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.
