NorthWesternFinancialReview.com Blog

Small groups of protesters demonstrated outside the offices of the 12 Federal Reserve Banks on Saturday; the rallies were organized by a group called End the Fed. In Minneapolis, about 100 people protested, according to this report, and YouTube video of a rally in Detroit, which has a branch of the Chicago bank, shows about two dozen people protesting. Click here for more coverage of the protests.

Many of the protesters are supporters of U.S. Rep. Ron Paul, who ran for president. Rep. Paul is sponsoring H.R. 833, which would abolish the Federal Reserve, and H.R. 1207, which would require the General Accountability Office to conduct an audit of the Federal Reserve. Many of the protesters blame the current economic crisis on the Federal Reserve.

Of course, the Federal Reserve isn’t going anywhere, but it is very interesting to see where people are wiling to pour their energies when it comes to protesting. These protesters clearly are concerned about the direction of the country.

Hopefully, you know about Prosper.com, the peer-to-peer lending web site. The service has been the focus of many presentations and conversations at the various banking industry trade shows during the last two years.

The service was suspended for a while, but starting today it is back in business. Here’s the interesting thing for bankers. There is a way for you to participate. Prosper is now buying bank loans and making them available for sale on its web site. Is this the right path for your bank and some of the assets on your books? Check out this link for an explanation from the president of Prosper.com

The internet is changing the business of lending in all kinds of ways. The service that initially seems like a competitor may end up being a friend.

President Obama met with leaders of the credit card industry yesterday. Check this out: Lawrence Summers, Director of the White House’s National Economic Council, apparently didn’t find the meeting too interseting.

I actually think Summers is one of the brightest economists around, but he is going to have to do something about this propensity to fall asleep at meetings. Remember this story, which we told you about on Feb. 24 (Be sure to read all the way to the second-to-last paragraph.)

Here’s an interesting profile–well, more like a family drama– of Indiana banker Chuck Welter. His father, a car dealer, convinced him to come in on a bank deal in the early 1970s. The article summarizes the father’s vision: he “wouldn’t take no for an answer. He wanted to create a family business that would span the generations.”

After a rough start and then several years of steady success, Chuck Welter was fired “in 2006 by his own younger brother in part for hewing to traditional banking values during the subprime-mortgage mania— a stance that Chuck took in large part because he was old enough to remember the fallout from the last mania, the S&L crisis.” The family sold the bank over Welter’s objections.

Now Welter and his daughter are establishing a new bank.  Key quote from the article: “We used to struggle to explain to people the value of a community bank. I don’t think we’ll have to now.”

Read the whole thing.

I am reading a book called “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed. The book is about the central banks of England, Germany, France and the United States between the world wars. In the introduction, he offers a cursory survey of economic crisis, going all the way back to 33 a.d. Here is what Ahamed says:

Each of these episodes differed in detail. Some originated in the stock market, some in the credit market, some in the foreign exchange markets, occasionally even in the world of commodities. Sometimes they affected a single country, sometimes a group of countries, very occasionally the whole world. All, however, shared a common pattern: an eerily similar cycle from greed to fear.

Financial crises would generally begin innocently enough with a surge of healthy optimism among investors. Over time, reinforced by cavalier attitudes to risk among bankers, this optimism would transform itself into overconfidence, occasionally even into a mania. The accompanying boom would go on for much longer than anyone expected. Then would come a sudden shock — a bankruptcy, a surprisingly large loss, a financial scandal involving fraud. Whatever the event, it would provoke a sudden and dramatic shift in sentiment. Panic would ensue. As investors were forced to liquidate into a falling market, losses would mount, banks would cut back their loans, and frightened depositors would start pulling their money out of banks.

…a problem at one bank raised fears of problems at other banks. And because financial institutions were so interconnected, borrowing large amounts of money from one another even in the nineteenth century, difficulties in one area would transmit themselves through the entire system.

So I guess there is nothing new about what we are going through now. The world has seen this before. Many economists have made the point that the economy goes through cycles — it seems to be a point that is difficult to grasp when you are at the bottom of one of those cycles.

As you visit with customers and constituents who ask about the strength of your bank and the economy, remind them of the cyclical nature of our economy. Remind them that we have been through this before. And, that we have typically emerged stronger than we were before.

Did you see this article about the possibility of the U.S. Postal Service getting into the banking business? Even with postage rates going up next month, the service is expected to lose $6 billion this year. Reportedly, it is evaluating the possibility of offering banking services to make up some of the loss. In Europe, the postal service already offers banking. In the United States, only Congress could authorized the Post Office to get into banking.

Banks, of course, are one of the biggest users of the U.S. Postal Service, even with more information flowing via the internet. If the Post Office gets into banking, it seem to me the banking industry should band together and figure out a way to offer mail delivery. It could start by delivering its own mail, and then expand the service by offering it to other businesses.

A year ago, the industry was abuzz about the Treasury’s Blueprint for Reform, which is published March 31, 2008. It seemed dead on arrival to me, with its recommendation that all banks carry a national charter. The Office of the Comptroller of the Currency, a division of the Treasury, has a long history of pre-empting states’ rights, and this looked like an attempt at the ultimate pre-emption — an audacious power grab.

With the change in administration, and all that happened in the financial services industry last year (rescue of Bear Sterns, failure of Lehman Brothers, collapse of IndyMac Bank, and conservatorship of Freddie and Fannie, plus federal government responses in the form of new programs), many people have forgotten about that Blueprint for Reform. But I think we should be keeping our eye on it, for at least three reasons:

1) Regulatory reform for the financial industry has emerged as a congressional priority. A lot of ideas will be floated and discussed. My sense is, they won’t be small plans about peripheral or minor issues, but major plans that call for total overhaul of the current regulatory regime. The Blueprint offers that.

2) The current administration seems quite comfortable with the idea of a power grab. Plans that call for greater federal control appear to be in favor.

3) The fact that the plan originated with the Bush administration might actually be a plus. Current lawmakers can claim high-minded bipartisanship by drawing from the Blueprint.

When I first read the Blueprint a year ago, I thought “This is a nightmare.” But now I am afraid it might be something worse. At least you wake up from a nightmare. This Blueprint is still haunting us, and may not go away for a long time.

In any good business, the CEO has to manage the interests of three constituencies: the shareholders, the customers and the employees. The trick is satisfying one group without short-changing one or both of the remaining groups. In the early 1990s, Congress passed legislation which caps the deductibility of executive salaries. Many businesses responded by exchanging salary and other forms of cash compensation over a certain threshold with stock or options to buy stock. This gave CEOs much more incentive to work to increase the share price of their company’s stock. At many companies, this kind of arrangement substantially skewed the tension between the three constituencies in favor of the shareholders.

The incredible government intervention into business affairs of the last few months is only further skewing things in favor of shareholders. This article in Saturday’s New York Times describes concern bank CEOs have over the control the government is trying to exercise at their banks because they agreed to sell preferred shares to the U.S. Treasury. Some want to give the money back because, while they might like the additional capital, they really don’t want the management interference that seems to be coming with the money.

The Obama Administration clearly seems to believe that shareholders have the right to manage the company, and as shareholders in many banks government is now apparently exercising, or beginning to exercise, a management prerogative. Personally, I think this is very dangerous.

Management is the preview of the CEO. When the CEO manages, s/he needs to consider the needs of his/her constituents. These include shareholders, but the shareholders do not get to run the business any more than the employees or the customers. They are supposed to leave management up to the professional managers they hire. Input from all three groups is essential, but in the end, it is the CEO who makes the decisions about how to run the company, including things like when to sell certain assets or how much to pay certain employees, or where to host certain meetings.

A CEO will fail if s/he fails to appreciate the relationship between the constituents. If the CEO cannot manage the tension between shareholders, customers and employees over a long period of time, failure is unavoidable. My fear is, our government is setting these CEOs up for failure.

This fascinating inside report on last week’s White House meeting with bank executives indicates that the confab may have been less collegial than originally reported.

Ed Yingling, president/CEO of the American Bankers Association, does a good job explaining the significance of new rules adopted by FASB yesterday in the FOX news interview. As Yingling says, it is a shame these rules weren’t changed six months ago.