Deja Vu All Over Again

The Beat Goes On

Well, as Yogi Berra said, “it ain’t over 'til it’s over.” Just when the stock market started to show some signs of recovery and the TARP funds had been spread among the banks, auto industry and GMAC, things turned south again. The news that Bank of America is back to the TARP trough to support its acquisition of Merrill Lynch and Citicorp’s plan to sell off up to a third of its assets has the financial markets in a downward spiral.

The TARP Conundrum

A number of our clients determined not to take the TARP because of concerns about the government’s ability to change the rules of the game after the fact. It appears that they are right. So, while if you needed the TARP and could qualify, it still may have been the best course of action, if you didn’t need it, you avoided the uncertain aftermath we are starting to experience. The disconnect between Congress, the Treasury and the federal banking agencies is enormous. Congress thinks the TARP should be put out in loans, while the Treasury and the agencies view it as a vehicle for relatively healthy banks to bail out the weaker banks and save the FDIC insurance fund.

The Regulatory Environment

In my 35 years as a regulator and lawyer, I have never seen an environment with so little room for tolerance or negotiation with the regulators. Exams are harsh, offsite temporary CAMELS rating downgrades have become common, single and double exam rating downgrades and enforcement actions have become the norm. It appears if you get in trouble, you basically are in a box – a “3” rating = a Memo of Understanding and a “4” rating = a Cease and Desist Order – PERIOD! Concentrations in construction lending and brokered certificates of deposits are two of the biggest regulatory hot buttons.

The Liquidity Crisis

Funding has been an evolving challenge for banks over the last couple of years. Now funding and liquidity have come to the forefront. If you get in trouble, the regulators (primarily the FDIC) may curtail your future access to brokered certificates of deposit. If they view the bank at risk, they will not allow you to renew or replace these CDs. Remember, the FDIC is an insurance agency. They feel that brokered CDs devalue a franchise in liquidation and garner no premium at the time of sale or liquidation. Also, the FHLB may require you to collateralize funding lines with qualifying assets. With interbank funding all but dried up, this can cause enormous liquidity pressure on some banks. This is the very issue that hastened WAMU’s demise. Further, we are aware of weekly and even daily liquidity reports being required by the FDIC in a number of situations with viable banks.

The Broader Economic Solution

It seems the key for our economic turnaround is to stop the downturn as quickly as possible. With consumers tapped out, many businesses struggling and banks reluctant to lend into this mess, a government guaranteed lending program seems to be the best solution. Realistically, we (the U.S. taxpayers) will pay for the recovery anyway. So why not stop the bleeding and inject funding into the economy sooner rather than later? The longer the recession, the deeper the hole we will have to dig ourselves out of and the longer and more painful the recovery. Think of this as laparoscopic surgery v. more invasive traditional surgery. The less intrusive, the faster the recovery. So, if the government can fashion such a program, encouraging the banks to lend, while streamlining the normal bureaucratic process, we could start to turn our economy around more quickly.

Management and Board Challenge

Our visits with management teams and Boards of Directors throughout the West reveal the stress of the most uncertain economic environment of our lifetimes. Boards and management must stay well-informed, be proactive and focus on Asset Quality, Capital and Liquidity. Many of our clients view 2009 as a year of survival and recovery. Maintaining a good dialogue with your regulators, shareholders and investment community and a healthy relationship with your regulators is paramount in these times.