Wednesday, August 12, 2009

Elizabeth Warren takes on smaller banks now

Yesterday the Congressional Oversight Panel that is guided by Elizabeth Warren released comments saying that smaller banks are still plagued by impaired assets and would, by their estimates, need $12 billion to $14 billion of new capital. The premise is that the existing capital and reserves of these banks is inadequate to deal with the need to clean up their balance sheets. The comments focused on loans, especially commercial real estate loans, as the core problem.

The Congressional Oversight Panel released little detail on their calculations and focused on the big picture. This is scarily reminiscent of the OCC in 1990 and 1991 when their overzealous accountants destroyed or forced consolidation of many previously well regarded local and regional banks.

If by chance this new study had some commentary on the treasury portfolios of these banks and revealed that they in fact had been relying on now toxic mortgage backed securities to boost returns, it would make some sense. The focus, however, was on loans and that's the problem. Local and regional banks are in the business of making loans to small and mid-sized businesses in their communities. Loans intended to be held to maturity on the balance sheet are not securities. In times like these if they are valued by an accountant as a security they are of course underwater. For smaller banks that's a misunderstanding, or worse coming from the agenda driven Warren, as these extensions of credit are based on local knowledge and relationships just as much as they are on what is going on in the national economy month by month or even year by year.

What will be the result of this Congressional Oversight Panel's report. It is an absolute certainty that it will cause smaller banks to become more conservative and more restrictive in their lending at a time when the overall agenda should be and supposedly is to create a landscape that encourages more credit availability. Smaller banks that went through or are going through the TARP experience feel tarnished by it, and in general want no part of the government's bureaucratic and finger pointing hand.

Like the OCC in the early '90's recession it appears that this report fundamentally misunderstands basic banking. As a career academic and one with an apparent bias for mandating the public utility, as opposed to business, purpose of banking, Warren is once again acting or speaking in a way that will restrain the move out of this downturn. Her intentions may be good, her well known insights and concerns about the decline of the middle class have merit, but her actions are bizarrely misguided. What I mean is, she's dangerous.


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