Banks Repaid TARP When Others Bailed

April 23, 2014

Last week the Congressional Budget Office (CBO) released its congressionally required annual report on the Troubled Asset Relief Program (TARP). While the report has attracted little press coverage, it does offer some interesting information. The bottom line is that the CBO estimates that TARP ultimately will cost the federal government an estimated $27 billion — fully $6 billion more than the estimate presented in the 2013 report. To date, $423 billion of the $700 billion which Congress authorized has been issued. CBO expects that an additional $15 billion will be issued, all of which will go to support mortgage borrowers through programs such as the Home Affordable Modification Program (HAMP).

The most fascinating statistic in the report is that the funds lent to banks are the only ones that the federal government profited from. Every other group of recipients resulted in losses to the federal government. Those other groups are: AIG (American International Group Inc.); the auto industry manufacturers and captive financers; and direct consumer programs, such as the aforementioned HAMP. Stunningly, the programs aimed at consumers to modify mortgages have resulted in a default rate of 29 percent. Of the 1.3 million mortgages held by homeowners granted a modification, 375,000 subsequently were canceled, primarily due to homeowners’ later defaulting.

General Motors Company, Chrysler Group LLC and their captive finance subsidiaries were lent $80 billion, of which $6 billion remains unpaid. CBO estimates the cost to the federal government at $14 billion for the assistance, due to the sale of debt, equity and preferred shares in the post-bankruptcy companies. The government invested $61 billion in these securities and sold them for $47 billion.

In the case of AIG — the giant insurance conglomerate — the government invested through a variety of means a total of $68 billion, of which it collected only $54 billion, resulting in another $14 billion loss. The losses occurred on the sale of stock, so AIG claims it has paid back all of its obligations. While AIG did pay back the debt portion, taxpayers still lost $14 billion on the sale of the stock invested in the company to save it from imminent failure. AIG obviously feels no responsibility to pay back taxpayers for their generosity. The auto companies obviously feel no responsibility to pay back taxpayers for their generosity, either.

While this report could be construed to absolve the banking industry from the onslaught of criticism leveled at it by the national media and the Obama administration, I am glad it has received little coverage. Banks remain an easy target, after years of being errantly maligned by the national media to the point that most individuals believe that banks were the root of this evil. My fear is that if this report had been picked up by the national media, the headline would have been misconstrued to: “Bank Bailout to Cost Taxpayers $27 Billion.”

These are the circumstances we find ourselves in today. Yet anyone who reads the entire report, which is only eight pages long, can clearly see that banks were the only recipients of TARP to fully pay it back, and then some. While bankers would love nothing more than to be vindicated of financial crisis allegations, and the facts outlined above would go a long way toward that goal, I doubt that any banker truly expects it to happen … except by rebuilding their sterling reputations over a long, long period of time.

Consolidation of the Banking Industry

April 16, 2014

Last week the Federal Deposit Insurance Corp. (FDIC) issued a report studying the consolidation of the banking industry during the past 30 years. The report arrives at some unbelievable conclusions. It concludes that banking institutions between $100 million and $1 billion in assets have increased — in the number of institutions, as well as in total assets — respectively by 7 percent and 27 percent! It further finds that both the number of banks and total assets of banks in the $1 billion-to-$10 billion range also increased, respectively, by 5 percent and 4 percent.

Apparently the consolidation has only taken a toll on the smallest and the largest banks, according to the FDIC report. The number of banks under $100 million in assets has declined by 85 percent, while banks over $10 billion in assets have tripled in number and have seen their assets grow by 1,000 percent. Yet somehow the study concludes that the rate of consolidation has been higher among the largest banks than among smaller banks. The study does recognize that there were more than 20,000 bank and thrift charters 30 years ago, compared to only 6,800 remaining today.

I understand that inflation makes banks larger, thus many banks that had been in the smallest category would have grown into the next-higher category. I also understand that banks that had been part of multibank holding companies have largely been rolled up into one bank, through the collapsing of charters. But I cannot buy the conclusion that all of the consolidations and failures that have occurred have only had a net effect on the banks under $100 million. The report seems to cleverly use rate of change, which camouflages what has really occurred.

I have had a seat at the table of consolidation in Indiana for the past 24 years. Consolidation has affected banks of all sizes, charters and ages of institutions. There were more than 600 bank and thrift charters in Indiana 30 years ago; when all of the recently announced mergers are completed, we will be down to a little over 120 remaining charters. What is not revealed in this data is the number of small, rural communities that no longer are anchored by a locally owned bank … and there are thousands of them. What effect will this trend have on rural America over the next 20 years? Rural America continues to shrink, as jobs disappear and poverty rates climb.

I do appreciate that the FDIC has been studying this issue. The researchers did an impressive job of collecting and analyzing data. They factored in mergers, acquisitions and failures. They factored in de novo banks, many of which should never have received a charter or FDIC insurance and, thus, failed within the past few years. I wish the FDIC had reported the data more realistically to show that consolidation is definitely changing the banking landscape in this country. I wish FDIC had factored in the growth of the fully tax-subsidized credit union industry, which has had a negative impact on tax-paying community banks.

It is obvious to anyone watching that there are many, many fewer banks today than 30 years ago. It is also obvious that those remaining banks are larger. The very largest banks have enjoyed the most growth, while the very smallest have disappeared. Regulatory burden, unfair competition, ridiculous accounting standards and wrong-minded policy directives have all contributed to the complicating of the banking business for all traditional banks, regardless of size. Banking is too important to the economic vitality of communities, states, regions and the country at large to allow these constraints to continue. That is what the FDIC report should have concluded, instead of: “The net result is a community banking sector made up of institutions that tend to be somewhat larger than was the case in 1985, but that otherwise continue, as before, to make loans and take deposits within a fairly limited geographic area.” Duh.

S. Joe DeHaven, 04-16-14

Friends of Traditional Banking Seeks to Grow

April 9, 2014

Two years ago, a small group of state bank trade association executives met with a few bankers, mostly from the western United States, and developed a concept to positively influence a couple of key Congressional races. The effort, now known as the Friends of Traditional Banking (FOTB), is managed by a 50-state board of banking leaders. Indiana is represented by Pat Glotzbach, who recently accepted an FOTB board appointment. He serves banking as president and CEO of The New Washington State Bank, Charlestown, and is a past chairman of the board of the Indiana Bankers Association.

Today there are about 5,000 members of FOTB; the goal is to reach 10,000 by this fall’s election. Members pledge to support two candidates — selected by the FOTB board of directors — and send personal checks to the political action campaigns of those candidates. In the last election two years ago, FOTB supported Dean Heller, a community banker in the Nevada Senate race. Heller won the race, and he now sits on the U.S. Senate Committee of Banking, Housing & Urban Affairs, where he is quickly becoming a respected voice on banking issues. The other candidate selected by FOTB was Scott Brown in his effort to defend the seat he had won in Massachusetts in a special race to complete the term of Ted Kennedy upon his death. Brown’s opponent was Elizabeth Warren, who had conceived of and implemented the idea of the Consumer Financial Protection Bureau. Warren won the election and now she, too, serves on the Senate banking committee.

These are two vivid examples of how the FOTB board will determine the congressional elections to ask members to support. In the first example, FOTB identified a former banker in a tight election and encouraged support from FOTB members. In the second example, the strategy was based on siding against a candidate with a track record of opposing banks. Regardless of how the FOTB board selects the election races to enter, there are two constants. First, FOTB engages only in close races where the financial support of FOTB members can make a difference in determining the outcome. Second, FOTB selects only races that appear to be important to banking.

FOTB is not designed to replace or compete with existing banking political action committees. As a matter of fact, both the American Bankers Association and the Independent Community Bankers of America are FOTB supporters. FOTB is simply an additional concept for influencing a small number of elections in favor of bank-friendly candidates.

Two years ago, during the last election, FOTB had only about 500 members. As noted above, today there are about 5,000 members, with an election goal of 10,000. Two years ago, it is estimated that FOTB was responsible for about $250,000 for each of the two elections. With 10,000 members, we could be responsible for $5 million per race. That support will make a difference. In the coming weeks and months, you will likely be hearing from Pat Glotzbach about how you can become involved with FOTB, and I encourage you to take the time to seriously consider participating. In the meantime, you can learn more at the Friends of Traditional Banking website.

S. Joe DeHaven, 04-09-14


Leveling the Playing Fields and Reducing Regulatory Burden

April 2, 2014

Amid dual tragic news stories last week — deadly mudslides in Washington state and the continuing ordeal of the crashed Malaysian flight 370 — Amber Van Til from IBA’s GR Team and I participated in the American Bankers Association Government Relations Summit in Washington, DC. For this annual event, bankers and state banking association leadership from throughout the nation gather to discuss the state of the industry and to call upon elected officials to espouse our views on issues affecting the business of banking and the overall economy. This year’s summit brought together a record number of nearly 1,100 attendees. Various meetings covered an array of subject matters, and general sessions featured messages from key congressmen on regulatory burden, secondary mortgage market and housing government-sponsored enterprise reform, and plans for strengthening our economy.

The Indiana delegation was able to visit with the offices of all but two of the 11 U.S. senators and representatives from Indiana. In all but two of those offices, we were privileged to meet with the actual elected officials. Our consistent messages were that overregulation is devastating to our banks, communities and customers; that community banks suffer innate disadvantages compared to credit unions, particularly regarding the unjust credit union tax exemption; and that unfair government-backed competition from the farm credit banks allows them to provide unrealistic pricing and terms for loans, many of which are unrelated to agriculture. We also asked for opinions on the recently released versions of suggested reform of the housing government-sponsored enterprises and, thus, access to the secondary mortgage markets.

While we received little encouragement regarding leveling of the playing fields with either credit unions or the farm credit banks, we were encouraged by what appears to be a growing recognition that the pendulum has swung too far toward regulatory burden on the banking industry, particularly on the community bank sector. Significantly, this regulatory burden sympathy seems to be shared by both Republicans and Democrats. Many Democrats are showing a growing concern about the effect of regulatory burden, not only on banks, but also on job-creating businesses in general. Message breakthrough is precisely why we invest so much time to call upon these influential people regularly. And we certainly are not alone. While banking remains at the forefront of regulatory burden, the message is being driven home by all businesses. Most Republicans get it, and now more Democrats are getting it, too.

Another issue is that, in addition to being overburdened with the endless minutia demanded by our federal government, U.S. businesses are the highest taxed in the world. Congressmen on both sides of the aisle seem to grasp that, consequently, the United States is losing economic leadership worldwide. Regardless, be aware that Congress moves at a glacial pace. Even if a majority of legislators agree, the system is structured to allow individual roadblocks, particularly in the Senate, that can drag out the simplest of measures. Nevertheless, it is encouraging that our problems are being recognized — the first step toward change.

We will continue our messaging about all of the aforementioned issues in the hope that fairness and logic will eventually prevail and will dictate an agenda that allows all parties to compete on level playing fields in an environment of reduced regulatory burden. The United States must retain its position as economic leader of the world. It is a gift we should pass on to our children and grandchildren, just as it was passed on to us. Indeed it is a gift for the entire world, as this great experiment called democracy must prevail. That, ultimately, is what we are fighting for, and we thank you for standing with us.

S. Joe DeHaven, 04-02-14

Historic FOMC Meeting

March 26, 2014

Last week the Federal Reserve Bank Federal Open Market Committee (FOMC) held its first meeting under the chairmanship of Janet Yellen. The financial press had been abuzz about this event for days in advance. The meeting was significant because Yellen is the first female Fed chair in history. Additionally she followed up the meeting with her first news conference as Fed chair. By all accounts, it went pretty well.

There had been speculation as to what the FOMC would do relative to continuing to reduce the amount of securities purchased monthly on the most recent quantitative easing (QE) program initiated last year. There was concern about what economic indicators Yellen might favor to determine appropriate reduction amounts. Now we know the answers to these questions and concerns. Yes, the Fed will continue to reduce the amount of securities by $10 billion per month, as long as inflation remains under the target of 2 percent. Previously the target had been unemployment at 6.5 percent or less, and inflation under 2.5 percent. After the announcement of the continued reduction, which followed the meeting, Yellen clarified that unemployment was now at 6.7 percent; while the Fed will continue to watch that rate closely, it appears that this criterion would be met, so it does not need to continue to be a target.

Yellen also, importantly, stated that interest rates would remain low “for a considerable time” after the QE securities purchasing program ends. When pressed how long a “considerable time” was, she said around six months. Don’t look for her to be that specific again, as the Dow Jones industrial average dropped 160 points on that news. It did recover somewhat to be down only 114 for the day. The next day it was up 106 points, essentially back to where it started. While Yellen’s candor was somewhat refreshing following 20 years of Greenspan and Bernanke, expect her to be more cautious in future public speeches.

When asked how her life has changed since assuming the chairmanship, she responded, “I feel I’m very lucky that I’ve had a lot of Fed experience to draw on as I approach this role, because it’s complicated. And now, in many ways, I feel that the buck stops with me in terms of management of the FOMC and responsibility to assure that the Federal Reserve makes progress on its goals.” She continued: “In terms of the conduct of business, it’s pretty much the same as usual. I’m not envisioning, nor have there been so far, any radical changes in how the Federal Reserve does its business, and that includes operating the Fed’s policy-setting committee.”

On the subject of the economy, she noted: “Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging.” Regarding unemployment, she said: “The share of long-term unemployment has been immensely high and has been very stubborn in bringing down. That’s something I watch closely.”

When asked how she felt about the path set by former chair Ben Bernanke, she answered: “I think we are committed to exactly the same set of goals. I think he had a very good agenda, and it’s one I shared.”

Bankers, particularly community bankers who live off of interest-rate spread, are not likely to be thrilled with the continued program of keeping short-term interest rates at a very low level. The interest-rate levels for the past few years have taken a toll on community bank profits. Interest rates paid on deposits cannot go down any further, yet competition for good loans has continued to keep loan rates at historically low levels. This continued squeezing of the interest-rate spread apparently will remain a problem for bankers for some time.

Investors, however, seem to be comfortable with a continuing low-interest-rate environment. Regardless, it was an historic day that went relatively unnoticed.

S. Joe DeHaven, 03/26/14


The Fate of Housing Reform

March 19, 2014

Senate Banking Committee Chairman Tim Johnson and ranking minority member Mike Crapo released their version of restructuring the housing government-sponsored enterprises last weekend. While their version had been rumored for some time to be nearly complete, it was built upon the prior release introduced several months ago by Sen. Mark Warner and Sen. Bob Corker. While these four senators and several others support moving quickly on this issue, other key senators, led by Elizabeth Warren and Sherrod Brown, seek to slow down the process, contending that it is too important to rush.

The reality is that any passage of a housing reform bill is at least a year away. Even if the Senate could rush something through, it would differ greatly from the vision held by House Financial Services Committee Chairman Jeb Hensarling. There are significant philosophical differences between the two Chambers as to how much support for the housing market should be guaranteed by the federal government.

While both proposals intend to eliminate Fannie Mae and Freddie Mac, the Senate version replaces them over a five-year period with a new Federal Mortgage Insurance Corp. (FMIC), patterned after the Federal Deposit Insurance Corp. The FMIC would collect fees from lenders using FMIC services to hold in an insurance fund, to be used before any taxpayer dollars would be called upon. FMIC is to create a platform, where lenders can bundle loans into securities that are sold to investors. FMIC would insure the bonds after the lender suffered a 10 percent loss. The fund would be tapped only after losses exceeded the 10 percent from private capital, with the fund expected to reach 1.25 percent in five years and 2.5 percent in 10 years.

The loans eligible for the FMIC guarantee would closely mirror the qualified mortgages as defined earlier this year by the Consumer Financial Protection Bureau, plus would require a 5 percent down payment, unless the loan is to a first-time homebuyer, who would be required to put down only 3.5 percent.

The FMIC would be governed by a five-member board of directors, nominated by the president and approved by the Senate for five-year terms. In the event of market crisis, the five-member board, the chair of the Federal Reserve, the secretary of the Department of the Treasury and the secretary of the Department  of Housing and Urban Development could permit — on a temporary basis — guarantees of loans that otherwise do not qualify.

A widespread concern has been how to continue support of affordable housing. The goals currently in place for Fannie and Freddie would be abolished, and a new system would replace it. The new plan is to finance, with fees to lenders, a pot of money for affordable rental properties, and a second fund to create incentives to serve low-income borrowers.

To keep smaller lenders on par with larger lenders, a small lender mutual company owned by community banks, credit unions and other small lenders would provide access to the secondary markets. It is to be available to insured depository institutions with less than $500 billion in assets, and to nondepository lenders with assets greater than $2.5 million that originate less than $100 billion of loans annually. The mutual company would be managed by a 14-member board of directors, authorized to promulgate other requirements as necessary.

The next few weeks will be interesting, as experts analyze this draft and express their opinions. Its fate may be determined within that same, short period of time.

S. Joe DeHaven, 03/19/14

Two Great Speakers, Hundreds of Great Bankers

March 12, 2014

Last week I had the pleasure of attending the national convention of the Independent Community Bankers of America. ICBA always hosts a spectacular event, and this year lived up to the billing. The general session last Tuesday featured two of the best speakers I have ever heard … and I have heard scores over the years. The first presenter was a young man named Jason Dorsey, who leads a company that researches and disseminates information about Generation Y. Members of this generation, also known as millennials, differ vastly from their mostly baby boomer parents, whom they incidentally outnumber. Dorsey provided an entertaining yet thought-provoking assessment of millennials, assigning credit (or blame, depending on perspective) for their behavior to the baby boomers who raised them.

For example, Dorsey pointed out that when boomers turned 18, they were instructed that, as adults, they had to decide what to do: Go to college, find a job, or join the military. By contrast, when millennials reached 18, they were assured that Mom and Dad would support them throughout their college careers, which could take as many as seven years to complete! Even after college, they often would move back home until they could get a job. On average, Generation Y will graduate from college, begin a career, marry and start a family five years later than their boomer parents did.

Another Gen Y trait: They were raised to believe they were special, unique and one-of-a kind. Consequently the best way to connect with them is to utilize their special, unique, one-of-a-kind self-image. Also, computers have always been part of their lives. Millennials have never used a map, read a newspaper or written a check; consequently, communicating with them means sharing a screen for them to talk to. I have only scratched the surface of Mr. Dorsey’s engaging presentation. If ever you have the opportunity to hear him speak, I would urge you to do so.

The second speaker is much better known in financial and political circles: Karl Rove. He was the political strategist responsible for George W. Bush being elected president twice, and he served as chief of staff under President Bush. Whether you agree with Rove’s politics or not, he is a brilliant man and an impressive speaker. In recent years, Rove has become a lightning rod for liberal Democrats, much as Rachel Maddow is a lightning rod for conservative Republicans. His speech last Tuesday pointed out that Republicans must develop meaningful answers — beyond simply saying “no” — to issues such as universal healthcare. While we have all heard that advice from many quarters over the past few years, it has apparently become obvious to political insiders, such as Mr. Rove. Again, whether you love him or hate him, if you have the chance to hear him speak, I highly recommend that you do.

Last Tuesday was an outstanding opportunity to hear two memorable speakers and, best of all, share that experience with community bankers from throughout the country.

S. Joe DeHaven, 03/12/14


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