Wednesday, August 01, 2012

State National Bank of Big Springs is not too big, and not failing: the obvious limits of regulation

The Economist, hardly a magazine for populists, good ol’ boys, or working stiffs, has reported on a bank in rural Texas that has gone to court to challenge the financial reforms mandated by what is commonly known as the Dodd-Frank Act.

Jim Purcell is chief executive of the State National Bank of Big Spring Texas, with three branches and 40 employees. It’s the kind of job where an executive has to work for a living. The bank does something that many believe would do more to reign in banks taking risks (with the entire national economy) than all the pages of regulations combined: State National keeps loans on its own books, keeping the risks and the returns local.

This means they keep their loans small – there is not a lot of margin for a big loan that goes bad – and their interest rates are a bit higher. The average figures cited by the Economist are $60,000 and 7 percent. Terms are shorter, to protect against shifts in interest rates. Small credit unions had problems in the 1970s with twenty and thirty year fixed mortgages paying less interest than what had to be offered depositors to keep money in accounts, which is what loans are made from. When you take in 6 percent on the mortgages, and have to offer depositors 10 percent, you’re well on the way to dissolution.

State National often loans for five years, with balloon payments at the end that are rolled over into new loans, at whatever the going interest rate is then. Major banks don’t do that, but major banks sell their loans to mortgage companies, to Fannie Mae and Freddie Mac, or syndicate them in the infamous “collateralized debt obligations.”

High interest rates and balloon payments are frowned upon in Dodd-Frank, for good reason, but regulators are granted wide discretion in deciding what is abusive. It seems Mr. Purcell is worried the regulators will be coming after him. The Consumer Financial Protection Bureau has just drafted a 1099 page regulation to simplify mortgages – which is an expensive proposition for a small bank with 40 employees to digest. Purcell worries that good customers will go to the big banks, while poorer customers won’t get credit at all. According to the Economist report, State National has never repossessed a home in seven years, nor cost taxpayers a penny.

This is precisely the kind of facts-on-the-ground which define where economically socialist principles must yield to politically libertarian and culturally conservative considerations. It would be a disaster to overturn the Consumer Financial Protection Bureau. There are some big nasty ruthless characters in the big banks who would steam roller mere citizens of the republic without the CFPB. But regulators need to learn to pick their battles, or their discretion needs to be tightened up a great deal. One thing we DON'T need protection from is banks that keep their own loans on their own books.

Leaving banks like State National Bank of Big Spring alone makes sense, for the same reason it makes sense not to deport teens and young adults who were brought into the USA illegally at a young age, grew up here, graduated from high school here, served in the military, completed college, obeyed our laws, and supported themselves. Jim Purcell did not put the economy into a tailspin in 2007 and 2008. He’s not “too big to fail.”

Purcell may, for all I know, have voted for George W. Bush, and if so, in my seldom humble opinion, that was a foolish thing to do. But, Dodd and Frank haven’t made that case by comparison. The obvious solution for “too big to fail” is to break up anything that IS too big to fail into smaller pieces, which can go off into the free market and do good or fail, with nobody else needing to worry except shareholders. Dodd and Frank were too cozy with the big banks for that.

They provided for a complex process which provides government backing to those banks who ARE judged “too big to fail,” which is part of why they can offer lower interest rates, because they can borrow at lower interest rates, because everyone figures, the government won’t let them fail. No risk, all the big boys are happy, taxpayers will once again pick up the tab.

Maybe a SMALL piece of Lehman Brothers should have been sold to State National Bank – although Purcell sounds like a man too smart to pay more than what the asset was worth. The big boys like to see little banks getting regulated – it makes a great poster child for no regulation at all, and, little banks can’t afford all the compliance costs, so we end up with big monopoly banks having the field all to themselves.

We need regulation of business. Real live red-blooded Populists demanded regulation, of railroads, of banks, of currency… but every time a regulatory agency was created, they pick on little guys (which is easier work), and some farmer in Ohio can’t grow wheat on his own forty acres. There’s a revolving door between regulatory agencies and regulated industries, because industries have “the best talent” and also offer great salaries and perks when an expert finishes their stint on the regulatory board.

Small businesses can be predatory too. There should be some basic rules for banks under a certain size, which should fit on about ten typewritten pages. Maybe start by combing the Ten Commandments for any sin a bank is capable of committing, then police the fine print in loan contracts. Like they say in the army, Keep It Simple Stupid. I suppose it would be too much to ask of either Democrats or Republicans to try to understand that.