Archive for April, 2009

Too Big To Regulate???

Sunday, April 26th, 2009

Interesting how convoluted and frustrating the release of the Stress Test results has become… So now supposedly, the “Too big to fail or manage” have received word on whether or not they have sufficient capital, in other words, are solvent.  It appears that by some miracle, we are all supposed to feel better about the system.  The reality is that this dance was designed to obfuscate the fact that these banks have gotten larger than any of our regulators can understand or resolve. The regulatory process has been unable to keep pace with the growth of these institutions, and have in fact allowed for the creation of institutions that pose a risk to our capitalist system and to our financial health. The FDIC simply does not have the ability to oversee, and regulate these multi-directional behemoths that no longer resemble traditional banks. There is much talk today of a super regulator to fill in the void… It is my opinion that this would be a colossal mistake, and would pit the unwieldy, super powerful, giants against the rest of the more traditional banks that have for the most part, played by the rules.

It is these traditional banks, the local community banks like ours, and many others across the nation that continue to play a significant role in the support of the vast majority of businesses today. In fact, the only increase in lending is occurring at the community bank level. While there is certainly a place for national bank players, they must adhere to the same regulatory process as it relates to risk, and if they are going to be afforded FDIC insurance coverage, must be forced to pay higher premiums as they elevate their risk profile. In turn, no bank should be allowed to grow larger than the FDIC’s ability to determine insolvency, and the ability to prosecute an orderly wind down of a failed institution. That is all but impossible today…

There are only 19 banks today with assets over $100 Billion… Almost 100% of the problems we are facing reside at those banks… For them, the Stress Tests so far have proven that it is acceptable to take outsize risk, become “too big to fail”, and then win whether your risk pays off, or seek government intervention if you failed.

On May 4th, let’s be done with the stress tests, and begin to look for a permanent solution that will benefit not only the visible 2% of banks in this country, but instead will support the transparent, vitally important 98% who are being penalized from this crisis…

Why we should be Stressed over the Stress Tests…

Sunday, April 19th, 2009

With all the talk of the Government Stress Tests lately, I thought some rational explanation was warranted..

First, banks have been required to stress test their balance sheets since their original formation, including any denovo institution. All banks undergo regular regulatory exams which include stress testing of their balance sheets under various, interest rate, credit risk and capital scenarios.

Second, the nineteen banks that are part of the “Stress Test” being discussed could not be in a more varied set of businesses… On one hand we have the largest deposit gathering bank in the country, and on the other, a bank with virtually no deposits or branches, and every other type of business that a bank holding company might have, including investment advice, mortgages, real estate, hedge funds, derivative products, insurance, etc… How is it possible that one test will identify the strong from the weak in this set of banks?

The Stress Test although well intentioned, has added a political side to appease the populist voice being heard by our leaders…

It is clear to me that none of these nineteen “too big to fail” banks can, or will fail the stress test… Instead we will hear about how our banking system is safe from catastrophe, and that some of these institutions may need some additional capital to weather an impending storm. If the institutions are unable to raise the additional capital in the private sector, then they will be able to use a new TARP II funding program.  That’s when the fun will really begin.

Congress is not ready to appropriate more money to this cause; the banks will not like the terms of any new TARP II program…

And once again, we find ourselves concentrating on those that have created this mess, and looking for the best way to bail out banks that should be broken up instead. All this while the solvent, strong and functioning community banks receive no help, and worse, are being forced to pay a FDIC assessment which will substantially reduce not only their ability to lend, but will exacerbate the downward spiral of lower earning, lower share price, and difficulty in raising new capital.

Instead let’s look to support our community bank system and the economy by:

  • Eliminating the FDIC additional assessment altogether
  • Create a tiered FDIC fee arrangement that rewards traditional banks with a lower fee structure, and charges more for the bigger risk takers; peg fees to assets, not deposits
  • Reducing the Regulatory and Tax Burden on Community Banks
  • Incent more lending by allowing 1 & 2 Rated banks to lower their capital ratios; and/or provide a low cost TALF alternative geared toward community banks
  • Support the Federal Home Loan Banks, allowing community banks to better participate with first time home buyers, and those seeking to refinance


Our leaders need to understand that it is the community banks that are currently expanding, lending, hiring, and growing profitably which is providing the fuel that economy so desperately needs. Let’s get on with the Stress Tests, and then take a step back, and look to support those that know how to get the job done (our community banks)  and then onto how to re-sculpt the financial landscape so that we never have a systemic risk again…

Have you been TARPed yet???

Sunday, April 5th, 2009

TARP (Troubled Asset Relief Program) was originally meant to support those banks deemed to have capital issues, so that a catastrophic failure of our financial system could be avoided, or to get healthy banks to lend at a faster clip to stimulate the economy. How anyone could not have known, or predicted that TARP’s passage would actually endanger our capitalist system, and pose what may be the greatest threat that entrepreneurs and Main Street businesses have ever faced, is hard to understand… Do you remember the quote “we’re from government, and we’re here to help.”

Let’s take a quick look at how TARP has morphed…

  • Banks deemed “Too Big To Fail” are forced to accept TARP funds whether they want the capital or not…
  • Due to populist outrage over the AIG bonus debacle, all TARP recipients must follow new government guidelines on compensation and bonuses.
  • The President forces out the CEO of General Motors and orders the company to start building smaller and more energy efficient cars, as a condition of receiving additional TARP funds.
  • Chrysler is being forced into a merger with FIAT, and now the banks that hold its loans, who are TARP participants are being pressured into converting their debt to equity.
  • And now, TARP is being used to support the new Public Private Investment Partnership (PPIP) which although may be needed in concept, will serve to only reward the very largest investment companies, and in some cases the very same people that got us into this mess. Main street investors need not apply. Only a select few Investment managers will be allowed to invest with the Treasury to make outsized profits, and the FDIC will guarantee any losses…
  • Banks that have accepted TARP are now scurrying to figure out how to repay… One needs to question the decision making process that went on at any of these banks. The Boards and Managements Teams need to be questioned and in some cases may need to be replaced. As a shareholder, I would be outraged that management recommended, and the board approved, a contract wherein the other side retained the right to make changes at any time… It is clearly a breach of the fiduciary responsibility that is expected and required of those positions.

 Main Street businesses, investors, or individuals get to pay the price with higher taxes, higher FDIC assessments (which they will pay as a pass-thru from their banks) and more regulations. The program does not do anything to help those that have a troubled loan, a troubled mortgage, or face the downdraft in the economy created by the irresponsibility of the “Too Big to Fail.”

 No one wants TARP because of what it represents; the darkest side of our government reaching into, and trying to run our businesses. That is not what made America great..

 What we need today are programs that are designed to help those that have acted responsibly, and have been the engine of growth for this country; the local main street businesses, and community banks. Incent the entrepreneurs with tax credits for hiring, buying new equipment, and for making new investments in factories, offices and stores. Grant tax and regulatory relief for those that have proven to ability to “get it done,” and return to a system where calculated risk taking is rewarded, and reckless activity punished…That, is what has made America great.

Is Capitalism Dead??

Thursday, April 2nd, 2009

Failing Banks and Investment Banks are forced to merge with other competitors…The “Too Big to Fail” banks are summoned to the White House and forced to take TARP funds…  GM, once the country’s largest corporation has its CEO forced out by the President…Contracts are routinely abrogated, and Congress seeks to “cram down” mortgages…The FDIC seeks to retroactively assess all banks for the sins of a few..

Surely it is important for our government to address, and change the “systemic risk organizations” that exist today. But the prescription for the health of our economy is not in asking our government to take control, but rather in returning the system to a place where the entrepreneurial spirit lives; Main Street, USA…

What happened to being a steward of your company’s capital, and making risk/reward decisions.. If you make good decisions, and deploy your capital intelligently, then you are entitled to whatever profits inure from your business. If however, you make foolish mistakes, and take on undue risks, you are punished by losing your capital, and possibly your entire business. Is that not what has made this country great?

We have become a country who wakes up every morning to the news, newspapers, TV shows and other media outlets for direction. It is as if our businesses success or failure is determined by what is happening in the media… The truth is that like any other time, it is what we do every day that makes the difference between our success and our failure. The difference is that today we do not have a rising tide to help us. The things that we have been accustomed to are not the same. What used to work, day in, and day out, does not work anymore.

In these times it is especially important to remember to run our businesses, every day, and look for new ways to innovate, improve, evolve and be different. People are coming back to basics, back to things they can understand, back to a place where service matters and hard work is respected again. For some these may be the worst of times, but for those who remember that “hard work never killed anybody,” these may be the best of times in generation, or quite possibly, a lifetime…