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.