This afternoon, small business which include community banks (which are, afterall, small businesses) got to see where it really stands in the U.S. Senate. House Bill 5297 is dying a very slow death. The bill has been debated, delayed, decimated, discarded, and delayed again. I am really upset with the Senate Republicans because they are again playing politics as usual. They are speaking out of both sides of their mouth when it comes to this bill. They say that there are too many provisions in this bill that are not related to small businesses but at the same time they want to add more amendments to the bill. When the Senate majority leader was asked how many more amendments must be added, he gave no answer. Or, let me rephrase, an answer that did not answer the question. Come on! The Democrats showed some good faith by removing the Agriculture amendment to the bill which the Republicans said was not related to small business. Not related to small business? What are farmers? Most are small businesses.
Here is the real reason why I’m so upset about the delay in the bill.
Several weeks ago, I responded to three articles written in the Atlanta Journal & Constitution. Here is my response:
Mr. Grantham,
Thank you for the three banking articles that appeared in Sunday’s AJC. It was great to see that someone is getting close to figuring out what is going on within Georgia’s banking system specifically the metro Atlanta banks. You are getting close and I commend you for your efforts. It’s starting to eat away at me and I can’t let it go any longer without expressing my view.
My first comments to you are in regards to what U.S. Rep. Paul C. Broun is quoted as saying, “The federal government is closing these banks down when there is absolutely no reason to do so. It’s just totally wrong.” Secondly, I will touch on what you are quoted as saying, “Still, failures of small community banks with assets of $1 billion or less have cost the FDIC billions of dollars. Such banks accounted for the vast majority of the nation’s 200-plus bank failures over the past two years.” And, lastly, your comment which said, “During the height of the crisis, the federal Treasury Department’s $700 Billion TARP bailed out several of the nation’s largest banks, financial firms and automakers.”
To begin, Mr. Broun is trying to say that the federal government is not governing all the banks on a level playing field. There is some unfairness as the left hand does not know what the right hand is doing. I know life is not fair and it’s just a fact of life but there is some absurd and contradictive behavior on the federal government’s part. For example, we heard in the beginning of the crisis that the big banks were too big to fail. Well, there are plenty of community banks that are too small to fail. They are too important to the communities they serve. Basically, the federal government shoved or forced the TARP funds to the big banks because they were too large to fail.
Did the federal government force any community banks to take TARP? When the troubled community banks came knocking the federal government said, “Hold on a minute. We are holding you to a higher standard. You’ve been mismanaging your bank by investing in too much ADC real estate. Your concentration levels are way too high…sorry. You need to withdraw your request so it doesn’t look like we declined you. Wait a minute…you are a Subchapter S bank with only a few shareholders, there is no way we can measure your true market value. You need to withdraw your TARP request so it doesn’t look like we declined you. Wait just a minute…your Texas Ratio and Capital Ratios are too low we can’t give you any TARP…duh…you need to withdraw your TARP request so it doesn’t look like we declined you.”
So why did the federal government choose to bail out the nation’s largest banks despite all of their irresponsible behavior, mismanagement of the subprime loans, and with capital ratios well below regulatory requirements? It’s because the federal government is/was basically covering its rear end. Yes, the big banks were/are too big to fail, and if a handful of these institutions failed, then imagine the cost to the FDIC. I bet you could multiply the estimated $60 billion cost the FDIC estimates the current bailout will cost.
http://www.usatoday.com/money/industries/banking/2010-07-09-bank-failures_N.htm
I would wager the cost to be in the trillions. Just look at the list of larger banks that have taken TARP.
http://www.foxnews.com/politics/2009/02/05/raw-data-list-banks-receiving-funds-b-tarp/
Just imagine if one, two, or maybe three of the larger banks failed what the cost might be. We will never know because the federal government would not allow it. They even assisted the Wachovia / Wells Fargo forced merger.
So it’s back to my statement about the federal government covering its rear end. Please understand that I’m not one of these right wing government conspiracy theorists. In the past, I considered myself a Conservative Republican but to tell you the truth, I’m not sure where I am politically. I will explain that one later too.
It all begins in the early 90’s when CRA (Community Reinvestment Act) became the political hot button. Pressure began mounting to increase home ownership and it was a way for the federal government to flex its muscles. CRA was enacted to force the larger multi regional banks and national banks to lend in the communities in which it served. It was not uncommon for a large bank to have a branch in a community, suck out all of the deposits, and refuse to lend money within the community. So, how could these larger banks lend in these areas when in theory, it really didn’t want to lend on such a small scale? Along came the pooling of subprime loans. What is pooling of subprime loans?
When a large number of subprime loans are originated by a large bank like Bank of America, for example. When they reach a certain number of loans, the bank will package or pool the loans together and sell them all as an investment to a brokerage firm like Lehman Brothers or Merrill Lynch. Most of the time, these brokerage firms would buy the pool of loans for an amount greater than the face amount of the loans. Bank of America would pocket the difference between the selling price and the face amount which is their profit or better know in the industry as their premium earned on the sell of the pool or package of loans. It was big business. Wall Street could not get enough. The returns were astronomical and investors were demanding more.
Although community banks must comply to CRA (Community Reinvestment Act), it really does not apply. Essentially, that is what community banks do. Community Banks receive deposits within the community and lend it directly back into the community. Very few community banks receive CRA violations.
http://www.homebuyinginstitute.com/homebuyingtips/2008/01/mortgage-crisis-of-2007-love-story.html
I’m not a Clinton hater but I’m certainly not a supporter either. He had good intentions and I commend his efforts to increase home ownership in America. I truly believe that subprime lending in its infancy was the right approach for everyone. It wasn’t too liberal and it certainly was not too conservative. It gave someone a chance to purchase a home that had the willingness and ability, but had a few obstacles to overcome.
Whoever is to blame (Clinton, Congress, HUD, Democrats, Republicans) it really doesn’t matter. The political pressure came from somewhere within the federal government.
Community Banks in partnership with our larger bank brethren played its role in the subprime debacle. Although community banks did not participate directly, but it was our indirect lending to builders and developers that was the fuel igniting the fire.
Why did metro Atlanta community banks get caught with its pants down? Let’s back up to the 1996 Olympics. Metro Atlanta was suddenly on the map. I mean really on the map. Metro Atlanta was/is the place to live. We have so much to offer.
1) Pretty good road system. Traffic is bad but not as bad as other parts of the country.
2) Pretty good climate. Not as hot as Florida and not as cold as Tennessee, North Carolina (Mountain States).
3) Excellent job market. Employment growth was tops in the country.
4) Cost of living is excellent.
5) Close proximity to the Atlantic Ocean and Gulf of Mexico.
6) Very close to the mountains. Less than 2 hours.
7) Excellent topography and terrain. Gently rolling hills.
8.) Great school systems with several major universities.
9) A lot of diversity. For the most part, all of the ethnic groups get along.
10) Alot of attractions. Stone Mountain. Six Flags. White Water.
11) Good professional sports teams.
Unfortunately, with all of this appeal came people. Our population boomed and people were relocating to Atlanta like crazy. This brought both qualified and unqualified home buyers and we were suddenly a spec home market. Human beings are typically impatient people so when someone came to Atlanta to buy a home, they wanted a home that was finished and ready for move-in. As more people moved in, more community banks popped up. Homes were in demand so what did the community banks lend on? Spec homes. Residental lots and developments. The subprime faucet was opened and the money was flowing freely.
The federal government was getting what it wanted, politically. Home ownership. The larger banks were complying with CRA and everyone was happy. So what caused the collapse?
http://www.homebuyinginstitute.com/homebuyingtips/2007/12/subprime-mortgage-crisis-explained.html
As competition increased within the subprime market, the loan requirements and qualifications loosened to the point that just about anyone could get a loan. It became a credit score driven market and subprime lenders stopped looking at affordability. Incomes were not verified and suddenly people were in the wrong homes with the wrong product. The Fair Lending Laws were designed to prevent people from being placed into the wrong loan products but somehow the federal government overlooked this law. It was not enforced.
Now let’s fast forward to late 2006. Suddenly, delinquencies and foreclosure rates were escalating when the subprime loan market was just off of its peak. Subprime lenders (large regional and national banks) started turning the subprime faucet off. By mid 2007 it was turned off completely. So in a matter of six months, the subprime market shut completely down. Community banks that were trying to keep up with the frantic pace had very little time to react to the market that went from gangbusters to nothing.
With Atlanta being one of the top housing markets in the country it’s only natural that we were the ones that were going to suffer the most. Due to our demographics, we were, as explained earlier, a spec building market. Was that by choice? No. It was just the way that it was.
Community banks will lend to whatever their market demands. For example, Midwestern banks struggled during the farming recession of the 1960’s and 1970’s. They suffered because farming was the predominant industry in their market. Texas banks struggled when the oil crisis hit during the 1970’s. Michigan banks have suffered because of the auto industry leaving the area. Manufacturing communities throughout America have struggled as jobs have left the country to overseas. These losses have a trickledown effect and it will eventually hit other industries within the community as well.
It amazes me that the FDIC is spending millions analyzing each bank failure to determine the reason for the failure. In most of the Atlanta failures, it’s just an over concentration of ADC loans and no, the regulators are not to blame. They did allow the over concentrations but the regulators had very little warning about the abrupt shut down of the subprime market. No one knew it was going to shut down so fast. No one saw it coming. Not even the regulators.
So why has the federal government turned its back to the community banks? Why are they operating on such a double standard? Why have most of the politicians turned their backs as well? I believe it boils down to believing in the concept that bigger is necessarily better. Community banks make up a small percentage of the overall banking deposits but geographically speaking, the community banks impact more cities and counties throughout the U.S. Furthermore, I believe it is a condescending attitude as well. They think community bankers, especially Georgia / Atlanta community bankers are not very smart. Just look at the condition of their banks. How stupid could they be? In actuality, the failures have been caused by the subprime lending shutdown. Community banks are more of the victims or indirect beneficiaries of the subprime crisis.
Do I believe that all community banks should be saved? No. But I believe that most of them should. If Atlanta Community banks were given the same forced TARP opportunities that our larger brethren were given then I truly believe the Georgia real estate recession would be close to over. We could unload the toxic assets, further write-down problem loans, and recapitalize with private funds. Instead, our problem loans and toxic assets are still hanging around, we can’t lend, and we can’t recapitalize. The larger TARPED up banks are waiting for the smaller banks to fail and enter into a loss/share agreement with the FDIC, so there are no merger opportunities out there. Do you blame them? I don’t. Private funds for recapitalization are almost nonexistent because after all of the negative press would you invest in a metro Atlanta community bank? Most institutions will not. If you are lucky, you can raise the capital locally and that’s if you’re lucky. Here is my blog about this very subject.
https://badnewsbanker.wordpress.com/2009/08/20/the-joke-is-on-you-america/
If problem loans were the community bank’s only problem, then we might be alright. However, I think the dumbest bank failure was Silverton Bank f/k/a The Bankers Bank. Out of all the banks to save or to force TARP money down a throat, this was it. To me, this was the biggest smack in the face to community banks in Georgia and around the country. All banks that are members of Silverton Bank must buy shares of stock. Overnight, community banks suddenly had to write-off its ownership of Silverton Bank and many others had to write-off its Trust Preferred Securities as well. It was a huge blow to community banks. Not only did community banks have loan problems it suddenly had investment problems as well. Months down the road, it created loan participation problems.
http://www.creditwritedowns.com/2009/05/fdic-friday-night-silverton-bank-is-seized.html
http://money.cnn.com/2009/05/05/news/companies/bankers_bank/index.htm
The FDIC estimated that the Silverton Bank failure will cost the FDIC $1.3 billion. What if the FDIC forced Silverton to take TARP, let’s say for half of the estimated amount of the loss? What impact would that have on the community banks that own shares of Silverton as well as work through its toxic assets? The FDIC / Federal Government could’ve turned a loss into an investment. Correct? This shows how the left arm does not know what the right arm is doing (FDIC & Treasury Department).
Here is another example of the right arm / left arm example. The problem, in cases of construction loans is that we have the FDIC telling us we can’t lend. Even in cases where the USDA or SBA is guaranteeing the construction loan. (I’m not talking about speculative residential construction loans, but loans to small businesses to expand or build new facilities that will create jobs during and after construction) We have numerous deals that we have to turn away due to capital and lending restraints.
The problem is always Washington with good intentions but too many departments and agencies not knowing what the other agencies are doing. For example, the USDA recently changed its guidelines and will now guarantee a B&I (Business & Industry) qualified construction loan. Also, the SBA will guarantee a construction loan in the 7a program but the loan must meet many requirements. However, the FDIC mandates that certain banks must reduce its ADC (Acquisition, Development, & Construction) and does not differentiate between a guaranteed government construction loans. In the FDIC eyes, a construction loan is a construction loan regardless of whether it’s guaranteed or not. Again, the left arm does not know what the right arm is doing.
Some politicians say that we would use the TARP money to shore up our balance sheet and not lend is ridiculous. Having capital would allow us to once again to lend. Construction loans are vital to start the great economic engine. We have to continue to build America. How can you build without construction? Until we resolve the dysfunction between government agencies that regulate and guarantee lending especially construction lending, then we will continue to stalemate and stagnant. The White house says lend, the SBA and USDA say lend, but the FDIC says no lend and no bend.
I have taken my cause to our politicians but with very little response or support. My congressman is Linder and my Senator is Isakson and I received formed replies that basically said that they oppose any more government spending or intervention into the banking system. I believe Isakson voted for the original TARP and lender for against it. Here is my letter that I sent to the many politicians both Democrat and Republican. Most of the politicians outside of my district said they would not read my e-mail unless I was a voter within their district. My letter is as follows:
“I am in support of President Obama’s proposal during the State of the Union address on January 28, 2010.
Any help that you or any politician in Washington can provide to get this bill expedited to passage would be greatly appreciated. Some Georgia community banks are measuring their lifespan by days, weeks, months, quarters, or the lucky few years. Community Banks across Georgia and this nation need vital capital and finding it in the secondary market is nonexistent. Potential investors are waiting for prospective banks to fail so they can gain control at no cost and enter into loss/share agreements with the FDIC. In a way, I don’t blame the investors for waiting on the sideline. It makes good business sense to get something for free and a government guarantee.
I support any measure that is similar to the previous TARP plan. Our Bank and many community banks like us are not afraid of any caveat that requires the bank to lend to small businesses. We have built our Bank by lending to small businesses and have continued to lend during this recession. The problem, in cases of construction loans is that we have the FDIC telling us we can’t lend. Even in cases where the USDA or SBA is guaranteeing the construction loan. (I’m not talking about speculative residential construction loans, but loans to small businesses to expand or build new facilities that will create jobs during and after construction) We have numerous deals that we have to turn away due to capital and lending restraints.”
I admire Congressman Linder’s position on Government intervention. I can respect it. What I can’t understand is his blind eye to the unfairness by the Treasury Department’s handling of the TARP funds. With the Republicans refusal to right a wrong has caused me reconsider my party lines. The monies involved are miniscule in comparison to the monies issued to the larger banks. I believe $5 to $10 Billion to community banks would go much further than all the dollars invested in the larger banks. They have to look at it as an investment and not spending. The money would have to be repaid. The politicians even talked about using the funds that were repaid by the larger banks.
Mr. Grantham, thank you for letting me share my perspective. I hope my prospective will be of some help. As you can tell, I am very passionate about the double standard in Washington. I know Wall Street points the finger at Main Street and Main Street points the finger at Wall Street, but I believe we are all to blame.
Bad News Banker 
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By: Blog #100 Dedicated to Easton | Bad News Banker on September 27, 2013
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