Bankers’ Hours column: the government is not wrong in banking
We all denounce the government, even when the government offers us benefits ranging from protection to livelihoods, jobs to education. But there is 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, had it not been for the underlying banking foundation of the US banking system, the current recovery could be a permanent recession with all the hallmarks of a third world economy. This foundation, with federal insurance for bank deposits, was started nearly a century ago by Washington residents, and it has saved our budget bacon more than once.
We bankers constantly complain about obtuse regulators and oxymoron regulations; hey, that’s a cultural imperative. I did this for 40 years – and still do, by the way. But all of us in banking owe our jobs and our livelihoods to the global perception that Uncle Sam is a good guy to keep your money, be it rubles, yen, or pounds.
After the great collapse of 2008, the government got it right in at least one case: the Troubled Asset Recovery Program. He made money available to banks to help them build capital (equity) as a buffer for lending assets that have been reduced in value by the collapse of the real estate market. In essence, in the case of banks, the Treasury Department has purchased preferred shares of the institution, to be repaid within a specified period. In reality, it was a loan, and it was not free; the return to government – read taxpayers – was around 8%.
Eight of the major central banks took the funds; all of them repaid the money with interest. Of course, not all banks took cash; many did not need it. Some opted as a life jacket when needed, and then there were those whose survival was ensured by help from the Treasury.
At the end of the program, the results were as follows: $ 426.4 billion invested by the Treasury, $ 441.7 billion recovered. More importantly, the liquidation of many banks was avoided, which would have turned out to be an economic nightmare for taxpayers, as was the massive liquidation of the entire savings and credit industry in the late 1990s. As a banker once said to me, “Bank liquidation and divorce have one thing in common: they are very expensive. Better resist if you can.
I happen to know a small bank in Colorado that might be the star of this quote. At the start of the Troubled Asset Recovery Program, the institution withdrew just over $ 3 million in TARP funds. As it turned out, this infusion of capital kept them afloat as local loans, which were well underwritten and strong when taken, began to turn sour. The chairman of the board was a retired Texas lawyer from a big city, one of those gentlemen in that profession who projects the personality of a country lawyer and is anything but that. (If you’ve done a lot of business with people from West Texas to South Carolina, you’ve probably met him 100 times.)
His Colorado bank was not his first rodeo. He was a veteran of the S&L crash of the 80s. He told me, after the TARP money 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 its operations, eliminated excess spending and made home loans, many of which were sold on the secondary market. An investment company found a buyer for the bank in 2019; the deal was done and the wallets of shareholders and taxpayers benefited. It took 11 years, but TARP was the fulcrum that allowed the bank to achieve a positive result.
There have been many, including me at one point, who thought something similar should have been done with all the savings in 1985. If you’ve only read this article once, you probably have noticed that, ad nauseum, I ‘I said bad assets (loans) are the only thing that can break a bank. And the collateral for those bad debts in 1990 was certainly 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 standards – that is, the FDIC – and some dramatically. Better to keep a tight grip on the life jacket and let the whole industry flow, even if the asset divestiture process hits taxpayers like a two-by-four in reverse.
When Old Paint hobbles in the corral after the last roundup, sometimes the cowboy has no choice but to put his .44 on the head of his mount, look away and pull the trigger.
Pat Dalrymple is originally from western Colorado and has spent over 50 years in the mortgage lending and banking business in the Roaring Fork Valley. He will be happy to answer your questions or hear your comments. His email is [email protected].