both seemed to have made the same bad lending decision; they were deeply involved with commercial real estate loans. They believed the same false logic that real estate prices were always going to go up and the properties would be fully rented out at all times.
We know that never happens even in California.
Grey heads like me know that every twelve to fifteen years California goes through a real estate shake out. This is not as predictable as the sun rising in the east and setting in the west. But, it still happens.
Both of the banks operated in highly competitive markets. I believe they took on more risk than they normally would have in order to keeping growing. As a bank chases loan opportunities, it may weaken its underwriting standards a bit here and then a bit there until the credit culture has become so weak that it only exists in some lenders’ memories.
I won’t bother to speculate to what degree the bank’s incentive compensation program played any part of their demise.
Be well and stay happy.
Friday, June 12, 2009
The Next Banking Crisis
Trying to call the next banking crisis is like trying to play roulette in Las Vegas or anywhere else for that matter. You know you are more than likely to lose or be wrong.
I think the next banking crisis is going to be fueled by serious problems with commercial real estate loans at banks. Commercial real estate loans are loans made to developers who build, develop, or purchase commercial real estate projects like strip malls, office buildings, hotels, and multi-family housing.
I know I should separate multi-family housing since the federal regulators treat it as a separate category. But, it’s Friday; I would rather be at the beach if the clouds weren’t obscuring the sun.
It is easier to think of them as being in the same pot since they are similar in many respects.
Why are problems loans with commercial real estate going to be the next financial crisis?
Here are my thoughts on why this will be important.
Commercial real estate loans are based on appraisals and estimates of the project’s cash flows. That makes sense in general terms since the property value represents the collateral security for the loan. Cash flows, rents usually, are important because that is the primary source of loan repayment.
When I learned how to underwrite commercial real estate loans, I was taught to make certain there was a solid cushion so that the project and the loan could survive a brief slowdown. Economic and business cycles happen. They have been happening for hundreds of years; it is not new.
We liked to lend when the borrower had real equity at risk in the loan so that the loan to value of the property was less than 80% of the loan amount.
One of the ratios, bankers tend to love ratios for some reason, we used was based on how much money was available to pay the periodic payments. The ratio is formally called Debt Service Coverage Ratio. We thought that a ratio of 1.25 was fairly safe. This means the cash flow from the property was equal to 125% of the required periodic payments.
So where did the bankers lose their prudent way in the last decade?
They believed that property values would continue to increase.
They made small commercial real estate and multi-family housing loans, loans with a loan amount of $1,000,000 or less with little or no documentation.
They made loans where the Debt Service Coverage Ratio was less than 125% at inception and would decrease further as the initial low interest rate rose to its natural level.
They made loans to people who had no experience operating a real estate based business.
They borrowed from the Federal Home Loan Banks to leverage their lending business.
They accepted appraisals that may not have been the best or strongest.
They bent over backwards to make the loans and probably accepted a bunch of loans that would not have been made in normal times.
They adopted a culture and performance attitude that rewarded those who booked the most loans; thus encouraging a culture of risk within the institution.
Oooops.
Doesn’t this sound like what happened with the sub-prime housing loan mess?
I saw this developing back in 2005 when I worked for a multi-billion dollar commercial bank with a large commercial real estate loan portfolio; more than 90% of the loans were commercial real estate. It is now subject to a FDIC cease and desist order to improve the loan portfolio and to build capital. If I were a gambler, I would bet the bank will be gone before year end.
Full and fair disclosure, I was not a commercial real estate lender. I just saw some files of existing borrowers who wanted a short term line of credit.
The signs of trouble are growing.
There was an article in the Los Angeles Times [May 30, 2009, B3] about five Southern California community banks that had received cease and desist orders from the FDIC. Most of the orders were related to lending; improve loan quality, increase capital, and bring in new management. I picked three of the banks to look at their loan portfolios.
New Resource Bank of San Francisco had 87% of its loan portfolio in commercial real estate loans. Mirae Bank of Los Angeles had 75% of its loan portfolio in commercial real estate loans. Independence Bank of Irvine, California had 96% of its loans in commercial real estate. [Source: FDIC March 2009 Call Reports].
I suspect that many of the community banks out there are in similar positions. I think the problem loans will grow as the economy works its way through recovery.
Commercial real estate loans that were made in the last four or five years ago now are fully indexed. Many borrowers took out loans with the idea of holding the property for a couple of years and then selling out for a profit. Property values have fallen so there are no buyers because the existing loan maybe more than the property is worth. Loans are difficult to obtain.
Cash flows from the properties may weaken. You can test this theory by looking at how many stores are vacant in any local strip mall. Lots of empty stores mean no rent payments which mean no money to pay the lender. Unless the borrower has excess cash elsewhere to pay the bills, the loan will go into default.
Raising rent rates is not much of an option since that is most likely to exacerbate the cash flow problem because some tenants will not be able to afford the new payments.
Troubles with commercial real estate loans affect all banks. On Wednesday, Citibank Global Markets Realty Group announced that it would hold a foreclosure auction on its $70 million junior loan it held on the St. Regis Monarch Beach resort in Dana Point, Californa. There is also $230 million worth of senior debt that would have to be paid as part of the auction for a new owner to take control of the resort property.
So, how big is the potential problem?
Large in my mind. There are just over 6,500 community banks according the FDIC’s First Quarter 2009 Quarterly Banking Profile Report. The large banks have all gone through their stress testing; community banks, for the most part, did not have any stress testing so they represent an unknown quantity.
Last week, McKinsey & Company forecasted the banking industry will have to absorb between $750 million and $1 trillion in losses from residential mortgages, commercial real estate loans, credit cards, and high yield/leveraged debt. [Source: McKinsey Quarterly, What’s Next for U. S. Banks, June 5, 2009].
The consequences of the commercial real estate problems go far beyond the loans themselves. If community banks have a problem real estate loan, that takes capital away from small business lending, one of the key elements of an economic recovery. Small businesses account for most of the jobs that are created in the economy.
No new jobs; the recovery takes longer to happen.
Coming up next, how to check on your bank’s condition from the comfort of your home.
Be well and stay happy.
I think the next banking crisis is going to be fueled by serious problems with commercial real estate loans at banks. Commercial real estate loans are loans made to developers who build, develop, or purchase commercial real estate projects like strip malls, office buildings, hotels, and multi-family housing.
I know I should separate multi-family housing since the federal regulators treat it as a separate category. But, it’s Friday; I would rather be at the beach if the clouds weren’t obscuring the sun.
It is easier to think of them as being in the same pot since they are similar in many respects.
Why are problems loans with commercial real estate going to be the next financial crisis?
Here are my thoughts on why this will be important.
Commercial real estate loans are based on appraisals and estimates of the project’s cash flows. That makes sense in general terms since the property value represents the collateral security for the loan. Cash flows, rents usually, are important because that is the primary source of loan repayment.
When I learned how to underwrite commercial real estate loans, I was taught to make certain there was a solid cushion so that the project and the loan could survive a brief slowdown. Economic and business cycles happen. They have been happening for hundreds of years; it is not new.
We liked to lend when the borrower had real equity at risk in the loan so that the loan to value of the property was less than 80% of the loan amount.
One of the ratios, bankers tend to love ratios for some reason, we used was based on how much money was available to pay the periodic payments. The ratio is formally called Debt Service Coverage Ratio. We thought that a ratio of 1.25 was fairly safe. This means the cash flow from the property was equal to 125% of the required periodic payments.
So where did the bankers lose their prudent way in the last decade?
They believed that property values would continue to increase.
They made small commercial real estate and multi-family housing loans, loans with a loan amount of $1,000,000 or less with little or no documentation.
They made loans where the Debt Service Coverage Ratio was less than 125% at inception and would decrease further as the initial low interest rate rose to its natural level.
They made loans to people who had no experience operating a real estate based business.
They borrowed from the Federal Home Loan Banks to leverage their lending business.
They accepted appraisals that may not have been the best or strongest.
They bent over backwards to make the loans and probably accepted a bunch of loans that would not have been made in normal times.
They adopted a culture and performance attitude that rewarded those who booked the most loans; thus encouraging a culture of risk within the institution.
Oooops.
Doesn’t this sound like what happened with the sub-prime housing loan mess?
I saw this developing back in 2005 when I worked for a multi-billion dollar commercial bank with a large commercial real estate loan portfolio; more than 90% of the loans were commercial real estate. It is now subject to a FDIC cease and desist order to improve the loan portfolio and to build capital. If I were a gambler, I would bet the bank will be gone before year end.
Full and fair disclosure, I was not a commercial real estate lender. I just saw some files of existing borrowers who wanted a short term line of credit.
The signs of trouble are growing.
There was an article in the Los Angeles Times [May 30, 2009, B3] about five Southern California community banks that had received cease and desist orders from the FDIC. Most of the orders were related to lending; improve loan quality, increase capital, and bring in new management. I picked three of the banks to look at their loan portfolios.
New Resource Bank of San Francisco had 87% of its loan portfolio in commercial real estate loans. Mirae Bank of Los Angeles had 75% of its loan portfolio in commercial real estate loans. Independence Bank of Irvine, California had 96% of its loans in commercial real estate. [Source: FDIC March 2009 Call Reports].
I suspect that many of the community banks out there are in similar positions. I think the problem loans will grow as the economy works its way through recovery.
Commercial real estate loans that were made in the last four or five years ago now are fully indexed. Many borrowers took out loans with the idea of holding the property for a couple of years and then selling out for a profit. Property values have fallen so there are no buyers because the existing loan maybe more than the property is worth. Loans are difficult to obtain.
Cash flows from the properties may weaken. You can test this theory by looking at how many stores are vacant in any local strip mall. Lots of empty stores mean no rent payments which mean no money to pay the lender. Unless the borrower has excess cash elsewhere to pay the bills, the loan will go into default.
Raising rent rates is not much of an option since that is most likely to exacerbate the cash flow problem because some tenants will not be able to afford the new payments.
Troubles with commercial real estate loans affect all banks. On Wednesday, Citibank Global Markets Realty Group announced that it would hold a foreclosure auction on its $70 million junior loan it held on the St. Regis Monarch Beach resort in Dana Point, Californa. There is also $230 million worth of senior debt that would have to be paid as part of the auction for a new owner to take control of the resort property.
So, how big is the potential problem?
Large in my mind. There are just over 6,500 community banks according the FDIC’s First Quarter 2009 Quarterly Banking Profile Report. The large banks have all gone through their stress testing; community banks, for the most part, did not have any stress testing so they represent an unknown quantity.
Last week, McKinsey & Company forecasted the banking industry will have to absorb between $750 million and $1 trillion in losses from residential mortgages, commercial real estate loans, credit cards, and high yield/leveraged debt. [Source: McKinsey Quarterly, What’s Next for U. S. Banks, June 5, 2009].
The consequences of the commercial real estate problems go far beyond the loans themselves. If community banks have a problem real estate loan, that takes capital away from small business lending, one of the key elements of an economic recovery. Small businesses account for most of the jobs that are created in the economy.
No new jobs; the recovery takes longer to happen.
Coming up next, how to check on your bank’s condition from the comfort of your home.
Be well and stay happy.
Tuesday, June 9, 2009
Banking Really Is Simple
When I became a commercial banker, banking was a simple business. We took deposits in and paid a modest interest on them. Then, we lent out a portion of the deposits at a much higher interest rate. We paid for the business with the difference and anything left over was profits for the shareholders. If we were really good at our business, we could be on the golf course with a customer by noon and home for a family dinner.
Perfect.
What could be a better business model?
One of the first things I learned about lending was that a smart banker would spread the risk of a loan turning bad around as far and as wide as was reasonable. This way, we were protected if a loan turned bad because a loss on the loan would not be catastrophic for the bank.
I should point out that no honest, competent banker ever knowingly made a bad loan. All commercial bankers, me included, have made a good loan that turned sour. Life happens; you learn to accept this and learn from the experience and hope you don’t repeat your mistake.
We knew our customers because they came from the local community. And, our customers knew us.
If banking is so simple, why is there a mess in the financial services industry?
I think the mess exists because bankers lost their way and forgot their traditional values that have worked for hundreds of years. We started lending money to customers that we didn’t really know all that well. Some of us followed those self anointed industry experts who said they could lead us to the lending Promised Land.
Remember Walter Wriston of Citibank?
Most of you probably don’t remember him or even know who he was. I think of his famous statement about “countries don’t go broke.” It makes me smile. Then Mexico went into the toilet and Citibank was on the ropes. Wriston retired and John Reed cleaned the mess up. A lot of banks got burned on lending to sovereign and foreign borrowers they did not truly know well, if at all.
They forgot their traditional values of lending to people they knew.
Bankers are like lemmings in some respects; we tend to follow trends because everyone else is doing this new practice so it must be safe. Other industries have acted like lemmings as well.
So where does that leave the blog and where will it go from here?
I want to explore the coming mess in banking that is likely to burst later this year or early next year. I also want to talk about how small business owners can manage their financial institution relationship.
Maybe even answer some questions while I am at it.
What, you didn’t know there was a looming banking mess on the horizon? Then read my next post, in a day or so, about it and how to protect yourself.
Be well and stay happy.
Perfect.
What could be a better business model?
One of the first things I learned about lending was that a smart banker would spread the risk of a loan turning bad around as far and as wide as was reasonable. This way, we were protected if a loan turned bad because a loss on the loan would not be catastrophic for the bank.
I should point out that no honest, competent banker ever knowingly made a bad loan. All commercial bankers, me included, have made a good loan that turned sour. Life happens; you learn to accept this and learn from the experience and hope you don’t repeat your mistake.
We knew our customers because they came from the local community. And, our customers knew us.
If banking is so simple, why is there a mess in the financial services industry?
I think the mess exists because bankers lost their way and forgot their traditional values that have worked for hundreds of years. We started lending money to customers that we didn’t really know all that well. Some of us followed those self anointed industry experts who said they could lead us to the lending Promised Land.
Remember Walter Wriston of Citibank?
Most of you probably don’t remember him or even know who he was. I think of his famous statement about “countries don’t go broke.” It makes me smile. Then Mexico went into the toilet and Citibank was on the ropes. Wriston retired and John Reed cleaned the mess up. A lot of banks got burned on lending to sovereign and foreign borrowers they did not truly know well, if at all.
They forgot their traditional values of lending to people they knew.
Bankers are like lemmings in some respects; we tend to follow trends because everyone else is doing this new practice so it must be safe. Other industries have acted like lemmings as well.
So where does that leave the blog and where will it go from here?
I want to explore the coming mess in banking that is likely to burst later this year or early next year. I also want to talk about how small business owners can manage their financial institution relationship.
Maybe even answer some questions while I am at it.
What, you didn’t know there was a looming banking mess on the horizon? Then read my next post, in a day or so, about it and how to protect yourself.
Be well and stay happy.
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