As major banks with local branches continue to ask for our taxpayer dollars in bailout funds, we see two themes emerge as excuses for their current despicable condition and reasons why they should not be taken over by the federal government, reorganized, and resold to the private sector. Everyone has memories of President Franklin D. Roosevelt’s banking holiday during the Great Depression and more recently the takeover of savings and loans. Perhaps, though unpleasant and hard to swallow, it may be time for the same medicine. The quicker this is done the sooner we will recover.
First, the argument runs that these major institutions are so large that the ripple effect would devastate the economy if they were taken over. But the question becomes how in the world did these institution get so large that they have all of us in this strangle hold? What happened to anti-monopoly legislation that encourages competition by keeping the playing field level? Not only are large corporations national, they have also become international in scope with tentacles in each continent. One major bank used taxpayer bailout funds to purchase another bank and actually became larger at our expense. The answer is that we have seen no enforcement and a lack of regulation.
Just as local banks have difficulty competing, small local pharmacies cannot compete with national chains; local hardware stores cannot compete with big lot stores; and the profits from these large institutions are not spent locally. Local businesses re-circulate a major portion of the profit from what you spend in our local economy. Just as history has shown in the past, large monopolies today do nothing for free competition, just as—in times such as these—large monopolies do nothing to stabilize the economy.
But the major argument these large banks make to acquire taxpayer money is that they were forced by the Community Reinvestment Act (CRA) to lend money to low-income families that would otherwise not qualify. Most of these toxic mortgages were bundled and quickly sold to others.
Union Bank and many others did not get the same greed directive claimed by those banks now at the public trough, and they are shining examples of how banking should be done. John Stewart, a developer and operator of affordable housing, writes in the San Francisco Business Times that Union Bank has $60.2 billion in assets with 26 percent in residential loans. The average loan-to-value is 64 percent with FICO scores averaging 745. Debt service, taxes, and insurance must be no more than 39 percent of income. Not only does Union Bank make CRA loans (2 billion in recent years), but 100 percent are held for their own account and not sold to others. The delinquency/default rate for California banks is greater than 12 percent, but Union Bank’s rate is 1.13 percent for non-CRA loans and 1.61 percent for CRA debt. Union Bank has “zero” sub-prime loans.
Union Bank’s glowing statistics debunk the major argument made by these banks receiving bailouts today, and one can only view these toxic sub-prime loans as unwise, greed-based loans that were quickly unloaded on others. But banks needed help to quickly unload these sucker loans and that was provided by the largest mortgage insurer, who is also sloughing at the public trough trying to get additional bailout funds. These banks’ and the insurers’ situations show poor, greed-based business judgment by the top echelon of these corporations. Do they deserve our helping hand or a boot out the door?
It’s time for government to take that extra step and give bank regulators their marching orders to close down, reorganize, and eventually re-sell these institutions in smaller chunks—minus the current top executives who made poor decisions—back to the private sector. That medicine might not smell good, but it may be time to take it. If Union Bank and other institutions can set examples of banking excellence in the current economic climate, then maybe it’s time to reward those banks with our business and shun those that don’t operate in such a responsible manner.
Check out your bank! Ken McCalip is a Northern Santa Barbara County native who holds bachelor and doctorate degrees in history, cultural geography, and law from various California universities. He can be reached at foxmt.one@verizon.net.
This article appears in May 28 – Jun 4, 2009.