Bankers’ Hours column: Government doesn’t get everything wrong when it comes to banking
We all rail against the government, even when the government provides us with benefits ranging from protection to sustenance, from jobs to education. But there’s no doubt that “government,” in the modern sense, is a word interchangeable with waste.
The last two banking crises, in the 1980s and again in 2008, can be cited as examples of government overreaction and subsequent waste. But, if it weren’t for the underlying banking foundation of the U.S.banking system, the current recovery could be a permanent recession with all of the characteristics of a third world economy. That foundation, with federal insurance for bank deposits, was crafted almost a century ago by people in Washington, and it’s saved our fiscal bacon more than once.
We bankers constantly complain about obtuse regulators and oxymoronic regulations; hey, it’s a cultural imperative. I did it for 40 years — and still do, as a matter of fact. But all of us in the banking business owe our jobs and livelihood to the planetary perception that Uncle Sam is a good guy to hold your money, whether rubles, yen or pounds.
After the Great Meltdown in 2008, the government got it right in at least one instance: the Troubled Asset Recovery Program. It made money available to banks to help them shore up their capital (net worth) as a buffer for loan assets driven down in value by the real estate market collapse. In substance, in the case of banks, the Department of the Treasury bought preferred stock in the institution, to be repaid in a specified time frame. In reality, it was a loan, and it wasn’t free; the yield to the government — read taxpayers — was around 8%.
Eight of the big money center banks took the funds; all paid the money back with interest. Of course, not all banks took the cash; many didn’t need it. Some opted in as a life preserver in case of need, and then there were those whose survival was assured by Treasury’s assistance.
At the end of the program, the bottom line was: $426.4 billion invested by Treasury, $441.7 billion recovered. More importantly, the liquidation of a lot of banks was avoided, which would have turned out to be an economic nightmare for taxpayers, as was the massive winding down of the entire savings and loan industry in the late ’90s. As a banker said to me once, “Liquidating a bank and a divorce have one thing in common: They’re very expensive. Better to tough it out if you can.”
I happen to be familiar with a small Colorado bank that could be the poster child for this quote. At the start of the Troubled Asset Recovery Program program, the institution took down a little over $3 million in TARP funds. It turned out that this infusion of capital kept them afloat as local loans, that were well underwritten and solid when made, started going bad. The chairman of the board was a big city, retired Texas lawyer, one of those gentlemen in that profession who project the persona of a country lawyer and are anything but that. (If you’ve done much business with folks from west Texas to South Carolina, you’ve probably met him 100 times.)
His Colorado bank wasn’t his first rodeo. He was a veteran of the S&L crash of the ‘80s. He said to me, after the TARP cash was on the balance sheet, “Pat, you and I know that all this property [referring to the bank’s collateral] will be worth more in a few years than it was when the loans were made.”
And he was right. The institution tightened down its operation, eliminated excess expenses and made home loans, many of which were sold in the secondary market. An investment company found a buyer for the bank in 2019; the deal closed, and the wallets of both stockholders and taxpayers benefited. It took 11 years, but TARP was the fulcrum that levered the bank to a positive outcome.
There have been many, including me at one time, who felt that something similar should have been done with all the thrifts back in 1985. If you’ve read this piece only once, you’ve probably noticed that, ad nauseum, I’ve said that bad assets (loans) are the only thing that can break a bank. And the collateral for those bad loans in 1990 certainly was worth much more in 2000.
But the S&L business model was broken and had been for decades. The majority of them were undercapitalized, by commercial bank — that is, FDIC — standards, and some dramatically so. Better to keep a tight grip on the life preserver and let the whole industry sink, even though the process of disposing of the assets hit taxpayers like a two-by-four upside the head.
When Old Paint hobbles into the corral after the last roundup, sometimes the cowboy has no choice but to put his .44 to his mount’s head, turn his eyes away and pull the trigger.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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