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February 9, 2010 |
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| August 05, 2009 |
By: Wayne Tompkins |
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mid the negative stories coming out of the banking industry, Alex Sanchez is liable to turn up anywhere — from the halls of Congress to the Legislature to cable channels like CNBC — a ready and irrepressible tonic for those needing a pep talk about Florida banking or at least a reminder that even in this downturn, the glass is not completely empty.
Even as South Florida community banks report minus signs on their second-quarter numbers, Florida’s top banking lobbyist points out that while it’s undesirable, in many cases it is helping to keep the banking crisis from being worse than it is.
Those banks are sacrificing short-term profits and diverting that money into set asides against future loan losses, he explains, warning that the bigger danger would be for banks to report profits at the cost of being underreserved, exposing them to mounting bad loans.
“It’s the untold story of the banking industry,” the president of the Florida Bankers Association said. “We have hundreds of billions of dollars in the country in reserves. Tens of billions of dollars here in Florida alone. As banks reserve against losses due to the economy, every month the banks put more in reserves — which would have been income.”
The reserve-first strategy has worked well enough to trigger an April rally in bank stocks when Treasury Secretary Timothy Geithner declared that most banks are sufficiently reserved against future losses.
But Financial Accounting Standards Board revisions earlier this year also gave banks more flexibility to determine the value of assets according to their worth in normal trading conditions. Critics contend that will allow banks to set aside less money than is actually needed if loans go bad.
“I have to credit the bankers and the regulators from previous experiences to the experience of today, which is why you have had a lot fewer bank failures in this recession,” Sanchez said. “Both the bankers and the regulators have been smart.”
Only two of nearly 70 banks to fail so far this year nationwide have been located in South Florida, thanks not just to increased reserves but tougher capitalization requirements in the wake of the 1980s savings and loan crisis.
“In 1990, we had 400 bank failures in this country. In 1991, there was 275. We had 30 last year and about 70 so far this year,” Sanchez said. “Even in 1982, it was 165.”
That’s not the only untold story Sanchez has been telling to an influential audience, even as he’s outnumbered by doomsayers who seem more in vogue and less likely to be scoffed at.
“I was told recently when I was in Miami-Dade County that 20 percent or so of the foreclosures were homesteaded property,” Sanchez said. “I looked at that as very good news as we stabilize our marketplace, because ... a lot of these foreclosures are flippers, are second and third homes. The main concern we have as a society is the family losing the home.”
He’s just as ebullient on behalf of the association’s 300 member banks. He talks of fighting proposals that he feels would only further weaken the battered industry, making the case that most community banks did not cause the financial crisis and yet are being asked to shoulder the burden of many proposed reforms.
“The president himself has said that 94 percent of the toxic high-cost mortgages came from the non-banking, shadow banking industry,” he said. “So why is 95 percent of the solution being created by Congress against the FDIC-insured banking world?”
At the top of his list is the Obama administration’s proposed Consumer Financial Protection Agency that would assume and consolidate some of the authority of the four current federal banking regulators: The Federal Reserve, The Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency.
“We think that the safety and soundness of the examination process should stay with our federal banking regulators and the authority on the consumer issues as well,” Sanchez said of the FBA’s position. “We think you can’t separate those things. We’re strongly opposing the plan by Congress to create this agency.”
He said the consumer agency legislation misses the people it should include: the “shadow” banking industry.
“The systemic regulator is a good thing. Most in our industry would support that — so that no doubts would exist in the marketplace,” Sanchez said. “It’s also a good thing for the AIGs of the world. If a major institution like that is on the brink of failure somebody needs to know about it now versus later.”
Twenty years ago when you had a mortgage with a bank, he recalls, it entailed one or two documents. “Now, it’s 50 documents,” he said. “We want that level of scrutiny brought to the shadow banking industry, and that’s a good idea. Why aren’t the rating companies getting more scrutiny? A lot of our banks bought AAA and it turned out to be C-rated paper. Companies relied on that rating. Individual Americans did.”
In going up against the Obama administration and its supporters, Sanchez faces an uphill fight.
Ken Thomas, an independent Miami banking analyst and Wharton School professor with a sphere of influence of his own, is among those supporting Obama’s consumer financial protection agency.
In his research on the Community Reinvestment Act, for example, “I concluded there was tremendous grade inflation and tremendous disparity among the regulators. The same rules are interpreted four different ways with four different grades.”
Thomas said he even had cases where a bank would switch from one regulator to another, with the same set of circumstances, and get a better grade.
“Arthur Burns once called that competition in laxity,” Thomas said, quoting the former Federal Reserve chairman. “The way you eliminate regulator shopping is by having one regulator.”
While agreeing that banks should focus on reserves ahead of profits, Thomas argues that many banks in South Florida remain under-reserved.
“For every dollar of problem loans we’d like to have a dollar set aside, ideally, against it,” he said. “There are many banks in South Florida with under 50 cents on the dollar” and many are below 25 cents on the dollar.
“A lot of those are reporting small profits,” Thomas said. “If they were properly reserved, they wouldn’t be reporting a profit. Meanwhile, your problem loans are increasing even more.”
Sanchez said that when banks have made mistakes, “those banks were shut down and those bankers are basically exiled from the banking industry,” he said.
He contrasts that with the Securities and Exchange Commission, “where they have 1,100 lawyers who check off boxes on applications and then when there is a complaint they investigate, but they’re not out like the bank examiners — the FDIC, the Federal Reserve, the OCC, the OTS and the state banking regulator, where at community banks every 12 to 18 months a team of 12 to 15 examiners physically go into the bank and stay there three weeks to a month, a month and a half checking records and on bigger banks year-round.”
One of the more hot-button issues in the mortgage crisis, is giving bankruptcy judges the power to cramdown mortgages — or reduce the principal on mortgages over the objection of creditors. It’s an issue Sanchez fears could come back as well.
“It gives uncertainly to lending,” he said, noting that banks would be hurt even though most of the mortgage crisis can be traced to non-bank lenders.
That’s one area where Thomas and Sanchez are closer to agreement.
“If you start changing contracts, then what’s the purpose of entering into the contract in the first place if you know some judge is going to change it down the line?” Thomas said. “The contract should be between buyer and seller. If a third party becomes involved that can change it, where is the certainty in that?”
It’s disruptive to business and to the kind of capitalism the country has established, he said.
“We need cash flow and other certainties to help us qualify people,” Sanchez said. “We don’t want to get back into problems that our society got into mainly with the non-banks that were lending before the recession began where a lot of these loans were not qualified. Nobody wants that and, in our industry, because of the high regulation, write-offs hit capital, capital reduces, that’s when banks get into trouble.”
Which brings Sanchez to another one of his economic points of light.
“Residential sales are way up from June ’09 versus June ’08 — way into double digit figures,” he said. “Are the values up to where they were in recent years? No. We’ve never had that acceleration of appreciation like we did from the ’03 to ’07 time period. That was not sustainable.”
Gradual appreciation in real estate prices long-term is healthier for society, he said.
“I always tell people the next someone tells you their home went up 30 percent for the third consecutive year, run for the hills because the dam is going to break again.”
Wayne Tompkins can be reached at wayne.tompkins@incisivemedia.com or at (305) 347-6645.
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