During these uncertain economic times, I want you to know that your bank, FSB&T, is not suffering any sub-prime difficulties and we have no liquidity or capital shortages. We maintain our 5-star status as one of the strongest banks in the country. We were offered participation in the TARP program; not because we have the need but specifically because we do not. It was believed that if healthy banks participated, there would be no stigma associated with participation. We did study the offer to determine whether it would benefit our customers and our stakeholders, but decided all would be better served by declining.
I would like for you to consider the role of traditional commercial/community banks like ours in the financial meltdown and what, if any, additional regulatory actions should be taken. There are more than 8,000 banks in this country and most have stayed out of the financial mess which we hear about daily. The business model of the average bank is not a “generate loans to sell off” model, and most bank professionals whom I know see themselves as a partner in their customers' endeavors, much like an attorney or accountant. Good bankers like to know their customers and work with them over extended periods of time.
Because the majority of the nation’s commercial/community banks are relatively healthy and have not created this mess and because they are already heavily regulated and monitored; it would be a mistake to heap more regulations on the back of the nation’s bankers.
On the other hand, a little research makes it clear that the bulk of our global financial exposure has been created by what are known as “Investments Banks.” Investment banks are not really banks as we know them and they operate in what is known as the “shadow banking system.” Investment banks are entities which trade, speculate, originate financial products, and distribute them around the world.
Investment banks, and others in the shadow banking system, have been able to operate with a complete lack of regulation. They have not had to maintain any minimum capital requirements, nor have they had to maintain any reserve requirements (commercial banks must carry 10% of their non-interest bearing deposits with the Federal Reserve Bank). Investment banks have had no societal mandate such as the Community Reinvestment Act or any security responsibilities for the nation such as the Patriot Act.
Because most of our nation’s financial problems have been created by the activities of entities outside of the banking system that are either unregulated or very lightly regulated; there is need for increased government supervision here. Again, investment banks and others operating in the shadow banking system, including mortgage brokers, hedge fund managers, and others do need to be put under higher regulatory standards in the coming months.
Now for a few thoughts on the American financial system as a whole:
On a daily basis we have bailouts, meltdowns, and bankruptcies. We are witness to a huge movement of government intervention and ownership into the private sector. The news from Washington on the size and cost of the “bailouts” seem to dwarf any numbers we have seen in the past. To put the scope of the numbers in context, consider the following:
- As of November 25, the running cost or new “investments” the federal government has enacted approximates $5.42 trillion dollars, and growing.
- By comparison the 2007 GDP of our entire nation was $13.8 trillion.
Let’s put this in perspective, from a “real” cost basis, and compare the current cost of the bailout to past large governmental spending programs. This information is provided by Jim Bianco of Bianco Research. Jim “inflation adjusted” past large spending programs to put them in some perspective as to size in today’s dollars:
||Inflation Adjusted Cost
|The New Deal
||$32 billion (est)
||$500 billion (est)
|Invasion of Iraq
||Total: $3.688 trillion
Of course, we can expect a very large “stimulus” package out of Washington. Soon we will have committed twice the resources on this bailout as all of the above programs combined ran us…and who will pay for all of this?
And what about the sub-prime mortgage mess which got this whole thing started? For a good analysis of the dynamics that created this situation, I’d like to quote Bradley Rock 2007-08 ABA Chairman:
“Republicans say that this whole mess was caused by Democrats who pushed the housing mission so far to an extreme that Fannie, Freddie, CRA and the mortgage securitization process got so far out of control that we created a mountain of debt that couldn’t be repaid, an upward housing price spiral that couldn’t be sustained, and a convoluted morass of carved up debt and contractual relationships that nobody really understands. Democrats say that this whole mess was caused by Republicans who so blindly adhered to free-market capitalism that they were unwilling to regulate the too-complicated, often greedy practices that created these problems. In my view…Separately, both sides are wrong. But taken together…They are pretty much on the mark. The housing mission is an important, laudable purpose. Every American has the right to live in a good and decent home. But the fact is, in a free-market, capitalist economy some of those homes are going to have to be rental housing, because not every American will be able to afford to own his or her home. Over the past 15 year, the housing mission has been distorted by government creating incentives for lenders to make home mortgage loans that people can’t afford to re-pay, and then…have government either buy or insure the bad loans to further encourage excessive risk-taking at the front end of the transaction. This is one of our mistakes that we all have to come to grips with. If we don’t recognize this part of the problem, 10 or 15 years from now, we will probably have to face this same whole mess again.”
It will take us some time to work through this current financial turmoil, and the global economic landscape will look quite different several years from now. We are a debtor nation and a debtor people. It will be painful to work off our debtor induced bubble. In the meantime, a couple of tried and true rules to live by may come back in vogue:
- Make it before you spend it, and
- Work with a financially responsible banker.