A Conversation With a Banker

Over the period of the last nearly quarter century my wife and I have had season tickets for Chicago’s Lyric Opera. We’ve occupied the same seats the entire time.

Over such a period of time you inevitably become acquainted with the other longtime subscribers sitting near you or, at least, my wife and I do since neither one of us is particularly shy. We’ve gone out to dinner with them before the opera. We’ve learned about their children, relatives, and dogs. I’ve attended their loved ones’ wakes.

As it happens one of our seat-mates is a woman who owns and operates a small, local bank. Although her bank hasn’t been involved with subprime mortgages or any of the other risky and complex financial instruments on which the financial crisis is at least in part being blamed, the last year has been a very hard one on her as you might expect.

While we were waiting for the opera to start, she and I had a conversation about the current situation in banking from her point of view that I thought I might pass on to you as food for thought.

First, small banks aren’t getting any of the money under the Troubled Asset Relief Program (TARP).

Second, federal bank regulators with whom she’s spoken have told her they expect 1,000 small banks to go out of business over the next year. As the owner of a small bank she finds that prospect horrifying but even more horrifying is that the bank regulators seem to consider this an acceptable loss.

Third, regardless of what we’re hearing from Washington these days, federal bank regulators are telling small banks not to make loans. I have no idea of whether this is a tactic on the part of bank regulators responsible for this region, whether it’s a strategy that’s come down from Washington, or what the reasons for it might be. I’m only recounting what my informant told me.

I won’t speculate on the reasons for any of these things. I’ll leave that to you in the comments. However, consider what the implications of these things will be after the financial crisis is over for, as Larry Summers reminded us just the other day, our experience has been that all financial crises and all economic crises end.

The decision has apparently been made that the very largest financial institutions including Citigroup, AIG, and Bank of America must continue to survive intact and, consequently, when the crisis is over they’ll still be around regardless of the condition of their balance sheets. In the process they’ll have received subsidies that are too large to understand or even keep track of. Some of that money will inevitably pass into the hands of the owners and operators of these institutions and, equally inevitably, disappear.

These subsidies mean that some of the market share and opportunities that would have gone to these financial institutions’ competitors won’t. And some of their competitors will go out of business that might not have otherwise.

As I see it the bottom line is that when all of the dust has settled we’ll have a less competitive market for financial services that is dominated by the reckless institutions that are most responsible for the fix we’re in.

FILED UNDER: General, ,
Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. odograph says:

    This tallies with what I’ve read. The logic I’ve been given:

    First, reason for lack of support, is that we are only bailing out the famous “too big to fail” to prevent “systemic collapse.” Obviously this can be gamed, and the big and fairly healthy can step up for their slice. It’s harder for the small to make the same claim.

    Second, reason for trouble now, small banks have traditionally held more commercial real estate (CRE) loans in their own portfolios, while passing on home loans to the secondary market. CRE has had its own bubble-like behavior, but with a peak later than housing. With the CRE market suffering, small banks would need to build reserves (and not lend) in anticipation.

    That puts us where we are. You could ask your friend “what’s the deal with the FDIC not collecting premiums for 10 years?” That one might be interesting from the ground floor.




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  2. odograph says:

    I guess I got that from Calculated Risk:

    Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.




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  3. Bithead says:

    Third, regardless of what we’re hearing from Washington these days, federal bank regulators are telling small banks not to make loans. I have no idea of whether this is a tactic on the part of bank regulators responsible for this region, whether it’s a strategy that’s come down from Washington, or what the reasons for it might be. I’m only recounting what my informant told me.

    That would be consistent with the stream of dishonesty coming from the WH these days, where he says one thing and does another.




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  4. PD Shaw says:

    I’ve heard locally that bank examiners were coming down on local banks to get their commercial accounts up to date. The suggestion was that a number of commercial owners/managers prefer local banks for their laxity in payment schedule, something which the examiners came down hard against beginning last Fall.




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  5. PD Shaw says:

    odograph, we may be talking about different banks. The mid-sized banks ($1-$10 billion in assets) have significant exposure in construction and development loans, which will cause many to fail. I think some of these will end up merging or being bought out.

    The smaller banks (under $1 billion) have some of that exposure too, but they still primarily focus on residential and consumer loans. They may not have the capital to withstand a shrinking financial sector.

    Calculated Risk

  6. Spoker says:

    Could this be part of a “hidden” strategy on the part Pres. Barry & his minions to drive smaller banks, that are outside of the TARP/federal control, out of business so the Feds can control the overall banking business? Nope, no way, never happen, not with all their promised honesty and transparency.




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  7. Ol' BC says:

    Dave, I was a banker for nearly 14 years before moving in another direction. This reminds one eerily of Jimma Carter. He had a freeze on lending and you remember the result, I’m sure. If her bank’s loan to deposit ratio is in line, she shouldn’t be discouraged from lending. If not she may wish to begin soliciting core deposits. Consumer lending and credit cards are the bank’s source for the best margins. The key for her is prudent lending.




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  8. Triumph says:

    the last year has been a very hard one on her as you might expect.

    Yeah, sounds rough, I’m sure she’s really hurting seeing that she has to slum it at the opera!

    Maybe she cut back on arugula to be able to afford the opera tickets.




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  9. Dave Schuler says:

    Maybe she cut back on arugula to be able to afford the opera tickets.

    A popular misconception. Most of the people we know who attend the opera including ourselves are people of very modest means who are willing to make sacrifices for the opera.

    For example, there’s the woman who manages a small local theater organization. That’s an occupation not usually known for vast wealth. Or the singing teacher that sits in front of us.




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  10. Bithead says:

    Most of the people we know who attend the opera including ourselves are people of very modest means who are willing to make sacrifices for the opera.

    I can vouch for this. I have a friend who works a job that involves, among other things, selling season tickets for the local opera company. He also sells tickets for local sports teams. Part of his job apparently is customer research. I’ll ask him again next I see him but the subject came up recently over a few beers at the bar, and he was surprised at the income levels of the core of the buyers of each. If I recall rightly, the incomes of each were remarkably similar, but the demographics were different.




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  11. odograph says:

    I think PD and Ol’ BC have some reasonable explanations. I’d consider those before going all conspiracy theory.




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  12. steve s says:

    As I see it the bottom line is that when all of the dust has settled we’ll have a less competitive market for financial services that is dominated by the reckless institutions that are most responsible for the fix we’re in.

    I consider that a trustbusting failure. Any institution so large it threatens the entire system should have been busted up into smaller pieces.




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  13. steve s says:

    Could this be part of a “hidden” strategy on the part Pres. Barry & his minions to drive smaller banks, that are outside of the TARP/federal control, out of business so the Feds can control the overall banking business? Nope, no way, never happen, not with all their promised honesty and transparency.
    Posted by Spoker | March 15, 2009 | 01:28 pm | Permalink

    Ah yes, this stuff again. I remember hearing from relatives, in 1999, about the hidden strategy of Bill Clinton to use the upcoming Y2k disaster to drive rural citizens into the cities where they could be more easily controlled.

    No surprise Obama’s now going to be the subject of that same high-quality speculation.




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  14. Triumph says:

    A popular misconception. Most of the people we know who attend the opera including ourselves are people of very modest means who are willing to make sacrifices for the opera.

    I guess it depends on where you sit. One of my hobbies whenever I’m in Chicago and have a free night is to hang out in the bar area of the Italian Village a couple of hours before showtime.

    You can spot the opera mavens pretty easily with they mink stolls, etc..I normally try and find an old widow and strike up a conversation with some BS about Puccini and how lovely the Guerin mural is, blah blah blah.

    Well, this usually endears me to the old hags and I can usually score an extra ticket from them. Normally the people I deal with have tickets in the lower tier of the mezzanine boxes.

    Its like night of the living dead down there, let me tell you.

    On occasion, during intermission I will excuse myself from my cougar and wander up to the top balcony to search for younger broads. They fall for the same BS that the cougar did, and I can normally arrange a hook-up following the show.

    I then retreat to the box to watch the rest of the show. I get to eventually party with the good looking dames, but get the advantage of having a decent seat by enduring a few hours with a washed up old hag.

    It works quite nicely.




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  15. Hence the name Triumph, no doubt.




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