Government-Sponsored Entities in Competition Against Private Business

March 25, 2015

Last week the American Bankers Association Center for Agricultural and Rural Banking unveiled its annual Farm Bank Performance Report. The report showed that 2,036 banks qualify as farm banks, which are those banks whose ratio of domestic farm loans to total domestic loans is greater than or equal to the industry average. This represents nearly one-third of all banks in the United States! These banks showed a 13.6 percent increase in farm lending during 2014, extending $94.6 billion in farm loans, representing over half of the total borrowings of farmers and ranchers in the United States. Interestingly, small loans — mostly under $100,000 — made up over half of the loans extended by banks.

Those banks have enjoyed a decade of a bullish agricultural economy, and the data reflect how well banks have fared. Over 97 percent of farm banks were profitable in 2014, and 65 percent reported an increase in earnings for 2014. Equity capital, the highest form of capital, increased by 4.8 percent to $46.2 billion. Perhaps most telling is that noncurrent farm loans declined to a pre-recession level of 0.5 percent of total loans. Employment at farm banks increased by 2.8 percent, equaling about 2,300 new jobs, for a total farm bank employment level of 89,000 rural Americans.

Obviously, many banks would love to be more involved in this area of lending. So, what are the organizations making up the other nearly one-half of agricultural credit? While I do not have that specific information, it is easy to speculate that the largest competitors would likely be those entities affiliated with the Farm Credit Services, the Farm Credit Banks (FCBs). Those entities enjoy regulatory advantages, significant taxation advantages and the implied guarantee of the federal government. It is a wonder why the FCBs are permitted to maintain these advantages, while competing in the retail marketplace against tax-paying, privately owned banks.

Even above and beyond the big-name, big-dollar nonfarm loans that have been made to Verizon Wireless, AT&T, U.S. Cellular and Frontier Communications, I regularly hear from bankers dismayed about loan terms offered by Farm Credit Banks that cannot be matched in the for-profit marketplace. This is outrageous. Our federal government was not founded to be in competition with private business. Our forefathers would spin in their graves at the thought that a government-sponsored enterprise (GSE) is competing directly against private business. On the other hand, our forefathers might have seen the wisdom in having the federal government support the private marketplace through a GSE such as the Federal Home Loan Bank System (FHLB). The FHLB system works at the wholesale level to provide better purchasing power to lower the cost of bank-provided mortgages in the retail marketplace. Both private banks and mortgage borrowers benefit from this GSE support.

By contrast, the Farm Credit Bank system picks winners and losers. The winners are those large companies mentioned above which are able to borrow at below-market rates, plus those farmers, ranchers and many nonfarm-related businesses which are privileged to borrow on favorable terms. The farmers, ranchers and nonfarm businesses, which are not able to borrow at those favorable terms, are losers relative to not receiving tax-break subsidies … but ultimately they are winners when they choose the banking system and benefit from its quality offerings. All taxpayers are losers, in that they are forced to support a system that discriminates in the marketplace, while at the same time competing against for-profit private businesses. Banks, too, clearly are big losers, as they are cut out of many loans that represent their very lifeblood to survival. Most banks in this country are small businesses themselves, with an average of $200 million in assets, 45 employees, four branches and four ATMs. These are the banks which are primarily the farm banks.

The question becomes, why is our federal government policy in favor of a government-sponsored enterprise that competes against thousands of small businesses? It is perplexing to me.

- S. Joe DeHaven

Americans for Peace, Prosperity and Security: Seeking a Safer World

March 18, 2015

Last week I was invited to attend a luncheon to hear former Congressman Mike Rogers of Michigan speak. Rogers is a Republican who formerly chaired the House Intelligence Committee. He has spent more than 20 years in top security positions with the U.S. Army and the FBI. He has served two U.S. presidents and has worked worldwide with countless foreign leaders, diplomats and fellow intelligence professionals.

Mr. Rogers expressed concern about our place as a world leader at this historic juncture. He said he does not believe that we are doing the right things, taking the right positions or implementing the right strategies. He fears we are leaving our allies “out to hang,” and we are negotiating poorly with our enemies. While I am not more knowledgeable about international affairs than any other average citizen, I do know enough to be scared … and Rogers certainly paints a very scary picture.

To address this issue, Rogers has accepted the honorary chairmanship of the Americans for Peace, Prosperity and Security (APPS). The organization’s mission is simple, yet difficult, to implement. The foreign policy challenges facing the next president of the United States on Day One will be more complicated than ever before. Understanding the challenges and benefits of American leadership around the globe will be crucial for our next president. National security, international engagement and the U.S. defense posture will have to be dealt with in the first months of the next presidency. With no time for on-the-job-training, a fulsome debate must begin now.

Therefore, according to the APPS website, the organization seeks to do the following to shape the 2016 presidential race,

  1. Raise the level of debate on the most important issue facing the country and move candidates beyond just rhetoric and talking points.
  2. Enhance the knowledge base of citizens in the early states to help elect a President who supports American engagement and a strong foreign policy.

These goals lead to the APPS mission statement: “To educate citizens on the strong national security and foreign policies necessary to provide for American peace, prosperity, and security in this century.”

APPS will host forums and town-hall meetings in the designated states where educated volunteer activists will push candidates to fully outline their policies on major national security issues such as Iran, Russia, China, ISIS, space and cyber. APPS will be the only organization connecting top foreign policy and business leaders with the grassroots activists in early presidential contest states, driving the debate with the candidates. Whether Republican or Democrat, the goal is to prompt candidates to unveil to voters what they will do regarding these important issues.

We all know from news reports that the Middle East is a tinderbox that could explode at any moment. Russia is once again flexing its muscle trying to put the Soviet Union back together. China continues to grow its gigantic economy and is now turning its attention to more international issues. I believe that APPS and Mr. Rogers have the potential to move the upcoming presidential race away from well-rehearsed sound bites to an intelligent discussion of these truly important issues. We all should hope so!

- S. Joe DeHaven

Arbitration: A Fair and Worthy Alternative

March 11, 2015

When drafting legislation, nearly every interest tries to provide language that will allow for disputes to be settled outside of court. Though our system of laws — and courts to interpret those laws — works well for both for businesses and consumers, it is expensive to appear before a court. There are multiple moving parts in a courtroom … all of whom need to be paid.

An alternative to the court system to settle disputes is arbitration. Many contracts require arbitration, or at least provide for it as an alternative. Financial service providers, including banks, often include such clauses in their contracts. This week the Consumer Financial Protection Bureau (CFPB) released the results of a three-year study, mandated by the Dodd-Frank Act, that is critical of arbitration clauses. CFPB Director Richard Cordray stated: “Our study found that these arbitration clauses restrict consumer relief in disputes with financial companies by limiting class actions that provide millions of dollars in redress each year. We found that it is rare for a company to try to force an individual lawsuit into arbitration, but it is quite common for arbitration clauses to be invoked to block class actions.”

The CFPB study found that, of the more than 1,000 cases filed through the American Arbitration Association in 2010 and 2011, consumers obtained debt relief or forbearance of about $400,000 total, while companies had rulings awarding $2.8 million. On class action suits, however, CFPB estimates that 32 million consumers were eligible to share $2.7 billion, after attorneys took 18 percent.

Yet according to research conducted by Christopher R. Drahozal and Samantha Zyontz, “Creditor Claims in Arbitration and in Court,” arbitration provides similar or better monetary rewards to court trials. Furthermore, studies have found that consumers prevailed more often in arbitration than in court.

Another study, “Survey of Arbitration Participants,” conducted by Harris Interactive, concluded that the majority of consumers who had engaged in arbitration found it to be faster (74 percent), simpler (63 percent) and less expensive (51 percent) than legal proceedings. In fact 66 percent of consumers said they would likely use arbitration again.

According to the American Bankers Association, arbitration is a streamlined legal procedure that has been in use for hundreds of years to resolve legal disputes in a manner that is fair and less expensive than litigation. An arbitration hearing is administered and managed by an independent third party for two or more parties with a legal dispute. The parties present their arguments and evidence to an arbitrator, who then decides the case.

Arbitration is regulated by the Federal Arbitration Act and a variety of state laws. In 1995 the U.S. Supreme Court recognized arbitration’s benefits: It is less expensive than litigation; the rules are simpler; the process invokes less hostility; it does not disrupt dealings among the parties; and it is more flexible in scheduling. In 2011 the Supreme Court ruled that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration.

Director Cordray may have his work cut out for him if he tries to ban banks from using arbitration clauses, since the U.S. Supreme Court has already ruled on the issue. Case closed.

- S. Joe DeHaven

Testy Testimony About “Audit the Fed”

March 4, 2015

The chairman of the Federal Reserve Board (FRB) is required by law to appear before Congress two times each year. I suspect that this is not one of the most appealing parts of being FRB chairman. The FRB, through the Federal Open Market Committee (FOMC), sets the economic policy of the United States and, arguably, of the world. There is an historic tug-of war-between the FRB and Congress as to how much information about FOMC decisions should be made public, and when.

In today’s age of transparency, efforts to “audit the Fed” have become a cornerstone for some factions in Congress. Sen. Rand Paul of Kentucky is using this as a plank in his efforts to win the Republican nomination for president. His father, former Congressman Ron Paul, mounted campaigns for president using this same cry for transparency at the Fed. Currently there is some support being rallied for “audit the Fed” among more moderate Congressmen.

Last week was one of those required appearances before Congress for FRB Chairman Janet Yellen. Her appearances were before the Senate Banking, Housing & Urban Affairs Committee on Tuesday and before the House Financial Services Committee on Wednesday. Chairman Yellen, by all accounts that I have seen, acquitted herself well, but left many House Financial Services Committee members frustrated. Yet she was well prepared to answer the plethora of questions from both sides of the aisle. When asked about the “audit the Fed” issue, she indicated that she would prefer not to have it implemented and questioned if Chairman Paul Volcker would have been able to effectively fight the elevated inflation that he faced during his time if he had been subjected to “audit the Fed” during the 1970s and 1980s. Sen. Bob Corker of Tennessee, who opposes the “audit the Fed” effort, asked if the financial statements of the Fed were being audited by anyone. Chairman Yellen assured him that the firm of Deloitte did indeed perform an audit of the Fed. That response brilliantly drew the parallel that the Fed is audited financially, as are all financial corporations. Many people swayed by “audit the Fed” proponents have no idea what it would actually do, and are mistakenly convinced that the Fed is not financially audited. Sen. Corker may well have stuck a fork into this issue by clarifying, to some degree, what the “audit the Fed” really does. I also thought it was clever of Chairman Yellen to proffer that, while she did not favor the current “audit the Fed” effort, that it was Congress’ decision, not hers.

The House Financial Services Committee proved to be much more challenging to Chairman Yellen. Its members accused her of being politically aligned with the president and the secretary of the Department of the Treasury ‒ essentially being overly influenced by the administration. Committee members further suggested that passage of the “audit the Fed” bill could surely not subject her to any more political influence than what currently exists with the administration. It was certainly a testy exchange.

No one knows what will happen with the “audit the Fed” proposal. If the Government Accountability Office is given responsibility for auditing FOMC decisions and the process for making those decisions, will the FOMC continue to be as candid as it is today in discussing and setting monetary policy?

- S. Joe DeHaven

GSB: Success Breeds Success in the Banking Community

February 25, 2015

One of the pleasures that I enjoy as a result of my position with the Indiana Bankers Association is a seat on the board of trustees of the Graduate School of Banking at the University of Wisconsin in Madison (GSB). This outstanding banking school was founded in 1945 by a group of bankers, and I am proud to have been a 1987 GSB graduate. Like every other graduate I have ever visited with, the school had a profound effect on my career and life. I am honored to have been elected chairman of the board of trustees for the 2014-15 board year, and more honored still that I am the first of 20,000 GSB alumni to serve as chairman in the school’s 69-year history.

GSB is unique among other graduate schools of banking, with much of the board made up of the state bank trade association executives from the states centrally located in the United States. It also is the only school of its type that has a full-time staff, which has led to the provision of many other educational services delivered in concert with those state bank trade associations. Another facet separates GSB from similar schools: the establishment of two groups which have been integral to its success. First is the Curriculum Advisory Committee (CAC), made up of the section leaders for each discipline taught at the school. This committee meets annually to review every aspect of the curricula and to review the performance ratings of each instructor. Every person who sits on this committee is interested purely in providing the best learning experience for the banking students who are the future leaders of the banking business for the next 30+ years. The candor of CAC members regarding what needs to be changed, and how, is thoughtful and thorough ‒ as it must be to attain the goal of providing the best learning experience for GSB students.

The other group that sets GSB apart is the Banker Advisory Board (BAB). This board is made up of one alumnus banker from each of the 17 states whose state bank trade association is a sponsor of the school. The charge of the BAB is to help with the marketing of the school to the banks and interested students in each state. This dedicated group of alumni work diligently year-round to discuss with other bankers the attributes that are unique to GSB. They encourage current students to complete assignments and to stay on course to graduate. The BAB met late last week and was kind enough to include me in its deliberations. The enthusiasm of these board members for GSB is contagious, and no doubt contributes to their success in helping students to succeed.

There are about six graduate schools of banking throughout the United States. All of them are dedicated to providing a broad management perspective to young bankers. All of them provide outstanding programming and instructors to deliver to students. It is very important that young bankers who aspire toward a lifelong career in banking attend one of these graduate schools to round out their preparation to become industry leaders. While I will admit to being biased toward GSB, what is important is that these opportunities exist, and that many talented individuals dedicate hours beyond count to ensure that the curricula remain relevant. These volunteer professionals also make the effort to reach out to potential students, so that the future of the banking business remains in good hands. Thank you to the GSB staff, CAC, BAB and my fellow trustees for their dedication and hard work to keeping GSB integral to the success of banking!

 – S. Joe DeHaven

Creativity Sparks Innovation

February 18, 2015

Last week I had the privilege of attending the American Bankers Association National Conference for Community Bankers. Over 1,300 bankers, spouses, exhibitors, friends and staff participated in this outstanding event. The theme, “Banking in a Brave New World,” focused on cybersecurity issues and on product and thought innovation. The cybersecurity discussions seemed particularly timely, given that one week prior, Anthem Inc., the second largest provider of health insurance products in the United States, had announced that it was the target of a massive security breach that could compromise the personal data of 80 million individuals. I have written before about cybersecurity concerns and the potential for serious, inestimable damage that may be wrought over the next several years, until government and business can collaborate to find solutions and bring the perpetrators of such crimes to justice.

What I have not spent much time writing about is banking innovation. Frankly, seeing this topic appear on a conference agenda was encouraging. We have expended so much energy in the past several years dealing with the financial crisis and inappropriate responses to it, that we have not been looking to the future. Giving innovation a prominent role in this national conference seems like a turning point for the community banking industry. It made the statement that we have survived the past, and now it is time to focus our attention on improving our performance for the future. It is truly a welcomed change.

There is no doubt that bankers must begin to think about what products they need to provide for the customer of the future. Much time and attention has been devoted to the emerging millennial generation, which this year will surpass the baby boomer generation in numbers. But what products and services will millennials need and want? Have competitors from technology companies swooped in during the past few years to capture much of this generation? If so, what can banks do to earn the business of these consumers in the future?

One speaker, Seth Godin, was particularly honed in on these issues, but not from a traditional business approach. Godin is a best-selling author and marketing provocateur, and has been dubbed “the ultimate entrepreneur for the Information Age” by Businessweek magazine. Urging attendees to think creatively, he shared examples of fresh thinking about product development and marketing. Godin suggested that community bankers must be creative in order to succeed in the future. Case in point: He told the story of a group of innovators who one day were discussing different ways to change up how things were being done. One person asked why socks were sold in sets of two, when socks are so easy to lose ‒ leaving behind a mismatch. The obvious answer, even for this group of innovators, was because we have two feet, and the idea was readily dismissed. Yet the questioner couldn’t let go of the topic, and he began to play with the idea of creating a package of three socks, intentionally mismatched. He conducted market research and found that “tween girls” ‒ ages eight to 13 years old ‒ actually enjoy wearing socks that do not match and would be likely to buy them, mismatched but coordinated, in sets of three. As a result, the appropriately named LittleMissMatched company was formed in 2004. Not only did the socks sell well, but product offerings have expanded into other mismatched inventory such as clothing, bedding and accessories. Crazy idea, huh?

As bankers, we are often closed to the very ideas that could set us apart. Much of the conference last week was about the need to set ourselves apart in order to rise above and prosper into the future. Well done, and thank you, ABA!

- S. Joe DeHaven

Addressing Debt Issues

February 11, 2015

Recently McKinsey & Company issued a report, “Debt and (Not Much) Deleveraging,” that states: “After the 2008 financial crisis … it was widely expected that the world’s economies would deleverage. It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP. This creates fresh risks in some countries and limits growth prospects in many.” The report continues, “Since 2007, global debt has grown by $57 trillion, or 17 percentage points of GDP … In advanced economies, government debt has soared and private-sector deleveraging has been limited.”

The report identifies three primary causes. First is government debt; next is household debt, particularly housing prices in Northern Europe and some Asian countries; and the third cause is the quadrupling of China’s debt within the past seven years, as led by real estate and shadow banking. Some of this debt increase has been desirable, as developing countries account for 75 percent of the corporate and household debt increases. In other words, citizens living in developing countries have seen some economic improvement, allowing households to assume more debt.

However, much of the new debt comes from governments, particularly those of Japan, the United States and most of Europe. Sadly, that trend is expected to continue. I have often written about my frustration for what my generation is leaving our children and grandchildren, namely the largest per-person government debt load ever recorded. With a per-person debt load of over $53,000 in the United States, contrasted to a load 50 years ago of $2,000, how will the next couple of generations ever pay it off?

I suppose we can take some solace in knowing that there are countries much worse off than the United States. Japan’s debt-to-GDP ratio is 400 percent. Ireland is at 390 percent. Spain has a 313 percent ratio. The United Kingdom’s is 252 percent, while the United States is at 233 percent. These debt ratios do not include unfunded liabilities, such as Social Security promises. But there are also countries in much better shape regarding this important measurement. China is at 217 percent and, per the quadrupling of its debt as mentioned above, is increasing rapidly. Mexico is at a scant 73 percent, and the lowest is Argentina at 33 percent. Some of the countries at the lower levels suffer from many other problems: Debt just doesn’t happen to be one of them.

Specifically to the United States, there is some hope. That hope comes from our energy independence due, in large part, to the advances that allow for inexpensive fracking operations. We also enjoy the most efficient and effective agricultural system that allows for inexpensive food, we have access to sizable fresh water resources, and our government is stable and supports a currency that is the de facto worldwide financial exchange. We have much to be thankful for, yet we still have issues to address, such as high poverty levels and the continually growing gap between those who are financially resourced and those who barely subsist.

I would highly recommend that reading through this excellent report would be time well spent. Both the full report and an executive summary are available at the McKinsey & Company website.

- S. Joe DeHaven


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