I agree with much of what Sheila Bair said about “too big to fail” and the injustices associated with bailing out the traders, brokers, mortgage promoters, “hedgers” and their associated quants who are largely responsible for our current economic conditions. She provided insights entitled to more respect than they received from the Wall Street influenced government financial establishment. However, as a close observer of what might be called, a bit unfairly, “Sheila’s March Through Georgia,” I wish she’d spent more time on her day job and less time kibitzing. The FDIC would have benefited from her creative strategic thinking.
The FDIC Ms. Bair recently left is an agency staffed by intelligent and generally fair-minded people lacking leadership with the courage, foresight and creativity to define a consistent and constructive mission, an agency which has degenerated into a mob of uncoordinated micro-units with individual business plans focused primarily on avoiding adverse mention in an Inspector General’s report. The FDIC’s Inspector General’s office apparently sees its task as reconfirming ad nauseam something that most of us learned when we first touched a hot stove, if you know what is going to happen in the future, you can avoid it, as if that helps in predicting future uncertain economic dislocations. FDIC personnel are now obsessed with avoiding any possible criticism in the performance of the tasks within their immediate control, without consideration of the appropriate mission of the agency and the impact of their individual decisions on the accomplishment of that mission. This phenomenon is exacerbated by the Agency’s having to operate for the first time in a depressed banking market under a statute enacted by Congress in response to the thrift crisis, a statute designed more to promote sound-bite platitudes than constructive economic resolution and rehabilitation.
Sixty-seven Georgia banks have failed since the Great Recession began in 2008, about 20% of all the banks operating in Georgia. Many of those closures were because Georgia was relatively late to the state-wide banking game, and the lure of profiting from natural consolidation by starting and quickly flipping de novo charters continued to attract investors, principally in the Atlanta market, long after there was meaningful market support for new “community” banks. These de novos, funded largely with brokered and other purchased deposits, substantially expanded the availability of residential construction and development lending in an already “hot” market, leading to their own demise and to the failure of other small, less diversified banks in their markets in a residential real estate led recession. But, many of Georgia’s bank failures were established community banks with core business and core profits. These banks did not have to fail. They were closed primarily as the result of myopic (and inexperienced) regulators, fearful of second guessing, punitively and dogmatically applying Congressional platitudes.
Georgia bankers and their advisors have not been innocent bystanders. The Federal Deposit Insurance Act (“FDIA”) as amended during and following the thrift crisis still leaves a lot of wiggle room between the platitudes. Where it does not there are substantial Constitutional questions that can be raised. Georgia bankers and their advisors have passively accepted judgments by regulators which could have been lawfully challenged. Their typical rationale has been that the regulators will “get even” if opposed. To get their way FDIC personnel subtly, sometimes overtly, foster this fear. Yet, in over 40 years in this business, and despite hearing that aphorism repeatedly during most of those years, I’ve seen only one instance where I could truthfully say that I thought a regulator was “getting even” because a banker or bank advisor had in good faith disagreed with a prior regulatory judgment or request. That instance occurred because an amoral banker punished an individual at the request of a regulatory employee. The Agency was not to blame. Regulators may not like your disagreeing with them, but they are, with no more than typical exceptions, good Americans who respect your right to do so, even if that means making their job, as they see it, harder. Yes, there are bankers who claim they are picked on for disagreeing with regulators. The ones I’ve seen deserved being picked on. I don’t see a rational basis for the professed fear, but even if I did, personal fear does not alter applicable legal principles. Passive acceptance of lawfully challengeable regulatory judgments leading to bank failures or material reversals represent a breach of a banker’s or advisor’s duty to the bank’s shareholders. That is a duty that trumps peculiarly personal concerns.
As they say, someone “could write a book” on the closure of these 67 Georgia banks. To tell the complete story, that book would need to tell two stories, one about the banks and their regulators and another about the banks’ shareholders and their communities. Shareholders of established community banks are not market players buying stocks like you bet on horses. Mostly, they are people with simple lives centered in their communities. They buy the local bank stock because of a combination of interests, investing for their retirement, knowledge of bank management, loyalty to their community and not being worldly enough to invest in a distant stock market. Because of those factors, they are probably over-concentrated in the bank’s stock just as their lives in some sense may be over-concentrated in their communities. These shareholders are proud of their investment. They recognize that the local banks are the economic engines of their community, what makes their community a place, not merely a cluster of bedrooms supporting a nearby city or shopping mall. Closing a local bank irretrievably damages the lives, hopes, dreams and aspirations of these shareholders. To them it is both a financial and emotional disaster. Closing a local bank can change a community from a unique independent economic entity to a spot on a map devoid of opportunities, camaraderie or a social fabric except as determined by its relationship to other spots on the map. Closing a community bank like that is not just a financial event, it is a personal and collective tragedy. That’s a story that needs to be told, but one that I am not particularly qualified to tell. My career has focused on bankers and their regulators.
Telling the complete story of the bankers’ and regulators’ roles in these bank failures will have to wait until the story is over. There is still unresolved litigation and the threat of additional litigation. Participants are not yet free to candidly describe the events. Critical documents are protected by government imposed confidentiality and by privacy considerations affecting bank customers. But, pieces of the story can be told, and telling them while the whole story continues to unfold may influence the outcome.
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