Sunday, October 25, 2009

Do Bankers Deserve Their Current Reputation?

There was a time, fairly recently, when lawyers were the personification of greed and the subject of countless jokes. But not now. Today’s stories of greed and selfishness are being told about Bankers- - -people who, only 2 years ago, were consistently reported to be among the most admired of all professionals. But do bankers deserve that reputation? Or has the Obama Administration put them in that position in order to gain enough leverage to nationalize the banking system?

This is a complex and highly complicated issue. So forgive me if I start off with a little "Banking 101" here. In the end I hope this response will be comprehensive yet simplified and clear.

All COMMERCIAL BANKS- - -WITHOUT EXCEPTION- - are subject to Federal regulatory examination at least 3 times during each 18 month time span. Troubled banks are "examined" more frequently. One examination is a "Compliance Exam"- - -how well does the bank comply with various federal regs like 'Truth-in-Lending', 'Truth-in-Savings', the "Bank Security Act" and about 20 other regs that have little to do with how "financially sound" a bank may be.

Another separate examination - - -the "CRA Exam" is devoted strictly to how well the bank complies with "The Community Re-Investment Act". This is the government regulation promulgated under Jimmy Carter that FORCED banks to make business and other loans in blighted and run down areas like Watts, South Central L.A., Liberty City, Cicero and so on. "Pressuring and picketing" those banks that may not have fully complied or possibly could not comply is precisely how and why ACORN got it's start. But, I digress.

The most comprehensive of the 3 examinations is the "Safety and Soundness Exam"- - -that's the examination from which Federal Regulators determine how "safe and sound" a bank may be and what is its likelihood of success or. . . failure. During the Safety and Soundness Exam all banks are given a C.A.M.E.L. rating ranging from ONE (the best) to FIVE (the worst). And each element of C.A.M.E.L. is also rated from ONE to FIVE. The CAMEL acronym stands for:
*CAPITAL- -does the bank have sufficient capital to do a banking business and keep sufficient reserves to absorb losses.
*ASSETS- - what is the quality of the bank's assets, which for the most part are its portfolio of loans and other investments and the real estate it owns.
*MANAGEMENT- -the skill, ability and experience of the 3 or 4 most senior executives and the Board of Directors to manage the business of the bank and make sound decisions.
*EARNINGS- -quite simply the bank's ability to be profitable.
*LIQUIDITY- -does the bank have enough cash and other liquid assets to meet its routine daily operations, honor the checks drawn against it, fund loans etc.
For the purposes of the rest of this discussion I'm going to deal only with the C and A of CAMEL- - -Capital and Assets.

When Federal Examiners look at a bank's loan portfolio- - -the largest portion of the bank's assets- -they assess the value of the collateral held on that loan (if any) and the probabilty of that loan being repaid. They then rate that loan as "Pass"- - -meaning the loan is OK and does not require any special attention; or "Substandard"- -meaning the loan doesn't quite measure up and there is SOME possibilty the bank might take SOME loss on the loan, or "Doubtful"- -meaning there is significant doubt about the value of the collateral and the borrower's ability to pay, or "Loss"- -meaning the value of the callateral is zero and the borrower is unable to pay thus the remaining balance on the loan will be lost. Once this assessment is complete the bank is required by law to "reserve" or hold back capital funds in amounts equal to 25% of the "Substandard" loans, 50% of the "Doubtful" loans and, 100% of the "Loss" loans.

Then there is the O.R.E.O. portfolio- - -Other Real Estate Owned- - -the properties the bank has gotten back through the process of foreclosure. In better times and better years Federal Examiners usually required the banks to reserve about 10% to 15% of the total amount of its OREO portfolio because it was assumed the bank could sell the property, in most cases, for the amount remaining on the loan or perahps even more. But times have changed. Today the Feds are requiring the banks to reserve an amount equal to 100% of their OREO portfolio even though the value of the properties may be anywhere from 50% to 90% of the loan amount. This amounts to a HUGE amount of money that CAN'T BE LOANED to businesses or other borrowers. Yes, the FEDS shelled out TARP money to the banks to help keep them solvent when the housing crisis first hit but, the Feds under the 'leadership' of Tim Geithner, Obama's boy wonder, did not alter the reserve requirements to loosen up capital- - -THEY TIGHTENED RESERVE REQUIREMENTS instead and made loan funds harder to come by.

If, Heaven forbid, I were to be thrust into the role of being a bank CEO once again, I would do exactly what today's prudent bankers are doing. . .maximizing my profits anyway I can to build my capital base and fund my reserves on my own without further government help. Why? Because if they don't and the housing crisis gets worse or the commercial real estate market collapses the banks might need government money and intervention AGAIN. And this time, the Obama Administration has let it be known, the price for such intervention will be to NATIONALIZE the banks the same way they nationalized the auto industry. And nationalizing healthcare and the banking system is what has happened in EVERY country run by dictators such as Fidel Castro and Hugo Chavez or their wannabees.

American Bankers are determined not to let that happen here even if it creates some temporary pain for small business and cramps entrepreneurship.So, even though it is in current vogue to demonize bankers you may want to re-think that position. It is entirely possible that US Bankers may be our first line of defense against turning the this country into a European style Socialist Democracy.