Sunday, March 8, 2009

Being too Big to Fail II

This evening on "60 Minutes," Shelia C. Bair, Chairman of the FDIC, said that banks that are too big to fail are probably too big to be in business when taxpayers' money is required. I agree wholeheartedly with this statement.

If banks are broken up, something that was suggested here by Senator Bernie Sanders, Being too Big to Fail, will this affect what we have come to know as global markets?

Should we, in fact, return to community banking? This may be good for a number of reasons. For one, it infuses a kind of face to face accountability on the part of lenders and borrowers that may elude Wall Street banks.

Will community banks affect globalization? Will Wall Street investment banks that lend to underdeveloped countries via a system of debt be halted? Is returning to community banking de-globalization?

Will community banking and de-gloablization better ensure our financial system and be seen as protectionism?

4 comments:

dave wheeler said...

Judith,

I have no earthly idea if community banking and de-globalization will be seen as protectionism. Nor do I really care.

We have to fix us first. It's like the emergency depressurization procedure when you're flying. The masks drop, the parent places theirs on first then tends to the child. Does no good if the parent passes out while trying to get the child taken care of. Our ability to grow, compete, provide for and meet our global obligations is dependent upon our financial. Going local makes sense. Better control, more visibility, and more accountability. Many other things would benefit by a "local approach" Build a strong foundation and the structure will endure.

judith ellis said...

Beautiful response, Dave. I agree. I love the opening. I also think that how we rebuild the financial system will be very important. I wonder if much have changed since the S&L scandals. We probably have by and large gone back to doing business as usual.

Bob Foster said...

Judith,

I’m sorry I missed this segment of 60 minutes. However, when we talk about banks being broken up, I don’t think most people advocate actual elimination of large banks or international banking. At least as I understand it, we are only talking about the very few banks that are such bureaucratic behemoths they can no longer function in our rapidly changing world. Of the over 9,400 banks in the U.S., only a very few are “too big to fail,” and therefore should not be in business—in their present form.

We never left community banking—it is still there and stronger than it has ever been. In fact, until the end of 2008, community banks where consistently lending money to small businesses. Then the federal regulators swooped in and stopped all but a small trickle of lending. Banks with decades of history of profitable lending can no longer make loans, as they had in the past, to small businesses, or consumers. It looks to me as though our community banks have “technically” been nationalized…through federal regulation.

Last Friday, on the ABC Evening News, they interviewed a banker whose family owned a community bank in a small town in the heartland of America. This man’s great grandmother started the bank 100 years ago, and it has been successful ever since. This banker said that all the small banks he knew of operated by the 3-6-3 rule…which is: pay depositors 3%, charge 6% for loans, and be on the golf course by 3 in the afternoon. In other words; be fair to depositors, be diligent when lending, and there is nothing to worry about—and it worked successfully for 100 years. Now, this bank is not allowed to follow that rule, because the feds are calling the shots and telling them not to make loans.

Does this make any sense to anyone?

judith ellis said...

Bob - Yes, your words make plenty of sense to me. The "60 Minutes" interview with Shelia Bair, spoke of the big Wall Street banks and insurance companies such as AIG. After all, Lehman Brothers and Indymac have already failed and the sky has not fallen as of yet. :-)

With regards to the smaller banks, many seemed not to have been engaged in subprime mortgages. And according to the "60 Minutes" interview, the idea is only for the FDIC to take over the bank until it can find a buyer. While they have a full staff to run the bank the desire is not to be in such places indefinitely. Also, the FDIC takeover can take three different forms.

There seems to be many buyers out there for banks. I forget the company that bought Heritage Bank, the bank highlighted on 60 Minutes, but the CEO thought that it is a necessary process to allow many banks to fail. I don't know if this is beneficial for him.

Heritage Banks had about 200 million or so deposits and had been around for 60 years if I'm remembering correctly. It was a community bank. Some 26 such banks have already failed this year alone where the FDIC has had to take them over. We are just beyond the second week in March and there appears to be many more forthcoming.

"This banker said that all the small banks he knew of operated by the 3-6-3 rule…which is: pay depositors 3%, charge 6% for loans, and be on the golf course by 3 in the afternoon. In other words; be fair to depositors, be diligent when lending, and there is nothing to worry about—and it worked successfully for 100 years."

OK, this sounds like a simple reasonable system that has worked. Was this featured bank taken over by the FDIC? Has the FDIC actually begun monitoring private enterprise to the point of telling banks that have not received TARP funds how to run their businesses? I understand the necessity or restrictions when taxpayers' money is invovled, especially until a plan is in place. Had that banker received TARP funds?

As always, I appreciate your words.