Lessons in Good Community Banking Practices

By Alain Bolea

Mortgage Banks received a helping hand from the Cook County Sherriff in Illinois on how to improve profitability and meet their community banking requirements.
 
Sherriff Dart was tired of sending his officers to evict people after foreclosures by banks only to find bewildered tenants, unaware of pending legal proceedings, facing eviction even after having dutifully paid their rents to a landlord who in turn did not pay the bank.  Evictions have increased dramatically. The police will now simply ask banks to prove that they have met the requirements to notify people subject to eviction within the legal timeframe.
 
This takes some courage from the part of Sheriff Dart and many will ask for his head, no doubt.  It seems that the American Banking Association is already beating that drum, accusing Dart of vigilantism and proposing he should be found in contempt of court.  Instead of dealing with the issue raised, the ABA is reacting in fear that other sheriffs might follow the example.

Whatever the legal aspects of who is supposed to do what, it seems that banks have an opportunity to help themselves and others at the same time.  Could they accept the tenants’ rent payments directly and use those to service the outstanding debt?  Or is it better to evict tenants and put yet another empty property for sale in a severely depressed market?  Not forgetting that the outcome is likely to be that the property will sit empty for months, and eventually be sold at a fraction of the loan value.

Let’s also not forget to take into consideration the burdens the latter scenario places on the community, from needing to accommodate “manufactured” homeless to the impact of vacant buildings on local economics and crime.  I will hardly mention the depressing effect on surrounding real estate.  (Think Detroit.) This is the time for banks to take their fair weather promises of community banking to a different level of social responsibility and take the initiative to find new solutions.

On the other hand, banks need help in thinking differently.  When they run into massive credit problems as they have now, they are under pressure from regulators and investors to clean up their act fast.  The plan is always the same unload the troubled assets they acquired through foreclosure as soon as possible.  Take the bad news in one gulp and move on.  The other reality is that banks have neither the staff nor the know-how to manage real assets, so the options are would require a new scenario.

Now in the case of real estate there is a further perversion.  In an orderly market, it is good to have rental cash flows to determine the borrowing capacity of the property.  But when the market is hot or depressed, having no tenants can be even better, because the new owners can do as they please with the building to maximize their returns, and it could mean buying a property for a song and keeping it shuttered for years.

The strangeness of ABA’s reaction is that they do not seem to believe one bit that a healthy community makes for a healthy business environment.

The courageous stance of Sherriff Dart is indeed a wake call to move away from the short-term compartmentalized thinking that has brought the world economy to the current collapse.

2008 © Alain Bolea

Alain Bolea is a former investment banker with Deutsche Bank. He is currently a financial consultant who advises companies and managers on how to bridge spirituality and economics.

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THE FREE MARKET isn't FREE

“Raw Capitalism is Dead.”  Hank Paulson

A United States Congressman grilling Treasury Secretary Paulson on the $700 billion dollar rescue plan during the recent U.S. House of Representative hearings asked the remarkable question: “Mr. Secretary,” he drawled in his southern gentleman twang, “is this the end of the Free Market?” The inappropriate timing of the question left even the Treasury Secretary stunned. He repeated the question. “Secretary Paulson, do you believe this is the end of the Free Market?” “Congressman,” Paulson replied stoically, “the Market needs discipline.”

Congress has been tallying up the bill for the no-holds-barred wild party the financial industry enjoyed over the past the seven years since September, 11, 2008. That day we are hit hard by foreign forces; it seems only a few years later from the same streets where our brethren breathed their last, we are taken down by our own.  The tally is not over. The economic casualties stretch far and wide.

First there was the government bankrolling of 30 billion for the collapse of Bear Stearns, then 200 hundred billion for Freddie and Fannie, followed by 85 billion for AIG, the 121 billion for US Government Discount Lending , and adding the 700 billion dollar request for bad debt, the Government’s bill to date is $1,436 trillion dollars and counting.  The securities industry write-downs are estimated so far at around $500 billion. Jobs lost since January 2008 total around 650,000 - 84,000 of which are for August alone.  Wall Street job losses total upwards of 90,000. Fifteen major bank and mortgage lending institutions closed their doors this past year. Washington Mutual Bank, a Pacific Northwest and national bank, heavily invested in toxic subprime loans, collapsed with 188 billion dollars in assets – the largest bank failure in U.S. history. In the first eight months of 2008, there were over one million new personal bankruptcies, 400,000 business bankruptcies, over 2.2 million foreclosures, $32 billion investor losses at Lehman and Bear alone, and hundreds of billions more investor losses world-wide.

The American way of life is at risk; the global economy is deeply compromised. All because of the unrestrained, extreme recklessness, and indifference of what Paulson calls, “raw capitalism.” Congressman, not only is the Free Market not Free, the price we are paying is inexplicablr.  The myth of the Free Market is that it never really was free. There was always a cost for someone. There was always a loser at the other end of the win. Someone had to pay if there were no rules.

Yet there were rules once - self-restraint kind of rules. For a time the business world possessed a kind of mutual morality, based on a sense of honor and integrity. Not for everyone, but for many people business based on trust  existed. In our nation’s financial history not so long ago, some can still remember, a time when a handshake was a fair deal; a man’s word was his bond and a bond meant something real.  

What happened to that? We got off the track somewhere and the train derailed and crashed at top speed.  There exist many in the business world who still rely on their word as their bond and a handshake to secure the deal. You of honor and integrity have been silent these long years. Sadly, the cost of that silence is too great.

The current financial collapse has made it the duty of every business person and professional with a sense of responsibility to the whole economic system to speak up for a new way to profit - one that doesn't take the system down with it. We have a choice in this economic crisis to rise like a phoenix with something completely new, yet in some ways age-old. An economy based on measured risk and responsible reward. We can choose to let go of the old ways and understand the old ways of indifference that have collapsed our system is the result of a inherantly flawed business model. We can instead as business persons seek something new - a new model where value is created and how we profit. 

The price of the Free Market with the growing tally of market losses reveals the free market is really not free at all. The market must guarantee freedom for those at the bottom and in the middle too, not just the top. Something is not free if others pay the price for that freedom. Congressmen, this may be the end of the "free market" as we have known it these last few years.  It may be the right time to create a new system where the rules of the game are clear and fair and serve everyone not just the select few. That is the guarantee of freedom. One system with Liberty and Justice for all. And sir - it is long overdue.  

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Investor Genocide: A modern question

BERKSHIRE HATHAWAY headed by investor extraordinaire Warren Buffett sold their remaining shares of PetroChina, a unit of the China National Petroleum (CNP), in October 2007. CNP had been the target of harsh criticism for their business ties to the militant Sudanese government. The Chinese oil company is accused of financially supporting the genocide in Darfur. Warren Buffet claims no humanitarian basis for the sale of his holdings. However, Buffet long ago proclaimed his view on ethics, “Always act with integrity; don’t follow the crowd.”

According to Investors Against Genocide, Fidelity Funds have filed a shareholder proposal with the SEC for a vote against “genocide-free” investing. Fidelity, Vanguard, T. Rowe Price, Franklin Templeton, Barclay’s currently own significant shares of PetroChina. Each fund has proposed a shareholder vote to measure support for these holdings.

Shareholder votes on genocide issues are highly irregular and symbolize an important shift in the marketplace view of “social responsibility.” Investors Against Genocide and journalists like Marc Gunther of Fortune Magazine can be credited with bringing a heightened awareness of the human cost of indiscriminate profiting to the business community.

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