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Feds shouldn't reward bad fiscal behavior, say some smaller banks

This article first appeared in the St. Louis Beacon: October 16, 2008 - Take it from Mike Walsh, president and CEO of Eagle Bank, a 97-year-old community bank in St. Louis County with $700 million in assets.

The $250 billion federal infusion for the troubled "big boys" in the U.S. banking system is going down hard among the ranks of community banks that pride themselves on conservative lending policies, supporting their customer base and keeping a whistle-clean balance sheet. 

"This is a bunch of East Coast, Ivy League, MBA guys taking care of East Coast, Ivy League, MBA guys," Walsh said Thursday.

Walsh speaks quite openly against the Bush administration's rescue plan, which will require the nine largest banks in the United States to accept federal purchases of shares totaling $125 billion.

"There needs to be some form of stimulus package, but I don't know if bailing out failing banks is the right way to go," he said.

The administration hasn't explained how the remaining $125 billion will be invested in other banks across the U.S. But some of those dollars could go to smaller banks, including community banks that are often privately held by a small group of investors.

While Walsh and other local bank officials haven't said the country's largest banks should be allowed to fail -- and they fully recognize the liquidity problem the federal effort is designed to solve -- they are deeply troubled that the large banks are not being held accountable for making many bad loans.

"This process seems to have avoided the issue that caused the Big Boys to get into this situation: greed," Walsh said. "It's not fair that the Big Boys are being preserved. It doesn't make any sense."

He also lamented that the entire U.S. banking sector seems to be characterized as failing, when clearly many community banks are on sound footing and are continuing to operate well.

"These big banks have cause the stress that's going on in the marketplace," Walsh said. "I'll not lend a nickel unless the borrower can prove that he can pay it back. These big banks have been much more careless than that."

The Bush administration's action this week has been widely characterized as a bailout.

But Mike Alderson, professor of finance at the Cook School of Business at St. Louis University, said the government, in effect, took the steps it needed to add liquidity to credit markets.

"I don't think of this as a bailout," he said. "I think of it as a rescue."

He added that Ben Bernanke, chairman of the Federal Reserve System, the nation's central bank, is an expert on the actions of the then relatively new Federal Reserve that helped to precipitate the Great Depression of the 1930s.

"The Fed failed as the lender of last resort," Alderson said. "It tightened up credit and helped to bring on the Depression."

The problems of the big banks, like Bank of America, Citibank and others that are being required to accept government purchases of their stock totaling $125 billion, Alderson said, is that they have lost so much money and stand to lose even more if they do not receive an emergency input of capital.

"Their capital base has been eroded greatly, and they stand to continue losing," he said.

Bankers, small and large, understand this point, but it still sticks in their craws that the large banks they may compete against in some markets are effectively getting away with making a pile of bad loans.

One is Mitch Baden, chief operating officer and executive vice president of Royal Bank, a community bank with $400 million in assets based in University City.

Baden called this reporter late Wednesday night, fairly yelling about what he called "a sad day in the industry."

"Because of their size," he said, "the government is rewarding the largest banks instead of regulating them."

Furthermore, he said, federal regulators who keep a close eye on the lending practices of banks like Royal, Eagle and others around the St. Louis area and across the United States are likely to have a conflict of interest now.

That's because the regulators work for the U.S. government, which will become a key shareholder in many banks, including some that could compete with community banks for customers.

"We have created a national banking system, and the largest banks will never be allowed to fail," Baden said. "I see this as a huge disadvantage, creating an unfair playing field, and it should never have been allowed to happen."

Well-run community banks don't need capital because "we have followed the rules," Baden said. "But we have moved so quickly, we are in such uncharted waters, that we don't know how this is going to work."

For Jim Regna, CEO of investor-owned Triad Bank, with $150 million in assets, the uncertainty and credit-market freeze have affected his Westport-based operation's ability to raise additional capital.

The bank had hoped to have a second round of investor buy-in of $10 million about now, but the collapse of the banking market means that Triad will have to settle for trying to raise $3 million to $5 million, Regna said.

"Bank stocks are trading under book value now," he said. "Would an investor want to buy more stocks in a bank when they are lower in value than they should be?"

Regna believes the federal action is necessary to restore confidence in financial markets and add liquidity, so he's not opposed as some of his fellow community bankers are.

He added that Triad Bank, because it is tightly run and has strong ties with its investors and customers -- sometimes the same people -- will weather the coming year and a possible economic downturn pretty well.

A big question yet to be spelled out in Washington is whether the $250-billion infusion of capital will also be available to privately held banks that may have trouble, like Triad, in raising capital from investors.

Ramsey Hamadi, chief financial officer of Pulaski Bank, a publicly traded bank based here with more than $1 billion in assets, applauded Washington's effort.

"This will give banks enough capital in cushion to go out and make loans" again, which will help to stave off a recession and keep the economy moving, Hamadi said.

"This is not nationalizing the banks," he said. "This is not a Republican or Democratic issue. This is a much more efficient use of taxpayer dollars," and the government will be paying for bank shares at their distressed, current market value, not face value.

Repps Hudson is a freelance writer in St. Louis. 

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