Small is the New Large (in terms of Banking)

It’s been over a week since the AIG bonus story broke.  The consequences are still ongoing.

One observation:  the credibility of the national financial services sector – indispensable only six months ago  — is now on the level of the subprime lenders whose wares they once gladly hocked.

Last fall, the U.S. Congress (and by extension all Americans) were asked to believe that some financial institutions were too big to fail.  Members on both sides of the aisle accepted that logic, as did both Presidential candidates. 

As a result of that sweeping presumption, the U.S. Congress passed the TARP legislation.  That legislation and the underlying principle are now looking more and more like a fallacy.  Why?  Because there is no indication that the U.S. taxpayer money went to open up credit for American businesses.  Instead, it was apparently ”skimmed off” to maintain lavish lifestyles and unwarranted bonuses or used to pay debts owed to foreign banks.

So much for saving U.S. jobs. 

The argument that “contractual obligations” required AIG or any TARP-recipient to pay seven-figure retention bonuses is a joke. 

If that’s the case, then why did the U.S. taxpayer save it?   Just let AIG fall into bankruptcy — like other failed companies — so that bankruptcy trustees could maintain “good assets” (performing accounts) and get rid of “bad assets” (overpaid executives). 

I’m not here to throw stones at Congress.  At the time, it made sense to intervene. The Bush administration requested TARP and the Obama administration has not repudiated it.  So this is not a blame game.  It’s simply the reality that certain industry voices cannot be trusted.  Because they assume the risk — but you insure their loss.  That’s not capitalism. 

In Virginia we have a very conservative banking culture (that’s small “c”).  As a result, Virginia banks over the years, once they reach a certain size, have been bought out by aggressive North Carolina lenders like Wachovia and BankAmerica.  There has been a certain amount of debate and criticism about our stodgy banking lawsand the need to loosen them. 

(Ironically, the biggest controversy that in my time was the 2002 decision to allow “payday” lending, a bill I voted against). 

Today, small Virginia community banks are still out there lending money and opening deposit accounts.  In fact, one gives a line of credit to my business.  The Virginia banks mostly avoided the subprime mortgage bundles, the securitized debt and other “get rich quick” schemes. 

With our small banks, they expect their customers to stay current.  Most have.  There are no large payouts to the execs but no government hand-outs either. 

So credit is still there.  And also credibility.  It’s just harder to find. 

This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.