$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.
Monday, July 27, 2009
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.
Subscribe to:
Posts (Atom)
