Thoughts & Comments
The President Goes Blank on Banking
When it comes to how the industry works, Barack Obama really doesn’t have a clue

Thomas Brown  ( about me )
Posted 12/16/2009
bankstocks.com
tbrown@bankstocks.com

Remember, during the presidential campaign, how we all kept going on and on about how smart Barack Obama is? Remember?  

Turns out we were wrong! I can’t speak to topics like foreign affairs or macroeconomics, but I do know about banking. And I will say flat out that Obama’s approach to dealing with bankers and the banking industry has been brainless. It is shocking to see what the guy appears to not know.

On Monday, the President summoned the heads of the country’s big banks to try to jawbone them into lending more. “America’s big banks received extraordinary assistance from American taxpayers,” he said after the meeting. “Now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild the economy.” 

Really? If the President wants the banks to start lending more, he might spend less time yammering at CEOs and more time talking to his own regulators. They don’t seem to have gotten the memo. Instead, regulators are apparently doing all they can to ensure that banks keep their lending to a minimum. For example, they now seem to be insisting banks maintain minimum capital standards meaningfully above the published, official bogeys.  Before the credit crunch hit, for instance, OCC policy said a bank would be considered “adequately capitalized” if it carried a Tier 1 capital ratio of 4%, and “well-capitalized” if it carried a Tier 1 ratio of 6%. It was simple. Right there in print.

And now—who knows? Regulators won’t come out and admit they’ve moved the goalposts but, as multiple conversations I’ve lately had with bank CEOs show, they have. Now, apparently, it takes a 10% Tier 1 ratio to be considered well-capitalized, and regulators don’t mind if banks are even a tad over that. This is not an official policy change, remember, but rather a de facto shift that’s happening at bank after bank across the country. 

Mr. President, the arithmetic couldn’t be simpler: the higher the capital ratio, the less credit is available and the more it costs! So if you want more credit to flow into economy, tell your regulators to stop the freelancing and stick to their published policy. It should be a short conversation. They work for you. You might also tell them to ease off their tactic of forcing banks to downgrade (and take added reserves for) loans that are current and cash-flowing. Each loan is different, of course, but if a borrower has managed to stay current to this point in the cycle, his lender isn’t necessarily being imprudent if it gives him the benefit of the doubt. Otherwise, banks will have to take redundant reserves and will have less capital to use to facilitate lending. This really isn’t hard.   

President Obama’s ignorance of how banking works seems to be nearly encyclopedic. He accuses the banks he spoke with Monday of playing a big role in causing the credit crunch. For the most part, they did not. (The main culprits have all long since collapsed.) He says the big banks should be grateful for the “extraordinary assistance” they received from the government. But except for Citi, none of the big banks even wanted the money. He keeps pushing this misbegotten Consumer Financial Protection Agency. But the effect of the CFPA would be to constrict credit, not expand it. His understanding of reality seems to be upside down and backwards. 

It’s also a jarring to hear the President talk about the “extraordinary commitment” he expects lenders to now make. The last time the government wanted that kind of concerted effort from the lending industry, things didn’t turn out so well. Then, the goal was the expansion of home ownership—everyone from President Bush to Barney Frank was all for it—and the key tool banks used to get there was an emphasis on subprime lending. I don’t need to remind you how that ended.

The banking business isn’t complicated. Banks borrow money at one interest rate and turn around it and lend it at another, higher rate. If enough borrowers repay their loans, banks will turn a profit and will be able to lend even more. A kind of virtuous circle will ensue. If enough borrowers don’t repay their loans, all hell breaks loose. That’s why political meddling in the lending business (that is, elected officials’ lobbying bankers to make uneconomic loans) can be so toxic to the economy. I don’t get why President Obama persists in meddling now. 

Nobody is asking Barack Obama to turn into the second coming of J.P. Morgan. But he might at least grasp the basics. Can’t any of the economic graybeards who endorsed him last year pick up the phone and explain the way the world works? We’re told he’s very bright. It wouldn’t likely be a long or difficult conversation.

What do you think? Let me know!


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Parkite Posted On 12/16/2009 1:44:37 PM

What do you expect from a "community organizer"? His lack of experience is on full display. PS - I am not a hard-core right wing republican supporting bankers. Like you say, this is not hard.

Stan from Dallas TX Posted On 12/16/2009 1:50:41 PM

Good article; thanks

jackbaz Posted On 12/16/2009 2:01:55 PM

Tom , He doesn't care of the economy falters, thew want chaos in order to build their utopian socialist state!

Ole Holsti Posted On 12/16/2009 2:26:48 PM

Banking is simple--how else could Ken Lewis [BAC] and Ken Thompson [Wachovia] reach the top and pay themselves more than $20 million to run their banks into the ground. I think that any of my "C" students could learn banking in 3 weeks-and do a better job than the overpaid goofs now in charge. Obama's error is in thinking that bankers have triple digit IQs.

HOKAP Posted On 12/16/2009 2:35:36 PM

Good piece. Who's advising him on what he says?. Who's on first? No, he's on second!

John from Columbus Posted On 12/16/2009 2:46:19 PM

Dead on. I hope your article finds its way to his advisors.

Scottsdale Bank Analyst Posted On 12/16/2009 2:47:44 PM

This seems consistent with the way he typically operates with two agendas, often contrasting, on many issues - the PR agenda and the behind-sceens-real agenda. For example, PR - control spending ACTUAL - borrow trillions, PR - expand lending, ACTUAL - regulatory restriction of credit, PR - control healthcare costs, ACTUAL - huge new healthcare entitilement, PR - create jobs, ACTUAL - job restricting regulatory and tax uncertainty. I haven't figured out whether he is delusional or sinister.

john sturm Posted On 12/16/2009 2:53:24 PM

A bullseye article but what do we expect from an antibusiness administration??

Pat the realist Posted On 12/16/2009 3:02:26 PM

While your editorial seems spot on at first, you seem to be missing something pretty fundamantal as well. Obama is a politician. As such, he must BOTH work to ensure that the banking industry is seen as more highly regulated and "well capitalized" while also urging banks to lend more. In this way, although it is to a great extent a "jekel and Hyde" approach, he satisfies more of the voting public. In practice, he should strive for both fewer bank failures and, if possible, lending when and where it is needed to help the economy and small businesses recover/expand. He needs to "tweak" both sides of the issue....... Pretty simple stuff Tommy.

Tom Johnson Posted On 12/16/2009 3:24:10 PM

Tom, you hit the nail on the head with this one.

BankAnalyst Posted On 12/16/2009 3:51:15 PM

Love it! Especially the part about the subprime lending expansion - this had that ring to it x 10. This whole meeting was PR stunt and unfortunately only further displayed his ineptitude. He even called the TARP/CPP capital injections "loans." Hmmm..since when did loans come with 15% warrant stakes? Those sound like investments to me - and so far they've done ok on them. Punish the good because of the bad - that's what you get in Washington when you paint an industry with one huge and oversimplified brush.

a Posted On 12/16/2009 3:55:30 PM

Its politics. He wasn't speaking to the CEOs, he was talking to the voters who want to hear these guys get lectured.

Brian Williams Posted On 12/16/2009 3:56:16 PM

Beyond federal regulation to deter the human tendency to move toward greed and power, the government should stay out of business. As you pointed out, meddling will cause decisions that are uneconomic for all stakeholders.

Jeff Elsea Posted On 12/16/2009 4:07:53 PM

Thank you. You have said, I assume, what 99% of U. S. bankers think.

Stan - Phoenix Posted On 12/16/2009 4:08:39 PM

Brain smart or affirmative action smart? Since we know so little of his background and history, perhaps his legendary smarts are a result of the Democrat spin machine. You know, every conservative is stupid and every liberal is smart. I know too many truly smart people who were taken in by the good speechifying and who didn't think about what they were hearing. Now, suppose you were raised a Keynesian and watched as the policy prescriptions were implemented. What if everything you were taught or learned has proven to be fraudulent and misguided? Do you go back to school, change your thinking, or double down with more stimulus? I know what this administration is doing and, of Obama is really as smart as folks say, he will turn out to be one great Republican president.

Sarwor Posted On 12/16/2009 4:08:43 PM

Couldn't agree more. This regulator-inspired illiquidity in the banking system almost rivals the petro-dollar liquidity crisis of the mid-1970's, which until 2009, was the most frightening circumstance of my 40 year career.

Regulatory Capital Solutions Guru Posted On 12/16/2009 4:08:50 PM

Sounds about right to me Tom.

Mark C Posted On 12/16/2009 4:09:06 PM

The President, the Treasury Sec and the balance of the economic team understand banking perfectly well. What this post shows is that Tom has no understanding of politics. Policy is not made at these dog & pony shows. BTW, this is no different than any administration of either party covering any topic.

Stan - Phoenix Posted On 12/16/2009 4:12:17 PM

Brain smart or affirmative action smart? Since we know so little of his background and history, perhaps his legendary smarts are a result of the Democrat spin machine. You know, every conservative is stupid and every liberal is smart. I know too many truly smart people who were taken in by the good speechifying and who didn't think about what they were hearing. Now, suppose you were raised a Keynesian and watched as the policy prescriptions were implemented. What if everything you were taught or learned has proven to be fraudulent and misguided? Do you go back to school, change your thinking, or double down with more stimulus? I know what this administration is doing and, of Obama is really as smart as folks say, he will turn out to be one great Republican president.

Jim C Posted On 12/16/2009 4:16:59 PM

Tom: Your article is spot on. If the president had been serious he would have had Shiela Barr, John Dugan and The NY Fed president tthere so the regulators heard the same message as the bankers. But it was just a photo op for BO.

Sandy Berry Posted On 12/16/2009 4:21:12 PM

Yea!!!

LEE Posted On 12/16/2009 4:58:54 PM

Ummmmm, let's see, who is smart? If the writer knows about banking, what on earth explains the results of his performance-oriented funds?; ummmmmm like in 2008. Ummmmmm, and if banking is so easy --- and I agree, at its core it is, but no banker stays at its core --- see exhibit A: US S&Ls , exhibit B: UK Building Societies --- how does one explain Ken Lewis, Sandy Weill and all the other geniuses who after all their deal nonsense over the years have built zero to negative value for their franchise. It's comical .....

Bob Vasko Posted On 12/16/2009 5:00:22 PM

You are so right and as eloquent as the president. The real and more dangerous product of the pounding the banks have gotten is 1) some people will believe the lie and 2) the real trouble makers are still making trouble. Well done. Circulate widely.

John Melware Posted On 12/16/2009 5:05:15 PM

Only the media thinks he is so ultra-bright. I have always thought that he is really not all that bright and have wondered who put up the money to get him in Harvard and also THRU Harvard. He is just the puppet of so many others.

Joe,CEx Posted On 12/16/2009 5:23:06 PM

The only thing he is good at is reading other peoples speechs and written info on the tele prompter,in stead of peace prize he should get top prize for constant tv shows.

roanokela Posted On 12/16/2009 5:56:00 PM

he is a socialist at best!!v He probably understands but was playing to his fans!! He has to have someone to blame for stupid policies!!

cailte Posted On 12/16/2009 7:41:37 PM

El Pesidenté has gone blank on a helluva lot more than banking. But, to your point, I could not agree more. Push banks to make loans to subpar credits because it's right. Huh? The banks have a lot going against them and Obama is the icing on the cake.

Doug Posted On 12/16/2009 7:42:29 PM

100% AGREE! The only problem is, the dumb, liberal masses will never understand this...(IE: See Ole's comment below..."Those who can, do. Those who can't, produce 'C' students!")

Doug Posted On 12/16/2009 7:42:44 PM

100% AGREE! The only problem is, the dumb, liberal masses will never understand this...(IE: See Ole's comment below..."Those who can, do. Those who can't, produce 'C' students!")

sgr Posted On 12/16/2009 9:19:28 PM

All excellent points, but I think you miss the obvious. Obama needs chaos and crisis to make the socialist changes that are his true agenda. He doesn't want recovery. He wants a frightened country, desperate enough to "change"; i.e. become Europe. Looks like its beginning to backfire as even the sycophantic media aren't able to keep his approval ratings above 50% anymore.

banker Posted On 12/16/2009 9:29:50 PM

Great article; Is Obama the worlds greatest speaker starting to sould like Congressman Frank?

Laurence J. Trapp Posted On 12/16/2009 9:37:46 PM

Great piece. We met for lunch years ago when you worked at DLJ and I was in Florida. Now at a $300MM bank in NC. Regulators are being very tough these days. Investing into corporate bonds is much easier these days. LJT

John Vollrath torsargn@aol.com Posted On 12/16/2009 10:48:18 PM

Very much enjoy reading Tom Brown. i would like to know if he has an opinion on John Stumpf and Wells fargo.

John Vollrath torsargn@aol.com Posted On 12/16/2009 10:49:41 PM

Very much enjoy reading Tom Brown. i would like to know if he has an opinion on John Stumpf and Wells fargo.

John Posted On 12/16/2009 10:56:28 PM

It is ironic that, according to press reports, even the financial CEO's called to the White House for Obama's little lecture didn't speak up to point out the obvious. Doesn't give one great confidence in their own knowledge of their industry or their leadership.

Obamaman Posted On 12/17/2009 8:29:31 AM

Why not send him a copy of your blog.

Tiger Posted On 12/17/2009 8:58:28 AM

You make some decent points but lose credibility with a statement like this: "But except for Citi, none of the big banks even wanted the money." BAC and WFC might say they didn't "want" the money, but they certainly needed it. You've drank too much Kovacevich kool-aid if you believe WFC would've been fine without it.

Joe V Posted On 12/17/2009 9:05:09 AM

Good piece. Any comments on the new BoA chief?

JW from Bellvile,TX. Posted On 12/17/2009 9:15:52 AM

I did not vote for him, you may not of either but most of America did. What the hell were they thinking? He is poison to the system yet America keeps consuming his brainless ideas. Wake up America!

Wiks Posted On 12/17/2009 9:17:44 AM

My guess is that he very well knows how banking works already, but is choosing to play politics with the public.

Tiger Posted On 12/17/2009 9:52:21 AM

You make some decent points but lose credibility with a statement like this: "But except for Citi, none of the big banks even wanted the money." BAC and WFC might say they didn't "want" the money, but they certainly needed it. You've drank too much Kovacevich kool-aid if you believe WFC would've been fine without it.

Malcolm Hotchkiss Posted On 12/17/2009 10:27:10 AM

As a CEO of a community bank I am painfully aware and completely agree with your position. The regulators all but laughed at Barny Franks letter regarding setting additional capital standards. In addition it is apparent that the regulators are manageing the industry as a whole through the UTPR or UBPR without regard to individual markets, business plans and or past perfromance. We are in serious troble.

ron lepes Posted On 12/17/2009 10:47:08 AM

why don't you call the White House ? You are well known, highly regarded, and most certainly ciuld get the ear of someone very senior. alternatively, ask Jamie Dimon to do it. he has easy direct access to the pres. the pres. is capable of understanding this and asking someone to look into how to solve it.....

JRG Posted On 12/17/2009 11:01:06 AM

L J Trapp has a good point. With todays yield curve its easier to invest in treasuries than loans. Capital requirements are higher for troubled banks but the liquidity is there to make loans. Bank's are choosing not to lend for many reasons fear, lack of creditworthy opportunities,capital constraints, more attractive asset opportunities with governments. My sense is that the regulator issue only plays a small part in this except for those banks that are under some form of supervisory directive.

josethea Posted On 12/17/2009 11:54:05 AM

He knows the basics of banking. As a typical pol, he is using banks, which most voters do not particularly like, as the scape goats for his failed economic and fiscal policies and 10% unemployment rate. Hopefully most of the electorate see through this charade and will remember it and others in 11/10.

Dirk Vos Posted On 12/17/2009 4:17:13 PM

Tom, points well taken. Have you attempted to get the message through to the President, either via his staff or any of the many "graybeards" you reference and undoubtedly know? It would seem the message would be far more effective coming directly from someone with credibility on the subject, you. I urge you to try if you have not already. Happy Holidays Dirk

silly things Posted On 12/17/2009 6:55:12 PM

I would be surprised if none of the bankers mention to the president about the regulators. No one knows everything. The fact that Obama talks to the bankers directly is clear evidence that he is smart.

Asela Posted On 12/17/2009 9:17:33 PM

On the contrary, I think Obama knows exactly what he is doing. Since he knows that he cannot force the banks to lend, so he is just putting pressure on the banks to help him with vague threats. Will the banks blink? We shall see. At the same time it is disingenuous to suggest that the banks were not to blame. Yes the government put in place programs and institutions (Freddie and Fannie) to encourage banks to lend to people with poor credit. And the greedy banks saw the perfect opportunity to essentially game the system to their benefit. The problem is the banks gamed the system too much. Yes they can blame the government for encouraging it, but like that old adage would you jump into a river just because some else did it. The banks jumped, knowing full well they would be rescued. That does not absolve them of fault.

Kennedy Posted On 12/18/2009 12:36:14 AM

Maybe this is part of his "big plan" to bring the US to its knees and destruction since he doesn't appear to be patiotic or a supporter of what this country was founded on. I have no idea what he is trying to prove or do at this point! God Bless America cause we need it!

Bob, Retired businessman Posted On 12/18/2009 9:10:10 AM

You are right on..His arrogance disallows him to be objective...He believes an Ivy League education makes him the no it all of all faucets of our lives. What a shame, he's destroying the American free enterprise system. Perhaps its because he didn't have the American experience in his formative years. He hasn't participated in business and was able to gain his education without having to endure the labor of earning same through physically working for it. Something received, not earned is not truly appreciated.....Stay on the offense...

bob womsley Posted On 12/18/2009 12:28:31 PM

Very well and cogently stated!!

wkhrdnsmrt Posted On 12/18/2009 1:16:27 PM

HOPE SPRINGS ETERNAL! http://www.youtube.com/watch?v=UZkvkLmkYVg&feature=player_embedded GIVE UP 3 1/2 MINUTES... Twenty Ten

wkhrdnsmrt Posted On 12/18/2009 1:16:59 PM

HOPE SPRINGS ETERNAL! http://www.youtube.com/watch?v=UZkvkLmkYVg&feature=player_embedded GIVE UP 3 1/2 MINUTES... Twenty Ten

Wondering Posted On 12/18/2009 5:00:36 PM

Don't you guys have access to money at nearly a zero interest rate? How hard is it to lend with those conditions?

Claire Posted On 12/21/2009 9:03:38 AM

Thank you for publishing this article. It helped me understand where the real credit issue lies. I disagree with your premise that this president does not know what he's doing or can't grasp banking concepts. BHO knows exactly what he's doing. He doesn't want any private sector industry to succeed. So he blames them and demonizes them for our problems. This causes the masses (ACORN & SEUI types) to speak out. He then considers what these people have to say as what America says or wants. And what they typically want is for government to 'fix' our problems. And as a progressive liberal that's what the president and Congress want. It helps Obama drive his agenda to redistribute the wealth and turn our country into a Socialistic / Marxist country. BHO plays on our ignorance and lack of information. So, again, thank you. Please keep educating us all on what is actually happeneing as you did with the capitalization ratio regulations. We can then call them on the carpet.

John in Florida Posted On 12/22/2009 11:41:56 AM

During the campaign I concluded he was an empty suit, capable of rhetoric and nothing else. I take little pleasure in being spot on.

Rick Posted On 12/22/2009 2:34:34 PM

If this is truely the case...why doesn't someone let the Prisident know? Perhaps then he could come down hard on the orginazation that needs the shaking up harder vs. the Banks.

Synd Loan Admin Agent Posted On 1/2/2010 10:31:34 AM

Tom- Your comments are spot on, as are those from Stan and Tiger (list above). As one who deals with the OCC regularly as an administrative agent for large syndicated credits that are in various stages of distress (I work for one of the big 4), I can tell you that the OCC is even more negatively biased than they were in past credit cycles. We have performing DIP loans that are 25% of EV and yet the OCC is still requiring us - and via the shared national credit process - all of our participants to carry the loans as NPA's. This obviously has a huge impact to our capital, and more importantly to the credit grading bias within our firm. So yes, from the front lines, I can reconfirm your comments. In my opinion, I think KLewis is right about one major item you did not mention - procyclical reserve building. I recognize the concern over cookie jar reserves, but something needs to be done on this one as it makes no sense to have minimal reserve build when times are good and massive reserves when times are bad. Lastly, as Tiger mentioned, WFC and BAC both needed TARP for their massive book of CRE that is largely class B or worse. Extend and pretend is what these super-community banks are doing and thus their capital is largely over estimated. I, and many of your faithful readers, would be interested in having you address this point, thx.

jp morgan Posted On 1/9/2010 1:48:16 PM

Obama is a charlatan
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