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Business
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Friday, 03 April 2009 03:23 |
 By James Ginderske
The daily drama of the financial crisis and the Bailout is fast becoming a time to evaluate both American economic policy and its greatest structural weaknesses. The dollar amounts are staggering, the theories complex, and the consequences uncertain, despite the confident pronouncements of myriad monetary experts and government officials.
Efforts to unravel the Bailout’s precise impact on local economies is difficult to do, primarily because each local set of conditions has its own unique features and influences.
The numbers, as most of us know are incredibly huge – $700 billion – and since it was revealed last week that nearly all of that initial round of funding has been committed, probably much more. That’s about $2,350 from every man, woman, and child in America (minus that $40 per month tax rebate, of course). Questions abound about how it will directly benefit local communities.
President Obama recently said: “So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you - I get it.” So why is he doing it?
According to local bankers, men and women who manage community banks here in the neighborhood, he’s doing it because he believes he has no choice. The bankers cite with resignation the importance of not endangering the systemic stability, which very large bank failures could potentially threaten.
High ranking community bank officials are uniformly cautious about criticizing the “Fed” directly, which is striking given the massive allocations the government is doling out to their biggest and strongest competitors. The reason for this seems to be more than just wise politicking. There is a strong sense within the financial services industry now that restoring consumer confidence is a shared interest.
The irony is that community banks for the most part aren’t the institutions that caused the mess to begin with. They have, however been spared neither the regulatory nor public relations consequences that stem from it.
A vast cultural gulf separates community banks from their large corporate counterparts, much of which can be traced to the business models promulgated by their management teams and ultimately, their investors.
The nation’s approximately 8,000 community banks quietly operate in most cases as local banking resources, providing essential financial services such as checking accounts and home loans, savings and financial planning. Larger corporate institutions, the great so-called “mega banks,” such as Bank of America and Citigroup, also provide such services, albeit in a more rigid fashion. In addition, they leveraged tremendous sums generated from so-called sub-prime lending into derivatives.
Those derivatives, such as Collateralized Debt Obligations, or “CDOs,” were then used as vehicles for buying and selling packages of loans, especially sub-prime loans, as well as other debt.
 Most people don’t understand the inner workings and the complexities of the financial industry, any more than they would know how to engineer an automobile or perform surgery. But where the specialized vocabulary of the financial services industry at the mega-bank level became hazardous, was when it was (and some argue still is) used to mask a deeply flawed business model. Added to that were two other critical components: the absence of meaningful regulation of new financial instruments and enormous amounts of unsecured debt.
Rounding all of this out is the idea, continuously reinforced by cable TV talking heads, government officials, and the public relations apparatus of large banking firms that it is all really too technical for regular folks to fully understand. These various entities argue that the best way for ordinary citizens to act in their own best interest is to trust them to handle things.
Not everyone is confident that will happen. As one person on the 147 bus was overheard to say last week: “Aren’t these the same people that got us into this mess?”
The concept of “Too Big to Fail,” where certain institutions are regarded as so structurally integral to the economy that they cannot be allowed to cease doing business, now places taxpayers at the mercy of the decisions mega-bank employees made in the pursuit of profits for their companies.
The question for many is whether it ever made sense to allow such arrangements (whose only apparent value was to a narrow the circle of shareholders and investment bankers) where companies exposed the economy to systemic risk in the first place.
In a different category rest community banks, who in many cases passed on the quick profits that were possible through sub-prime lending, in favor of more conservative, less risky and considerably more stable management strategies.
Where sub-prime lending often consisted of fee-laden transactions to poorly qualified buyers, defenders of the practices at the time claimed that it allowed more families access to “the American Dream of owning their a home.” In reality, the Dream that was touted as an opening to middle class living became for many an unsustainable burden, especially those who held Adjustable Rate Mortgages that required refinancing after a certain number of years.
Many now face the dual impact of reduced property values coupled with stricter lending policies, and often find they are unable to qualify for new mortgages.
Locally, sub-prime lending helped fuel the condo conversion boom that led in part to almost a thousand foreclosures in the Rogers Park, West Ridge, and Edgewater communities. Many of these conversions displaced long-time residents, forcing thousands of renters to relocate to other communities. Also, hundreds of condo units, many of them new construction or gut rehabs, now languish in a depressed market with very limited interest from buyers.
 Community banks, the heads of several of which we interviewed for this story, find themselves in an extraordinary situation. Though most avoided the sub-prime debacle, they are now faced with significant increases in regulation, along with a very large one-time assessment by the FDIC (the government agency that insures depositors), and the public relations fallout that has come from association with any banking establishment during this crisis.
Meanwhile Citibank, which has received $50 billion in bailout funds, continues to run daily full-page ads in major newspapers touting their services to consumers. They’re not alone. Bank of America and others are engaged in similar marketing campaigns.
For years, flashy ad campaigns combined with branches opening across the country (called “growth” in industry circles) in city neighborhoods and small towns, gave the impression that the benefits of the massive Wall Street finance machine could be accessed locally. In some sense, this was true.
The lack of meaningful regulation allowed the conglomerates to take massive risks with derivatives trading and engage in technically legal but dangerous lending practices, and to apply those policies at the neighborhood level.
Since several of these institutions have been now dubbed too big to allow to fail, the belief that customers’ money is somehow more secure with them has persisted, at least for some. But this too is illusory, because the ultimate mechanism that safeguards depositors is the same Federal Deposit Insurance Corporation that insures deposits for anyone, in any regulated bank, for up to $250,000. (This limit can be increased under certain circumstances, something offered by many banks, including community banks.)
Community banks do offer some alternatives to their larger counterparts. Several community bank leaders spoke of the current crisis as an opportunity, even as they detailed the fundamental unfairness of the overall situation. Primarily what they offer is a relationship, close to home, and one that they expect to evolve with their client’s lifestyles.
For many, its a tough sell. The familiarity people feel with large institutions does offer a certain feeling of comfort. One local banker speculated that people have become so accustomed to the impersonal nature of large corporate institutions that they don’t fully comprehend the fundamentally different experience a community bank typically offers.
Almost universally cited as the greatest strength of a community bank is the flexibility and support they can offer in difficult times and circumstances. Where the larger corporate banks are designed to operate according to rigid formulas designed on Wall Street, community bank policies are built around the neighborhoods they serve, and have to remain so in order to survive in smaller markets. Local bankers believe this gives them a considerable edge over their mega bank counterparts when it comes to meeting urgent local needs.
Banking is often a matter of perception. If people believe an institution is strong and stable, they’re more likely to feel comfortable doing business there. That strength and stability is no longer a staple of large American corporate banking, and at least in theory, this supports community banker’s contentions that theirs is a very competitive product.
At least one local resident agrees. “Pouring money into big financial organizations only gave them the ability to operate in a manner that has wrecked the economy, possibly for years,” he said. He added: “I moved my account [to a community bank] out of disgust with what these people have done to us. I can’t keep them from getting my tax money, but I’ll be damned if they’re getting anything from me personally.”
The community bank officials we spoke with don’t claim to offer better services for everyone. What they did wish to make clear, in every interview, was their intention to carry on with a focus on local customers, a commitment to prudent lending that promotes a stable community, and a desire to continue working in partnership with the neighborhoods that sustain them.
The contrast between that model and that of the mega banks seems stark, but how extensively it will impact local banking choices is yet to be determined. |
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