Tuesday, June 29, 2010

Fallout From Financial Reform

I recently met with an executive of a larger credit union, and I've been contemplating some of what I heard about the impact of the financial reforms being enacted by Congress on his core business of community lending.

In today's Wall Street Journal, Sarah Wallace, the CEO of First Federal Savings & Loan in Ohio has this story about a loan application:

"Recently, a couple came to us wanting to refinance their home. They were paying a relatively high interest rate (by today's standards) to a competing institution. They had reasonably good equity in their residence and owned a couple of rental properties, also with good equity. One borrower worked in the construction field and had experienced a reduction in income over the past couple of years, causing some recent slow payments on their credit report. After verifying the income and assets of the borrowers, an idea not new to us, we decided to deny the loan."

Making this kind of loan, given the equity cushions and their overall credit history, is foursquare in the charter of community banks and credit unions. The CEO characterizes declining this loan NOT as a credit decision, but as a compliance decision! Meaning, that she felt in the post-reform, process and compliance oriented environment her bank would have been criticized or called to task for making what might be a fundamentally sound loan. This is a perfect example of how what's going in the Capitol hurts Main Street and the ordinary citizen.

Through the heavy lobbying of the ABA, community banks and credit unions will be cast into the same regulatory net as the money center banks that were co-partners in creating the global financial meltdown. The compliance staffing and consultant costs for credit unions and community banks will increase post-legislation, for no fundamental reason. At the same time, the government will take a share of some of their profit streams, like interchange payments from the payment networks for their private label credit cards.

What will be the results? Probably the end of free checking and free debit cards (to access your own money), an increase in fees, a decline in profitability, and reduced levels of financial services access to new earners and families. It's another in what will be one long Excedrin headache for the beleaguered consumer.

Three Yards and A Cloud of Dust

I sincerely hope against hope that the Dodd-Frank "financial reform" bill dies without a signature. The financial industry has not become smaller, but more concentrated, and the big players, like JP Morgan and Citicorp, are still "too big to fail." The mortgage markets are now dominated more than ever, by Fannie and Freddie, the two culprits that led us into this mess, spurred on by legislators like Barney Frank.

Derivatives trading may become marginally more transparent in its smaller segments, but nothing of significance has changed here either, since this lucrative activity has not been separated from commercial and traditional investment banking.

So, where is the next crisis likely to emerge? The 1970's saw the old U.S. Bank almost brought to its knees by developing country debt, from countries like Argentina if I recall. The next boom in asset prices is and will likely continue to be in emerging markets. China has been dealing quietly with its real estate issues, and Indian properties have long been in a gold rush mode. Properties in Central and Latin America are drawing corporate and individual speculators. There is lots of money to be made, and lots of systemic risk to be generated in these emerging markets.

Interbank lending still seems to be frozen, and small businesses cannot get traditional C&I loans from banks or larger credit unions. If these businesses are the ones that generate employment growth, then this is not a good sign going forward.

There is an economic argument which says the demand for monetary assets will outstrip the demand for goods and services, and so the near-term risk is deflationary. That is what some of the markets are signalling. However, the longer-term response to the sovereign debt issue is on the inflationary side. Again, this is a trader's dream, but a nightmare for the citizen, small investor, and policy maker.

Monday, June 7, 2010

Adieu to a Master

John Wooden was a great basketball coach and a great teacher. His life was authentic, that is, led unfailingly in concert with his morals, ethics and professed beliefs. Don't chuckle, but I've heard from many people that everyone's favorite neighbor, Mr. Rogers, was the same kind of individual.

Wooden's teams won ten NCAA men's basketball championships, and six in a row from 1968-1973, which included my college years. I have to say that I hated the teams from the consecutive win era, because they always took out teams that I supported. One clue that he was an extraordinary coach is the diversity of players and personalities that thrived under his tutelage: Kareem Abdul-Jabbar, Gail Goodrich, Walt Hazzard, Sven Nater, Sidney Wicks, Curtis Rowe, Marques Johnson, and, of course, Bill Walton. That's quite a group of personalities, which doesn't include the number of backups and bench warmers who thrived even without pounding the rock as a starter.

I heard from coaches who attended his clinics that his manuals included details that might sound silly today. Coach Wooden required cotton socks over synthetics (boy was he right!) because they breathed better and were less likely to lead to blisters. Double socking has a very precise algorithm before you laced up the Chuck Taylor Converse All-Stars. Lacing was also specified in detail.

A good friend of mine was manager of the basketball team during part of Coach Wooden's tenure, and Wooden's interactions with Bill Walton and the sullen Abdul-Jabbar were memorable. Despite its political incorrectness, he insisted on addressing Kareem as "Lewis," his birth name. Despite Walton's immaturity and questionable hygiene, it seemed as if Wooden realized that there burned a competitive flame and dedication to improve that was essential to his core concept. Apparently, Coach Wooden rarely talked to his team about winning or losing. His questions were always about whether or not his teams could say to themselves, "Were we prepared, and did we give 100% to the team and did we apply what we learned?" Quite extraordinary.

The smothering press, the back doors, the squeaking sneakers during the layup drills---they were all part what created belief and relaxation in his teams. There was never any reason to be nervous, because they were well prepared, individually and collectively. Everyone knew his role. Sven Nater carried the bags of the starting center for years, but he made his contributions, and everyone knew that many of them came in practice.

Bill Walton is quite a success story in his own right, and not just for basketball or for his winning the NBA Championship either; he is exceptionally open in his gratitude to his teacher. I like that. There's a lot to learn from a leader, teacher and good man like John Wooden.