Full Faith and Credit

The following article appeared in the May 15, 2009 issue of American Banker. It was my eulogy to Bill Seidman, a great American.

As with any public figure, there were two (or more) sides to Bil Seidman. He was your basic consummate professional / belt-way insider / banker / lawyer / Regulator / Inflation-fighting / C-suite turned TV personality curmudgeon.

‘Losing him is bad for me, its bad for anyone who came to know and love him, and its bad for America. He kept us anchored to what banking really was and is and should always be; a bank 'takes deposits and makes loans' said the Chairman to me one night at dinner.’

And he was a cowboy.

Not a cowboy in the sense of an out-of-control, balance-sheet-wielding wall street transaction-driven loose cannon - I mean he was a Cowboy. A deyed-in-the-wool, horseback riding man on a horse; he loved horses. Bill wore boots, and Bill knew exactly how to wear boots; (real boots, worn under saddle and put up wet).

Once he arrived in Washington, as part of the "Whip Inflation Now" (WIN) team in the Nixon Whitehouse, he gave up horses but kept riding; a bicycle. Seeing him getting ready to leave his P-Street office on the way to CNBC back in the early-'90's became a tourist attraction around Georgetown. He was clockwork (even at the risk of being late, no car necessary); when it was time to get in front of the camera and talk about - well, no one ever really knew WHAT was going to come out his mouth in those early days (... or any days really) - but when his public called, he showed up and he delivered. He said it like it was and it turns out people were actually watching,; who would have known.

As a young banker, just out of FDIC/RTC "experience" (when the word "resolution" came to mean "best don't be at work" at an S&L on a Friday afternoon) - getting to meet, then getting to be around and then getting to work with "The Chairman" was a privilege beyond words. Every encounter was an experience in why America works; good old fashioned mid-west common sense (he was a Romney-ite, and I don't mean Mitt). He spoke, we listened, we learned. He was tough with us; tough as nails; there was a "no BS" zone around him the size of Michigan.

Losing him is bad for me, its bad for anyone who came to know and love him, and its bad for America. He kept us anchored to what banking really was and is and should always be; a bank "takes deposits and makes loans" said the Chairman to me one night at dinner.

Before you go back to work tomorrow, think about that for a moment.

Bill didnt' like the idea of little banks growing in to big ones fast, but nonetheless had a penchant for the under dog, the little guy. One look at the "portfolio" of relationships he cultivated shows where his heart was. He was an entrepreneur at heart who admired a can do attitude and a dream to match.

I know this, because I had one of those dreams, as President (at the age of 34 when I did not understand why a deposit was a liability) of a small insured institution outside of Philadelphia back in 1995. The Chairman agreed to serve as our Advisory Board Chairman. We had three things going for us; an insurance certificate, $9 million of assets (and i mean, total assets), and a branch the size of a closet. We were successor to a century-old Quaker savings bank charter, which by some freak of provenance had become an FDIC insured institution.

So why would the former Chairman of the one of the world's most powerful regulatory bodies affiliate with - this ? ... when he could have chosen ANY major multinational financial services conglomerate for his satisfaction ?

L. William Seidman believed in main street (and, as it turns out, I was lucky to be a better horseman than he and able to captivate his competitive spirit; he was actually quite a Polo player in his youth and I had a few pair of boots in the closet too).

At any rate, I will miss the Chairman. He lectured me on the evil of derivitives, the lure of yield ("Ken, sometimes there just IS NO interest rate HIGH enough to reflect the REAL RISK in a loan !") and admonished me for putting ice in a glass of single-malt scotch (I stayed away from the ice after that, but I can't say the same for some loans that would have been better left undone). The people close to him, he kept in his heart for life - (Birge Watkins, Jackie Pace, David Cooke, Bill Roelle, Patrick Hanraty, Amy Krallman - so many other good friends and co-workers) - and a trip to Nantucket for the weekend could easily turn out a political and corporate entourage fit to rival Congress in session). He loved and admired the political machine, and after a few early steps toward office, taught me that a "successful day" in the White House was any day the President did not notice you were there (a useful skill-set).

He was a true, red white and blue banker; he was a friend, he was a savior to a generation of lost banks and bankers - he was a great American. He gave the Japanese Fleet the better part of his grit, he gave S&L asset-junkies the better part of his mind and he gave his country the better part of his life. The Chairman may be gone but Full Faith and Credit (yes, a book plug, what he would have wanted) is here for good.

Is Bank Competition Really a Good Thing?

Truthfully, I’ve had to question everything. No stone on the surface of modern capitalism has been left unturned.

That got me to this question: Is bank competition really a good thing – or would fewer banks equate to more realistic pricing and therefore more reserves (and less net loss) every time an economic Armageddon comes around?

“If loan officers at my hometown bank won’t prostrate themselves to a 3% spread, there’s a lender somewhere else that will.”

I mean, who ever said a car loan should be anything under 20%? What ever happened to waiting to buy the car until you actually had earned (and saved) the cash to do it with?

Does the “reward” of a 6% car loan really have any relationship to the risk anymore of not getting paid back? How safe a financial industry model you can really build on a three (or under) point spread? Apparently, not one that’s safe enough.

But why is spread three points to begin with? Largely because if loan officers at my hometown bank won’t prostrate themselves to rate, there’s a lender somewhere else that will (probably around the corner at this point, or at least back when there was any credit to lend in the first place). And so the cycle begins; a good loan, set at a rate supposedly commensurate with real risk, turns into a time bomb.

That will – and I fear unfortunately has – gone off.

Will market competition ever allow real risk assessment in lending? And who ends up paying for the “under-market” rates in the end? We do in the form of TARP, TALF (and who knows what other four letter combinations are down the road waiting).

The metrics don’t quite add up. That’s because a spread of 3% (or under) leads to a return on assets of 1% (or under), which in turn means that banks can’t grow their capital base in a way that is consistent with the risk they are piling onto balance sheets. This leads me to the seemingly preposterous conclusion that banks ought to be lending money at something like 27% interest. Of course a number like that extracts an outrageous toll on borrowers, who pass the high cost of financing onto their customers, making the pain go even further and wider.

But then - it’s not like these same customers aren’t already getting a wallop in the form of perhaps another trillion (or more) on the national debt and the associated interest and taxes.

It gets down to the old “pay me now or pay me later” scenario. Frankly, I would have rather paid the up front costs associated with 27% (or whatever turns out to be “real”) interest rates from companies I’m doing business with in some form or another. As it stands now, it looks like I’ll be paying for all the lenders across the fruited plains who didn’t charge enough interest on their loans, which de facto, means every single one of them.

So if we want access to credit, make sure there is credit to access. Making it cheap may feel good for a few decades, but sooner or later, it gets expensive – apparently, very expensive and very fast. Maybe instead of caps on deposits (remember the 70’s? Take a look at the chart for “disintermediation and deposit rate ceilings” below) we need to set floors on loans.

Maybe the one metric the government needs to set is the “base rate of risk”. Anything above the base rate stays a private sector decision. Nationalize risk or nationalize banking; either way, someone has to start writing checks because the system is out of balance and out of control. The days of giving away cheap money without concern for what’s coming after are officially over.

Kelly Ripa’s Mona Lisa Look

When I look at the new TD Bank ads that Kelly Ripa does with Regis Philbin, there’s something inscrutable about her expression. It’s got a Mona Lisa quality to it.

Sometimes I think I see a little fear in her eyes while at other times she seems to be expressing mild uncertainty. Truthfully, it could be either.

“It’s not unreasonable to speculate that Kelly is wondering whether or not simply throwing away all of the brand awareness and brand equity created by Commerce Bank is really a good idea or not.”

Let examine the fear. Kelly’s a smart girl. She’s not one to endorse something without asking at least a few questions, like “Who are these people and what does TD stand for anyway?” When she found out she would be representing a Canadian bank, aka Toronto Dominion, she may have gotten just a tad uncomfortable.

Remember, Kelly is one of us. American yes, but also a Delaware Valley gal, born right here in the Philadelphia metropolitan region, where incidentally, I am from, and where her former benefactor, Commerce Bank, was founded. This is to say she was bred to root for the hometown team. If you’ve ever been a professional sporting event in Philadelphia, you’ll know what I mean. Or simply ask any hapless fan who had pluck to show up at a Phillies game wearing a Toronto Blue Jays jersey. You just don’t plug the visiting team without some kind of unpleasant consequence.

As for uncertainly, it’s not unreasonable to speculate that Kelly is wondering whether or not simply throwing away all of the brand awareness and brand equity created by Commerce Bank is really a good idea or not.

And on this score, she really is a smart gal. I’m sure she doesn’t spend her days thinking about intangible assets, but she is nonetheless onto something here.

After all, contained with the $8.5 billion TD paid for Commerce, there were millions and millions in goodwill. Enough that you would question the phalanx cranes that were deployed after the deal to take down the Commerce Bank signs and replace them with them emerald TD logo. One of these replacements happened in my neighborhood and I stopped to watch. In the few moments when the Commerce sign was hanging there at the end of the wire rope, I couldn’t but help see the whole thing for what I thought it was: a bit of a lynching for brand, and perhaps to some degree, shareholder value.

A little too passionate? Perhaps. But I’m passionate about banking. One reason for this is because it’s a simple business, that nonetheless can deliver truly remarkable returns to investors. But the way I see things, banking is a storefront business that has its roots – not it’s fiber mind you, but it’s roots – in customer service and consumer marketing. This is an idea that I think Commerce’s founder, Vernon Hill fully appreciated, and used to drive shareholder value for more than 20 years at Commerce.

So to watch all that brand equity disappear in one fell swoop, is a bit much for me. That’s why I may feel a little bit like Kelly, unsure if I should be a little uncertain or a little bit afraid.