I would like to write the story that is published beneath the headline “Banks and Credit Card Companies Lead Country to Prosperity.” It should be clear that there are things bankers do not know how to do. One such is lead. I am also troubled that bankers do not know what to do with the tax dollars they have received from the Troubled Asset Relief Program (TARP), such as lend. Since I cannot write that story, please accept this one.
If ever there was an industry that needs some positive public relations, it is banking. Bank failures have become commonplace. In Georgia, for example, there have been five bank failures in the last five months and the hits just keep on coming. Another fifteen banks are expected to go under this year, more than twice the number that collapsed there during the savings and loan crisis twenty years ago.
Until last year, California had seen only 3 bank failures during the previous decade – in 1999, 2000 and 2003. According to the FDIC, California suffered 5 bank failures in 2008 alone.
- PFF Bank and Trust, Pomona, California, closed.
- Downey Savings and Loan Association, F.A., Newport Beach, California, closed.
- Security Pacific Bank, Los Angeles, California, closed.
- First Heritage Bank N.A., Newport Beach, California, closed.
- IndyMac Bank, F.S.B., Pasadena, California, closed. (The FDIC was named Conservator.)
Banking is a highly regulated business. Despite news commentaries that bankers got greedy as banks were deregulated and became corrupt, bank consumers have protection. In the case of IndyMac Bank, the third-largest bank to fail in American history, a run on deposits and rising defaults made Federal regulators seize it. The mortgage loan portion of the banking business earned derision for being lax, and in some cases, predatory in its lending practices. Federal Reserve Chairman Ben Bernanke says that a sustained economic recovery may require additional bailouts of financial institutions. However, the business loan portion of banking has become the collateral casualty that threatens the country’s economic recovery.
As a business management consultant experienced in dealing with bankers on behalf of my clients, it is clear to me that business loan criteria are in flux. Even clients with excellent credit, strong assets and positive history are being denied new loans and are incurring decreased credit lines. New financing does not seem to be happening. Does that mean banks are not lending money to small businesses? They say that they are, but that assertion is inconsistent with my clients’ experiences.
Banks make money by selling the use of money, right? “If the borrower provides the bank with both a belt and a pair of suspenders,” Joe Nocera wrote in the New York Times, “the loan is being granted.” However, “[in] addition to not making new loans, the banks are systematically withdrawing commitments and capital from the economy.”
So what about the Economic Stimulus Package of 2008? It is about tax breaks for businesses that spent money on property and vehicles last year while their credit lines were getting trashed. According to the Packages press release, “This new legislation will not only benefit small businesses in a variety of ways, but it will also provide an economic boost to the entire nation.” Bold words in that generalization do not change the fact that “there are exceptions and additional requirements.” Tax credits for small businesses that create jobs sound fine, but it takes money to make the payroll to pay for the jobs to qualify for the tax credits.
Consider this: it is not that bankers are greedy, they are just not thinking of anything except their bank, as directed from the home office. They do not make informed decisions, they just react. That is not greedy, that is stupid. Additionally, from the previous bailout round of the dying days of the Bush Administration, there is no mechanism to hold the banks accountable for putting bailout money into circulation.
Bank accountability is about to change with the new administration. Specifically, the government might force banks to make loans they would otherwise avoid. It is certain that the Obama administration wants to avoid more stupidity, such as those of Bush Treasury secretary, Henry Paulson, “who sold Congress on an elaborate strategy for shoring up banks and then shifted to an entirely different approach before he even got started.”
A retreat is in order. Banking and bank shareholders have no choice but to go along with a change that will mean making less money by taking less risk.
Meanwhile, forces for the benefit of small business – the largest aggregate employer in the United States – are seeking the administration’s ear. The National Development Council wants a $75 billion small business stimulus package and a Cabinet-level position to coordinate federal resources for small businesses. Additionally, the National Small Business Association is seeking Congress’s ear, asking for 25 percent of TARP funds to be aimed at small business lending, and a mandate that 23 percent of stimulus infrastructure funds be contracted out to small businesses. Both are debatable requests.
Another debatable move is that of credit card companies like American Express. In November the Federal Reserve granted a request by American Express to become a bank holding company with access to low-cost financing from the Fed. Just like the banks, Amex also cuts back credit lines' regardless of business or personal credit-worthiness or history. The credit card business is a trillion dollar a year industry; cunning, predatory and greedy.
At the top of the banking food chain are some serious minded criminals who got away with being sharks in the Bush Administration’s pool. While the former president may avoid prison, I hope that those lesser crooks at the top serve time. Nor do I believe that bank shareholders, whom the crooks served, should prosper at taxpayer expense while the banking system undergoes its overhaul.
Small business needs direct financial help to grow our pillaged economy and to create the jobs promised by the new administration. Tax credits alone cannot make job growth happen. The new congress and administration need to hear from us. We will have to make prosperity happen. They will have to help us.