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Small Banks and Big Risks
Congress is planting the seeds of the next big bank bailout.
Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week 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 wink-wink accounting, which would allow banks to act as if they have bigger capital cushions than they do, is a remake of an old movie: 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.
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."
"When I get a call from Tim Geithner or I hear from Ben Bernanke, you bet I sit up and take notice," says 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." ...
Attention is focused on the House-Senate conference on a once-in-a-generation rewrite of the rules of finance. Meanwhile, a provision added, almost unnoticed, to a help-small-business bill that passed the House last week 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 wink-wink accounting, which would allow banks to act as if they have bigger capital cushions than they do, is a remake of an old movie: 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.
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."
"When I get a call from Tim Geithner or I hear from Ben Bernanke, you bet I sit up and take notice," says 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." ...
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