Tweet

Another big bank bailout:

Guest post by: Carl Moore

Article Overview: New legislation to help small business, recently passed almost unnoticed, from the House would allow all but the 100 largest banks to pretend they haven't made bad loans. The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately.

Another big bank bailout:

While attention was focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance, a provision added, almost unnoticed, to a help-small-business bill that passed the House would allow all but the 100 largest banks to pretend they haven't made bad loans. The goal is to prompt them to lend more readily to small businesses. The provision would permit more than 7,800 banks, with nearly $3 trillion in assets among them, to spread losses on bad real estate loans over six to 10 years instead of recognizing reality immediately.

This creative accounting, which would allow banks to act as if they have bigger capital cushions than they do, is a remake of the savings-and-loan horror show of the 1980s and the Japanese banking monster of the 1990s.

Allowing a bank that is broke or near-broke to pretend otherwise in the hope that temporarily depressed commercial real estate prices will eventually rise sounds nice. But history shows that too many such bankers realize the only survival strategy is to make more risky loans and pray they're paid back. If they aren't, well, the government deposit-insurance fund, not the shareholders, gets the tab.

Top officials are objecting...but no one is listening:

Treasury Secretary Timothy Geithner thinks this is an awful idea. "Could increase costs for the taxpayer by raising the likely losses from future bank failures," he wrote to House leaders.

Federal Reserve Chairman Ben Bernanke thinks this is an awful idea: "Banks that are allowed to carry these losses do not engage in sound lending."

Comptroller of the Currency John Dugan thinks this is an awful idea: "Will undermine the efforts of ... regulators to shore up investor confidence in the banking system."

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, thinks it is an awful idea: "Encourages ... executives to take excess risks with the hope that these bets will pay off. ... The taxpayer remains liable for any losses, but the shareholders profit if these investments result in gains."

Law Makers make laws:

Rep. Ed Perlmutter (D., Colo.), chief sponsor of the provision. "But after all the testimony I've heard-after my own experiences as a lawyer representing banks, insurance companies, real estate companies, which gives me some perspective that maybe they don't have-I think this is an approach that we need for these smaller bankers and smaller businesses, to get everybody back on their feet and creating jobs."

Luis Gutierrez of Illinois, Steve Kagan of Wisconsin and Ron Klein of Florida-don't want to cause a costly banking crisis, of course. They are responding to yelps from small businesses that say they can't get credit and managers of small banks who say they can't make loans because bank examiners are forcing them to value real estate at today's improbably low prices.

The administration's response:Put $30 billion in taxpayer capital into these community banks so they have the wherewithal to lend. The House has OK'd this; the Senate hasn't.

Community Bankers of America response:

"We're talking about banks that are well run, well managed, victims of their local area where the real estate market has just tanked," says Cam Fine of the Independent. "Poorly run banks are going to fail anyway," he says, and this won't change that.

• The political dynamic here is clear:
  
  Big banks are popular villains; small banks are heroes.
  
  Big banks-think Citigroup Inc.-are too big to fail; small banks aren't.
  
  Big business arouses suspicions among the public; small business seems friendly and entrepreneurial.
  
  Big companies can borrow from the bond market when banks are picky; small companies cannot, and thus can't expand and hire readily if they want to.
• But pretending helped get us into this mess:
  
  pretending that putting enough subprime loans into one security made it AAA,
  
  that people without incomes could make mortgage payments,
  
  that house prices would never fall across the country,
  
  that the CEOs of gargantuan financial institutions could manage risks they didn't fully understand,
  
  that supposedly sophisticated investors understood what they were buying.

Pretending that banks haven't lost a bundle on commercial real estate loans does not seem a smart way out of this mess.

Related Articles
  Small Businesses – the AIG Antidote
  Too small to fail
  Current state of the economy 2010
  The Power of Words
  Strike While the Iron is Hot Using the Recession to Your Advantage
  Does Your Small Business Need A Bailout?
  Modern Bank Robbers Wear Suits and Ties
  This is a Sales Emergency & You Can Win
  The Difference between AIG Small Businesses
  To Modify or Not To Modify
  The State of Franchising
  Raise Credit Score & Put Food On The Table or It's Bailout Time!
  Is your slogan authenticated by your story?
  Funny Works - Insurance Sales Training
  Why Banks will continue to get Healthier!
  Business funding sources for today's business owner...
  Central Bank of Nigeria (CBN) Approves Conversion of Community Bank into Microfinance Institution (MFI)
  What’s a small business to do regarding financing?
  Yellow Journalists Go Red, But Feel Blue
  10 Perfect Ways to Make Any Commercial Lender Angry

Article Tags: banks, new legislation, real estate financing, real estate loans, SBA, small business



Related Forum Posts
Re: The rape of the American consumer - I don't think 'rape' is an appropriate term to use, but I do agree that it makes virtually no sense in my opinion, why the American government has bailed out these institutions and not put reasonable clauses or monitoring on the way in which the money will be used. I can see the line up for bailout requests surmounting in front of the White House in the coming weeks. I see (no joke) that the adult entertainment industry is also asking for a 4 billion dollar bailout. It will never end. Taxpayers are PAYING the companies that CHARGE US to use their services. It's a double payment, and it's being grossly mismanaged.
Best banks for business loans? - Just as there are "chain banks" -- like Suntrust, where I bank here in VA, and which has at leat five banks here in the Tidewater area alone -- there are "stand alone banks." (Don't know if that's the proper technical term!) Banks that are small and have only one location or two at the most in any big city. "Local" banks rather than "national" banks, I guess. I would trust a national bank more than a local bank... I'd assume the smaller banks would be able to go bankrupt easier. (Although considering what has happened to Bear Stearns, who knows where the "little guy" can put there money and have it be safe!)
Re: How do you budget your life? - Here's an easy savings strategy for investment beginners: 1. "Pay Yourself First": Set up a regular payment into an investment fund, or even set up a direct debit from your bank account into a savings account that doesn't allow instant withdrawals. Keep it at a level that is feasible for you, but just a little bit challenging. 2. Whenever you come back home, throw your loose change into a bucket. Last month I carried my "bucket of money" to the bank and had over ¥100,000 (nearly $1,300) in it. Yes, it was heavy. I used a pushchair to get it to the bank! 3. Start collecting silver coins or other collectable assets. You can build up wealth at less than $50 a pop this way.
Re: Banks Vs. Credit Unions - [quote="Nana":103oec26][quote="Takuya":103oec26] Credit Unions (they hate to be called banks) are more conservative. Although they typically offer the best terms, they are more concerned about people's abilities to repay the loan. [/quote:103oec26] So it would be best to visit a credit union to try an obtain a loan before going to a bank? Or are credit unions looking for people who have a more matured business since they'll have a greater chance of paying off the loan?[/quote:103oec26] Its also very possible that one bank could provide the best checking and savings options while another bank could offer you the best lending options. Nothing says you can't deal with more than one bank or credit union. I've done this a number of times with different businesses and I've gotten the best options for me and the business and it also provides additional credit references. Shri
Re: Meltdown in the Financial Markets - If the US is simply creating fake/"funny" money with their bailout, then I wonder why the Canadian dollar has dropped so badly? One Canadian dollar is suddenly worth only about $0.84 US now. It doesn't make sense to me.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

The State of the Sustainable Furniture Industry

Ready for a Fresh Image?

Purchasing Real Estate using the SBA 504 Loan

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.