January 22, 2009
Authored by: Robert Klingler
On January 22, 2009, the Wall Street Journal published two stories of importance to community bankers:
- on the front page, the WSJ published an article titled “Political Interference Seen in Bank Bailout Decisions“
- on the front of the Personal Journal section, the WSJ published an article titled “What if Uncle Sam Takes Over Your Bank?“
The “Political Interference” article focuses on the potential role of politics in determining which institutions receive TARP Capital.
Bankers, regulators and politicians complain of a secretive and opaque process for deciding which banks get cash and which don’t. The goal of aiding only banks healthy enough to lend — laid out by the Treasury when the program began — clearly seems to have shifted, but in a way that’s hard to pin down and that the Treasury has declined to explain. Part of the problem is that some powerful politicians have used their leverage to try to direct federal millions toward banks in their home states.
The article focuses on OneUnited Bank in Boston, Massachusetts, which received $12 million in TARP Capital in December. Nominally, OneUnited Bank was certainly a poor candidate for receiving TARP Capital; according to its September 30, 2008 Call Report, One United Bank was critically undercapitalized, with a leverage ratio of 1.7%, a Tier 1 risk-based capital ratio of 2.92%, and total risk-based ratio of 3.67%. In addition, it was subject to a Consent Order to Cease & Desist with the FDIC.
However, OneUnited also had several factors working in its favor, not the least of which was that the TARP Capital infusion of $12 million was conditioned on the institution privately raising $20 million in new capital. In addition, OneUnited’s capital problems were specifically tied to the government’s conservatorship of Fannie Mae and Freddie Mac. According to their September 30 Call Report, OneUnited Bank recognized a $54 million loss in its securities portfolio, which held large amounts of Fannie Mae preferred shares. The Emergency Econoic Stablization Act specifically provided for special consideration to be given to smaller isntitutions that had taken a capital hit due to the conservatorship of Fannie Mae and Freddie Mac. Finally, OneUnited’s loan portfolio remains relatively clean, and is not concentrated in acquisition and development or commercial real estate lending (which we understand to be a significant factor in easing the approval process). The facts that OneUnited is a minority depository institution and a community development financial institutions also could not have hurt the processing of its application.
The article also includes two maps showing the amount of TARP Capital distributed per state and per capita. These graphs attribute all of the capital to the state in which the bank is headquartered. As a result, Bank of America’s $25 billion is entirely reflected as North Carolina while Wells Fargo’s $25 billion is entirely reflected as California, despite both institutions having branches (and loans) across the country. These large infusions completely drown out the effects of smaller contributions to community banks. As a result, we prefer to refer to our map of TARP Capital recipients. While that map also uses headquarter locations, it gives equal weight to each institution that has received funds.
The article on the possibility of nationalizing banks acknowledges that this is only a practical “solution” for the largest financial institutions.
The U.S. government would have, at most, the ability to take over only a handful of the most important institutions. As a result, nationalization would not solve the pressing problem of potential bank failures, particularly among small banks. Consumers who have deposits in such banks would still be dependent on the FDIC to return their money during a failure, and such a process could be lengthy and involve a lot of red tape.
An important fact not mentioned in the article is that FDIC insurance is highly efficient in permitting consumers to access their insured deposits, with such access typically being uninterrupted in the event of a bank entering receivership; the process is not lengthy, and does not involve any tape – red or otherwise.
The article also highlights a potential positive for community banks if one or more larger institutions were nationalized – an easier competitor.
If the government takes over a bank, management will be under even more pressure to cut costs. Expect more branch closings and poorer customer service. “Think of the bank as the DMV of the future, run by government employees who have little upward mobility,” says [Dave] Kaytes, [managing director at Novantas].
“I think we can expect that over time, the nationalized banks will be less open to innovation and new product development, more conservative in their approaches, and more constrained in their actions and subject to tighter scrutiny,” says Jim Eckenrode, banking and payments research executive at TowerGroup.